What is a PPP and what is it not?

28 November 2016 12:00 am - 0     - {{hitsCtrl.values.hits}}

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Sri Lanka’s infrastructure needs continue to grow amidst insufficient tax revenue and a growing debt burden. Historically, these infrastructure needs have been financed through generous grants or concessionary loans. Owing to the country’s progression to a middle-income country, we no longer qualify for concessionary financing. Furthermore, the subsequent strategy of commercial borrowing for infrastructure projects has been scrutinized due to the high cost of debt servicing coupled with weak government revenue.


Despite these restrictions, the economy cannot afford to stall vital infrastructure development and private investments mobilized through public private partnerships (PPPs) have been identified as an ideal mechanism for meeting the country’s infrastructure developmental requirements. A widely popular mechanism for funding infrastructure needs in developing counties, PPPs have helped reduce government debt, achieve cost reductions, drive innovation and enabled the development of the private sector.
 

What is a PPP?


PPPs are projects in the interest of the public, where the private sector has a long-term controlling interest. Both the state and private entity bear a component of the risk involved in development and operation of the project. Risks aren’t however limited to financial alone and include the risk of failure and underperformance, design risks and budgetary overruns among others. A typical PPP project would have a specialized agreement governing it. The government would have a role in ownership, financial support and regulation. 


One of the most successful and unique PPPs in Sri Lanka was the Sri Lanka port expansion project. In 1999, the Government of Sri Lanka (GoSL) initiated the Queen Elizabeth Quay (QEQ) terminal and prompted the creation of the South Asia Gateway Terminal (SAGT). The SAGT was created by the Sri Lanka Port Authority and several private companies to improve, expand, operate and manage the QEQ terminal through a 30-year build-operate-transfer (BOT) concession. The contracting of the operation of the QEQ provided for the risk to be shared by all parties and the 30-year contract meant the private companies had a long-term controlling interest in the project. However, at the end of the 30 years, the ownership would be transferred back to the government. 
 

What is not a PPP?


However, there appears to be an incongruous understanding as to what a PPP is and the term has been used liberally to often describe privatization of state-owned enterprises, joint ventures, leases and construction contracts. For example, the lease of state-owned land to ITC India Limited, franchisee for the US-based Sheraton group, would not be considered a PPP. The agreement is merely a lease, whereby the state incurs a rental fee for the asset. Furthermore, the state does not undertake a component of the risk of operation of the hotel. The state therefore would not be liable for the risk of underperformance. However, if the state were to make an equity investment in the project, that would then be considered a PPP.


Similarly, the development of the Norochcholai Power Station is also not considered to be a PPP. While a portion of the investment is funded by the Chinese government and the construction of the power station has been contracted to the China Machinery Engineering Corporation (CMEC), this would not be considered a PPP as the private entity (CMEC) does not undertake a long-term controlling interest in the operation of the power station. Furthermore, any operational costs would be borne by the state and the private entity would not be undertaking a risk.


There is growing evidence that poorly structured PPPs have had negative impacts on both the private sector and government, therefore devising PPPs that balance the interest of parties is crucial. A careful assessment of a project should be made prior to simply branding it a PPP, as misconceived notions and incorrect labelling have created scepticism about PPPs and made them unpopular.
(This column is part of the ‘PPP Knowledge Week’ initiative by the Ceylon Chamber of Commerce in collaboration with the World Bank, which will be hosting a roundtable discussion on ‘Country readiness for PPPs and way forward’ on December 3, 2016)

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