Public-private partnerships (PPPs) have become a common strand of public policy worldwide, motivated by a search for efficiency in infrastructure services. In a PPP contract, the government has a long-term business relationship with the private sector, with risks and returns being shared.
The private sector finances, designs, constructs, operates, maintains and manages risk operations. The government is responsible for strategic planning and industry structure, obtaining permits, regulating and facilitating the administrative tasks for the private sector.
PPPs take several forms: design, construct and maintain; build-own-operate; and build, own, operate and transfer – to name just a few.
Despite being touted by the World Bank and several consultancy firms as an immediate and tested solution to address the infrastructure needs of countries in the Middle East and North Africa (Mena) region, the conversation surrounding PPPs remains largely a rhetoric that has not yet translated into a practical solution.
Why governments like PPPs
PPPs have appeared in Western governments’ policy agendas after years of contracting out and privatisation. Governments adopt PPPs for several reasons. PPPs promise value for money and enable governments to get the best possible outcome at the lowest possible price.
The bundling of services – through building, operating, maintaining and transferring the asset to the government at the end of the contract – forces the private sector to minimise the project’s costs. Therefore, the efficiency of the service provided is driven by the private sector through efficient design and construction of infrastructure projects with the aim of keeping operational costs to a minimum.
Furthermore, the PPP model is beneficial when project risks are transferred to the party best suited to handling them. Project risks can be related to the construction phase, the size of the market, the cost of operations and maintenance, unexpected delays in finishing the projects, force majeure or abrupt changes to laws and regulations.
A successful partnership is based on mutual understanding and collaboration, whereby risk is carefully evaluated, the party to handle it is carefully selected, and both parties are ready to make compromises for the sake of the partnership’s success.
PPPs in the Mena region
In the Mena region, PPPs are largely debated, discussed and promoted by international organisations such as the World Bank or by consultancy firms. Yet a broader adoption of PPP has not been achieved.
As the table shows, the level of private sector involvement in financing and delivering infrastructure services in the Mena countries differs markedly. While Morocco tops the Mena countries in terms of total investment, with in excess of $18bn, the West Bank is at the bottom with a total investment of only $215m. Furthermore, Mena countries differ in the readiness of their regulatory and legal frameworks to adopt PPP projects.
PPPs in the Mena region are primarily restricted to high-tech and technology-intensive sectors such as airports, independent water and power plants or information and communications technologies. Generally, PPPs have not been adopted in social infrastructure projects such as in the development of schools, social housing, hospitals and other facilities, where they are needed most.
This contrasts with international experience, where PPPs have been used comprehensively in social infrastructure projects.
INFOGRAPHIC: THE REGION'S PPP PIONEERS
PPP projects must overcome insufficient regulations, complex contracting processes and wavering political will to play a more meaningful role in delivering infrastructure in the region
The key factor behind the lack of PPPs in a wider range of social services is the dominance of the state in the provision of these services and a lack of sufficient capacity in the private sector. This is a natural outcome of the private sector’s structural limitations in most post-colonial countries in the Mena region. The state in this region continues to play a larger role in the economy, and cases of successful privatisation and greater involvement of private finance in infrastructure delivery remain the exception, not the norm.
Broader adoption of PPPs
The lack of a strong pipeline of PPPs in most Mena countries is not necessarily due to the lack of legal frameworks or capacity to draft complex PPP contracts. Instead, it is a multitude of interconnected factors that make the uptake of PPPs a ‘mission impossible’. Some of these factors are summarised in the following six points.
- First, the dominant culture of public sector supremacy in infrastructure delivery remains a hindrance that requires considerable time to change. A significant cultural shift has yet to take place to enable the private sector to take the lead in providing infrastructure services. The local private sector needs to be empowered by the government to design and construct mega-infrastructure projects. The lack of trust in the private sector’s credentials also needs to change in order to enable the private sector to contribute to infrastructure development.
- Second, governance and accountability issues are of paramount significance in enabling the private sector to comfortably invest in mega-infrastructure projects. The majority of Mena countries still lack strong governance and accountability mechanisms that international investors factor in while estimating the risks associated with investment in a given country. When the rule of law and accountability of the government in case of default are not as strong as in more advanced market economies, international investors tend to refrain from investing in infrastructure services, which require reliable court systems and respect for the sanctity of contracts. Otherwise, the risk is too high for the private sector – to the extent that the project price becomes unrealistic for the public sector to bear.
- Third, streamlining government services and bureaucratic barriers will support the uptake of PPPs. In most Mena countries, bureaucracy paralyses the private sector’s capacity to do business. Lengthy procedures cost the private sector time and money, and increase the chances for corruption and unethical practices, which discourage the private sector from doing business in a given country. One-stop shops that provide services in a transparent manner boost investors’ willingness to invest in infrastructure services.
- Fourth, PPP laws and frameworks are useless in the absence of an enabling and business-friendly environment. If PPP laws exist, they should be aligned with other investment laws, and the private sector needs clarity and reliability in the legal system, such as the existence of arbitration. Proper and effective contract management tools are important for the successful delivery of infrastructure projects through PPPs. Accordingly, public and private practitioners need to be trained in developing effective contract management plans.
- Fifth, because PPP contracts establish the legal basis of the contract for a long period of time, the two partners should be happy with the terms. However, governments in the Mena region should adopt a more flexible attitude towards contract design. Consultants and private sector actors routinely complain about the rigidity of government entities when setting contracts and agreeing on which clauses should be included. A sense of partnership and support for the private sector is essential to win its trust, and protect its considerable financial investment. Successful PPP contracts emerge from clarity of purpose, sensible preparation and documentation of projects, accountability and competitive pricing.
- Sixth, involving the general public in deciding PPP arrangements is also important if PPPs are to achieve public value, trust and greater acceptance. PPPs in the Mena region seem to be a two-way street that connects the government with the private sector, but leaves the general public out of the equation. Involving the public at the negotiation table is essential in order to account for their interests and needs and ensure the responsiveness of the government to the needs of the public.
About the author
MORE FROM THIS MONTH'S PPP REPORT
MAIN AGENDA: Finding a regional model for PPP
INFOGRAPHIC: PPP pioneers
COMMENT: Building bankable projects
You might also like...
A MEED Subscription...
Subscribe or upgrade your current MEED.com package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.