Place of public-private partnership in growth

I refer to the story, ‘Why government should be cautious about PPP deals’ in the Prosper Magazine in the Daily Monitor) January 12,  highlighting why government should be cautious about public-private partnership (PPP) deals. The article indicated that experts are concerned that under the PPP financing arrangements, projects often cost the host countries almost twice the amount they would have otherwise spent if the contract was directly awarded to the public sector works and not to a private party. 

Infrastructure projects like roads, bridges, tunnels, expressways, dams, water plants etc, inherently have construction risks. Construction risk is primarily about whether the project can be completed and commissioned on time and within budget (cost). Roads, dams, water systems, etc, are also usually constructed in areas that may have different sub-surface or geotechnical properties, and this is one of the potential causes of cost overruns. 

This is one dimension that explains why similar projects may have different development costs. In traditional procurement delivery of infrastructure projects, these construction risks and associated cost overruns are covered by the government or public entity implementing the project. In PPPs, this construction risk is shared and or allocated to the private partner, which, therefore, results into high costs of project delivery.

The story further noted that CSOs and independent experts propose a halt on the aggressive promotion of PPPs to finance social and economic infrastructure due to the inherent risks in PPPs entail. Instead of discouraging PPPs, we need to create awareness and build capacity around implementation of PPPs. Risk allocation is central to structuring and implementation of PPPs.

A fair allocation and distribution of risk is important for ensuring that PPPs are affordable, commercially viable and bankable. A typical PPP includes financing risks, environmental risks, demand risks, construction risks, operational risks, political risk, foreign exchange risk, etc. These ought to be allocated to the party best suited to manage them in a PPP. 

For example, a newly constructed toll road faces demand risk, which is essentially a question of whether there will be enough vehicle traffic on the road (every year) to earn the private operator enough revenue to cover debt payments, operations and maintenance costs, working capital requirements, etc. 

In such a case, the private party may seek government guarantees for minimum revenue, among others. Without mechanisms such as revenue guarantees, the operator may be forced to charge high road tolls thus rendering the project unaffordable to users. In this regard, it is also best practice that there is full disclosure of project costs, government commitments and guarantees to ensure transparency, stakeholder involvement and efficient PPP implementation. 

For example, if the private operator of a toll road is charging $2 per vehicle to use the road, and government has a commitment to pay an additional $1 for every vehicle that uses the toll road, the users and wider public should know such details and commitments.

The PPP Act in Uganda makes provisions for these disclosures. Section 47(3) of the PPP Act (2015) indicates that all public private partnerships agreements shall be published on the website of the Ministry of Finance, Planning and Economic Development.

 

We should invest in the capacity of the PPP Units, government agencies, contracting authorities, civil society and environmental conservationists to conduct robust and comprehensive pre-feasibility studies to create a robust pipeline of PPP projects that will attract competitive bids from potential investors and private sector players. This is important for government agencies or contracting authorities before engaging transaction advisors, potential investors and lenders/bankers for these PPP projects. PPPs do offer value for money and we should transparently seek that value in our drive towards middle income status. 

 

Source: Monitor