PPP, the new fad in Middle East

Rajeev Singh, Partner, Ernst & Young, writes on how the concept of public private partnerships is bringing about a paradigm shift in the Gulf

Public Private Partnerships (PPP) have, in recent times, revolutionised the way the public sector operates. Instead of the public sector procuring a capital asset by paying for it in full upfront, the effect of a typical PPP structure is usually to create a single standalone business, financed and operated by the private sector. The purpose is to create the asset and then deliver the service to the public sector client, in return for payment commensurate with the service levels provided.

There are two key objectives in commissioning a PPP:
• The first is to maximize value for money in providing a service over a long timescale of 20 to 30 years, having taken account of all the risks. Maximizing efficiency and innovation is key to achieving value for money.
• The second is to enable the public sector to procure services in a manner consistent with economic policy.

In order to meet these objectives, the public sector considers a number of key criteria, like for example: What is the need and what is the optimal solution to meeting that need? Does the private sector have the capability to meet that need? Can PPP demonstrate value for money? Can the PPP solution be afforded?

The key is to focus on what service is required, which means specifying the output, and allowing the private sector to determine what inputs are required, including infrastructure and skills, with a view to achieving that specified output.

Why PPP? There are a number of factors relating to public sector cash constraints and the underlying principles of PPP, which might cause governments to consider the introduction of a PPP:

Public Sector Cash Constraints
In many countries, the demand for new infrastructure projects is growing in quality and quantity. Besides, there is the rising pressure for funds to renew, maintain and operate the existing infrastructure. Competition for such funding is often intense, not just between infrastructure projects, but also with the many other demands on public sector finance. PPP permits the authorities to substantially reduce capital expenditure and convert the infrastructure costs into affordable operating expenditure spread over an appropriate timescale.

Principles of PPP

PPP allows each partner (public/private) to concentrate on activities that best suit their respective skills. For the public sector, the key skill lies in developing policies on service needs and requirements. For the private sector, the key is to deliver those services at the most efficient cost. The nature of the PPP process may help to address any historical shortcomings in public sector procurement management in the following ways:

• Procurement Efficiency: Meeting monetary and time budgets, which are frequently overrun in conventional procurement contracts.
• Improved Accountability: Proper consideration of the long-term ongoing liabilities that arise, avoiding the possibility of short-term policy decisions taken solely on a cash accounting basis.
• Risk Management: Assessment of risk allows projects to proceed with a full range of risks being fully accounted for and priced into the procurement contract. Public officials are generally not trained, measured or rewarded for taking such risks.

Benefits of PPP

- Strengthening of infrastructure: PPP can help enhance the quality and quantity of basic infrastructure such as water, energy supply, telecommunications and transport as well as being widely applied to other public services such as hospitals, schools and prisons.

- Value for money: PPP projects can often deliver greater value for money compared with that of an equivalent asset procured conventionally. This is because the synergies developed by combining design, construction and operation outweigh the higher cost of finance. The fact that those responsible for the building of an asset are also responsible for long-term maintenance and operation, should ensure that whole life costings are properly assessed.

- New facilities provided efficiently and effectively: Because the private sector will usually not receive any payment until the facility is available for use, the PPP contract structure fosters the use of construction and procurement methods that encourage efficient completion and minimise the risk of defects.

- Innovation and spread of best practice: The expertise and experience of the private sector encourages innovation, resulting in reduced costs, shorter delivery times and improvement in the design, construction and facility management processes. Developments in these processes can be applied to future projects, facilitating the spread of best practice within public services.

- Standards maintained: Assets and services will be maintained at a pre-determined standard over the full length of the concession. This may contrast with conventional public procurement where maintenance of assets and service quality are dependent on the public sector continuously making funds available to maintain the asset and service.
o Flexibility: PPP has the inbuilt flexibility to be introduced successfully to most types of infrastructure, and the principles that underpin PPP can be adapted to any situation.

- Local employment: Where buildings and services are delivered which would not otherwise be available, new employment opportunities are generated. Such PPP projects are also helping support local businesses and promote long-term relationships in the local economy.

Ground Reality

Oman has gained significant PPP experience through its Independent Water and Power Project (IWPP) programme over the past few years. This has been a successful program that has allowed the Government to set up five power projects generating almost 1,800 MW of power and about 50 MIGD of desal water; it is also in the process of launching two more power projects of 600 MW power and 30 MIGD of desal water.

It appears that this program will now lead to IWPP programs too. In a path-breaking venture, the Ministry of Defence is in the process of finalizing a Military Technological College to provide a specialized education program under a PPP framework, together with facilities management. Going forward, one expects that this PPP framework has great potential in the areas of Education (specially higher education), Housing (and the focus here could be on social housing), and Transport (roads).

These trends generally hold true for the GCC, where power has always been the first sector to be tested for the PPP model. Abu Dhabi, Bahrain, Riyadh, and Kuwait, all seem to have adopted the IWPP model for their power sectors.

In other cases, Kuwait is piloting its PPP approach with a social housing project, while Bahrain is also about to appoint advisors for a social housing project under PPP. Abu Dhabi has recently made headway in Education with 30 odd public schools being handed over to the private sector for managing on a PPP basis. Riyadh too is keen to make a significant commitment on PPP for its water distribution and transmission sector.

Apart from these specific examples, the GCC Governments are keen to consider a number of other projects in the areas of infrastructure and real estate under PPP models.

Clearly, the next few years offer very interesting opportunities for the private sector to enter into partnerships with their Governments.
 

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