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Sharing risks in public private partnership

Sharing risks in public private partnership
By Hasaan Khawar
Monday, 06 Apr, 2009 | Dawn | Economic & Business Review

http://www.dawnnews.tv/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/sharing-risks-in-public-private-partnership

From power generation to industrial estate development, public-private partnership (PPP) is widely seen as a recipe for success and as a part of private sector led growth.

The private sector expertise, modern management practices and efficiency are often quoted as the reasons for involving private sector in areas, which until very recently had been considered falling strictly within the public sector domain. It is hoped that this marriage of public sector resources with private sector expertise would result in robust performance and effective service delivery.

The new privatisation framework, being developed by the Privatisation Commission, is also knitted around the PPP framework, with two important distinctions – its focus on Brownfield as opposed to Greenfield projects in the context of privatisation and the shift from the traditional infrastructure sectoral focus towards industries, tourism, banking, oil, gas and other sectors that are more appropriate for privatisation.

The Sindh government has recently created a PPP unit under the finance department to spearhead the PPP process. Similar establishments are planned in other provinces.

This enhanced emphasis on PPP is not specific to Pakistan and governments all over the world have realised that due to limited resource availability with the public sector, private capital must be mobilised to meet the ever-increasing development needs.

Besides investment mobilisation, and consequent reduced burden on government exchequer, the PPP projects are supposed to bring in a fresh perspective for the rusting government institutions. The PPP therefore, has been extensively used in a variety of sectors ranging from infrastructure to social services and from agriculture to mining.

However, the term public-private partnership is probably one of the most misunderstood terms. During the recent years, many government initiatives have wholeheartedly embraced the PPP principle as the Holy Grail which has resulted in all sorts of unique arrangements, under the so-called broad PPP umbrella. It ranges from private sector representatives dominating fully-owned government companies to provision of targeted farming subsidies.

While these practices may have some merits, they clearly do not fall under the ambit of the pubic-private partnerships. This broad use, and at times misuse of the term has also resulted in widespread reservations about the effectiveness of PPP modality within some government quarters, as it is sometimes being viewed as a rent-seeking mechanism.

A broad understanding is therefore critical to understand the role and limitations of this model and to draw a clear balance between the responsibility of government for provision of essential services and the profit-making motivation of the private sector.

According to a UK government report, PPP is defined as something which brings public and private sectors together in a long- term partnership for mutual benefit. It therefore represents a long-term arrangement where private sector shares risks and responsibilities in areas, where government would still acknowledge its public service obligations, as opposed to privatisation or other forms of private sector participation. The key ingredients in developing effective public-private partnerships are a clear commitment from the government, sufficient interest from investors and an enabling environment.

The concept of PPP is not new to Pakistan and has been employed in the past, in a variety of projects ranging from port operations to power projects. In 1996, a number of private power generation projects were undertaken under the Power Policy of 1994. The independent power producers (IPPs) were considered a successful attempt by the then government, at least in terms of mobilising private capital. The investors were given huge incentives to invest. As a result, the government was successful in adding 6000 MW of additional capacity, augmenting the installed power generation network by 33 per cent

However, the initial success of the IPP initiative soon turned into one of the biggest scandals for the government, owing to undue incentives offered to the private sector. The situation worsened in later years, when the power demand growth slowed down and consequently Wapda found it hard to make the dollar-denominated payments to the IPPs from its revenues.

The fundamental flaw with the IPPs was nothing more than unfair allocation of risks. One of the key pillars of public-private partnership is the fair allocation of risks between the government and the private party, with specific risks allocated to each party that is best capable to manage it. In case of IPPs, government bore most of the risk by providing price, power purchase and other guarantees, whereas the private sector hardly bore any risk, besides project implementation delays.

The PPP models range differently for different countries and sectors including private sector’s involvement in public services provision through service or management contracts, concessions or private finance initiatives. Similarly, these purposes are achieved in a wide variety of ways such as formation of special purpose vehicles (SPV) or long-term buying guarantees to the private sector to encourage investment.

However, the element of mutual benefit is something which should dictate the structure and direction of all such initiatives. This alignment of interests between the public and private sectors should be achieved through full-cost recovery and profit motivation for the private sector and private capital mobilisation and reduced risks for the public sector.

Such an approach can not only help capitalising full potential of the partnership but also lay the foundation for a sustainable development model. However, in case of specific sectors, where a pro-poor approach needs to be integrated to serve the marginalised communities having limited willingness-to-pay, such a model must be supplemented with government’s financing in terms of viability gap funding, at least for the transitional phase. The output based aid (OBA) models may be incorporated to achieve this purpose.

A renewed focus on PPP in recent years has raised many eyebrows and many officials are skeptical in taking up PPP projects to steer clear from any future allegations. Therefore, in order to promote PPP, a firm commitment from government is critical along with future political stability. This commitment should then be backed up by a sound institutional, legal and regulatory framework. The PPP policy of 2007 has been a step in this direction. The policy is in the process of revision and is likely to be improved even further.

The policy provides for a clear financial and incentives framework, legal regime and institutional set-up essential to promote PPPs. Infrastructure Project Development Facility (IPDF) is spearheading the PPP process at the federal level, apart from the energy sector projects that are undertaken by Private Power Infrastructure Board (PPIB).

While the PPP policy is a concrete step in the right direction to emphasise government’s commitment, what needs to be done immediately is to operationalise different components of the financial and incentives framework including financing arrangements for project preparation and viability gap funding. This should also be supplemented with enactment of a comprehensive PPP law.

The next step would then be to stimulate various ministries and organisations to adopt the PPP mode for undertaking specific projects. A similar complementing framework at the provincial level would also be critical to mobilise sufficient private sector interest.

Some of the critics may argue that keeping in view the global recessionary trends and the worsening law and order situation, it may not be a good time to look for private capital. While the argument may have certain merits, the formulation of a sound PPP framework would definitely help in addressing these shortcomings and would pave the way for future investments by domestic and international investors.

(hasaankhawar@gmail.com)

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About hasaankhawar

International Development Professional | Policy Op-ed Writer | Hon. Fellow at Consortium for Development Policy Research | Avid Traveller

Discussion

One thought on “Sharing risks in public private partnership

  1. Dear Mr. Khawar

    I am an avid reader of your articles in the Economic & Business Review section of the DAWN and was pleased to find your article on this blog. A very well-researched article and an excellent insight into the growing realization of PPPs to become catalyst for economic growth. I completely agree with your emphasis on “fair allocation of risks between the government and the private party, with specific risks allocated to each party that is best capable to manage it” for the desired success of a PPP venture. You have astutely recognized that PPPs’ success is mainly dependent on having the right framework in place. Knowledgeable experts like yourself, both from public and private sectors, should assist with structuring, screening, and procuring PPP initiatives. It is high time that PPPs be considered as viable options by the government. With the right circumstances in place, PPPs can prove a winning partnership for all stakeholders.

    Best wishes
    MB

    Posted by MB | February 12, 2010, 1:45 am

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