Across the globe, cash-strapped public agencies are showing increasing interest in Public-Private Partnership (PPP) programmes as a method for procuring public infrastructure assets and/or services. The current government’s PPP programme, with its basket of six-projects as the operational expressions of its PPP Programme, is a commendable first generation effort to introduce substantial private sector involvement in infrastructure development and finance.
PPPs should always be considered for infrastructure development or service delivery, but they should only be pursued if the PPP projectsare affordable, transfer risk to the private sector,and deliver value for money (VFM), which is loosely defined as the ‘optimum combination of life-cycle costs and quality meeting user requirements’. Life-cycle costs include all significant costs of competing design alternatives and the alternative that meets functional requirements at the lowest total cost of ownership (initial design and construction costs, operations, maintenance, and repair costs, replacement costs, disposal costs and financing costs). And value is the ratio of function to cost and can be increased by either improving function relative to cost or reducing cost while maintaining function. The definition of value must include the qualitative benefits of minimizing/preventing detrimental environmental impact and historic preservation.
PPP arrangements are governed by contracts and the accompanying body of contract law. Any PPP programme, therefore, needs to be supported by an appropriate enabling environment: a sound legal and institutional framework, appropriate accounting and reporting procedures and established executive guidelines outlining its development and implementation, the steps necessary to ensure proper allocation and management of the responsibilities and risks and clarifying the process for conducting such assessments. Most of these are lacking or poorly articulated in the government’s PPP programme.
Lack of a well-defined national policy or framework for the government’s PPP programme and a lack of clarity in the government’s PPP guidance documents opens up the government’s PPP programme to a number of unintended uses as well as a variety of abuses that result from selfish agenda-driven applications and makes it potentially difficult for the PPP programme to deliver on its expected benefits or that they may materialize at too great an expense.Serious defects in the government’s PPP model will continue forcing critical issues of PPP projects to be addressed subsequent to award, a situation that generally tends to favour the private partners since once selected private partners have a negotiating leverage as terms get negotiated as part of the agreement.
Not addressing issues or conditions related to renegotiation, termination, and project purchase-back provisions in PPP project guidelines, generally, works in favour of the private partners as they are left for interpretation and negotiation after award of the contract. In truth, most PPP guidance documents emphasize the significance of PPP clear and enforceable partnership “conditions” that include no-complete conditions, conditions for negotiation, termination rights and provisions, project purchase-back provisions and performance measurement instruments. Knowledgeable industry players and academics stress that identifying and properly allocating risks and ensuring that the private partners genuinely assume the risks given to them as crucial success factors.The less clearly specified the guidance documentsguidance documents, the greater the risk of a costly renegotiation of the contract during implementation.
Professor Akintoye who is the foremost authority on PPP programmes cites ‘risk sharing and allocation’ as ‘one of the most important factors for successful PPP outcomes’, stressingthe need for allocating each risk to the party best able to manage it to, in theory, reduce individual risk premiums and the overall cost of the project because the party in the best position to manage a particular risk is afforded the opportunity to do so at the lowest price.
It is not clear which parties to the government PPP arrangement are assuming what risk or if at all this is a consideration as was made clear in the Salima-to-Lilongwe water project when questions of project appraisal, cost estimates, feasibility and ESIA studies on the project surfaced. It is not evident or clearly spelled out which project specific risks were priced and clearly assigned to parties: Which party assumes the risk that the project will not perform to required technical standards or to its required functionality?Which party assumes the risk that the project will have adverse environmental impacts beyond permitted limits or have excessive operating energy consumption?Which party assumes the risk that funds allocated to the project will be insufficient or that project will run over allocated time and consequently incur further costs?Which party assumes the risk that the forecast income from the project will be below expectations?
We know from old Goodal that there was no serious or thorough proposal appraisal of any kind on the Salima-to-Lilongwe water project (this half a billion US-dollar project!) or other competing design alternatives or seeking a second objective opinion on the proposal because,we are told, in its excitement about the proposal, the agency responsible for the conduct of the programme ‘forgot about the need for any feasibility study’—old Goodal is confessing government rarely (if ever) conducts serious orthorough proposal appraisal and prioritization on its projects, especially on the mega-buck projects!Still, a serious andobjective comparative analysis of the proposal could have assured the government and its citizenry that it was receiving the best value that industry and the market could provide.
More importantly, is the Salima-to-Lilongwe water project a true PPP programme? Since PPP projects typically require user fees to finance PPP projects, the Salima-to-Lilongwe water project can not be characterized as a true PPP project if LWB is procuring a government-guaranteed loan to apply to payments for the project work or the if the project is found to be utilizing any LWB funds in the financial package for the project.
It must remain a propose-finance-design-construct-operate/maintain project with the private partner allowed to receive a ‘reasonable’ rate of return from user fees collected over the agreed period for the resources employed, risks assumed and work done. The user fees established must clearly reflect the ‘cost of services’ rendered—the resources employed, risks assumed and work performed’ by the developer, since the private partner would be required to set his fee at a minimally acceptable rate. A vexing issue, therefore, is whether the revealed project cost can be economically recovered through user fees or is the service delivered by the private partner translatable into reasonable service payments without necessitating changes in agreed terms?
The Attorney General (whose lega lstances I have often found troubling and rarely agreed with) is justified on this occasion in insisting on taking a closer look at (or even throwing out or tearing up) the contract between the parties that is a product of a defective PPP programme that could potentially expose government to considerable fiscal risk—liabilities derived from called guarantees and other contingent liabilities—and requiring serious consideration of both possible events that might trigger guarantees during project implementation and their likely impact and assessment of government’s maximum risk exposure under guarantees,alertness to consequent fiscal risks and filtering out unjustifiable guarantees over the medium to long term especially should “holes” in the enabling legislation or template not be filled by the agency responsible for the conduct of the programme that can get exploited by the private partner but in doing so has found himself at odds with special interests in the Mutharika government that have never cobbled together a government programme where massive thieving was not the principal goal.
Contribution by: Chisala, Maxwell L.
The views expressed in this article are not necessarily those of the Publisher or Editor of The Maravi Post.