Friday 2 June 2023

Rana ... lack of funding and public-sector capacity major challenges.

PPPs 'vital to bring efficiency into public sector'

DUBAI, September 25, 2018

By Dennis Buckly

The push for Private Public Partnerships (PPPs) offers significant opportunities for governments to bring in efficiency into the public sector. Sectors that have been traditionally held by the public sector, such as power, telecom, health etc., can now be delivered through PPP models, said Fida Rana, a leading PPP consultant of The World Bank.

If properly implemented, PPPs can offer significant service improvements, and thus offer value for money to the taxpayers, stated Rana in an interview held on the sidelines of the three-day Mena PPP Forum: Anchoring Solid Partnership event at Shangri La Hotel in Dubai (September 17 and 18).

Rana is a regular speaker in international conferences and workshops on PPP and infrastructure finance. He has written extensively on infrastructure finance and PPPs.

A leading infrastructure finance and PPP expert, Rana boasts over 18 years of international experiences covering Asia, Africa, the Middle East and Central Asia. He is currently a PPP consultant to the World Bank’s Infrastructure & PPP team.

Rana has long professional experiences in project & infrastructure finance, credit risk, Islamic finance and PPP. In his professional capacity, he has been a pioneer in structuring and financing infrastructure projects in many countries, especially in emerging and developing economies.

A veteran project finance professional, he has been instrumental in arranging, underwriting and syndicating structured loans in a wide variety of industries (power, oil and gas, mining, social infrastructure).

During the interview, Rana discussed some of the pressing issues on the sector in the Midlde East and North Africa (Mena) region, including the key factors for a successful PPP, the skills that a leader must have for successful projects, and his advice for organisations that are moving into this arena. 

Excerpts from the interview:
*What are the opportunities and challenges in economic growth with the rise of PPP projects internationally?

The huge global need for infrastructure, in all regions, is giving rise to a massive infrastructure investment deficit. The infrastructure deficit in emerging markets and developing economies (EMDEs) is particularly acute, and is one of the contributing factors to the low income level in these countries. Against this backdrop, many of them are resorting to tapping private capital by introducing projects.

With opportunities, there come some challenges too. I would highlight two challenges in particular that are often seen while implementing PPP projects: lack of financing and public-sector capacity.

With infrastructure need comes the question of funding. Traditional financing sources are not enough to support the need for scaling up PPP needs globally. Practitioners around the world are increasingly looking for innovative solutions to bring in more financing into infrastructure development. The World Bank Group and other multilateral organizations have been working tirelessly to bring in more private capital towards infrastructure development. This remains a significant challenge.

The other challenge is the capacity issue of public sector to deal with PPP projects. There is a dearth of bankable projects in the market and a common cited cause is the capacity constraint of public sector entities to develop such projects. Examples are abundant where these projects did not graduate to reality, either failing to attract interested sponsors, or despite getting sponsors, being unable to entice lending community. A failed PPP initiative leaves behind multiple impacts – failure to deliver an essential service to people, enormous loss of time and resources invested by public and private entities besides weakening the investment climate perception of a country among private investors.
*What do you consider as the key factors for successful PPP, particularly in the Mena region?
Optimal risk sharing is the key to successful PPPs, not only in Mena region, but globally. While speaking to public officials involved in PPP initiatives in many developing countries, I noticed a rather misperceived idea that PPP is a private sector-driven initiative, and hence the private investor must take most of the risks. This creates a tendency of shifting as much risks as possible to the private investors, without much considerations on whether they can actually manage those risks.

The fundamental principle that governs a win-win risk sharing protocol is to allocate risks to the parties who are best able to handle it. For example, a private investor cannot mitigate risks stemming from macroeconomic issues, such as exchange rate fluctuations, inflation and the likes. Similarly, the public entities are not supposed to take the risk of a poor operating performance of a PPP project, since it is the private investor who is tasked with running the PPP project.
*What are the demanding skills that leaders must have to ensure PPP projects yield benefits for all stakeholders?
Leadership can refer to two categories when in comes to implementing PPPs: political leadership and executive leadership. The former needs to focus on ensuring the value for money and as such, selection of projects that yield the highest value for money for the stakeholders. Continuous political support for PPP program at the country level is also important for a sustainable PPP journey. We need to remember that the life cycle of infrastructure projects is way longer than the political life cycle, so selection of the right projects and continuous support to them is vital. For executive leadership, as I mentioned earlier, there is a need to build up capacity to prepare bankable PPP projects. Leaderships at the executive level of different line ministries should focus on developing their internal capacity to deal with PPP projects.
*Having been involved in major projects across Asia, Africa, the Middle East and Central Asia, what do you think are the biggest benefits of PPP? On that note, in your opinion, which economic drivers have made PPP popular, especially in the Gulf countries?
The biggest benefit of PPP projects, in many emerging markets, is to tap into the private capital to deliver goods and services that are public in nature. These countries are often constrained by their fiscal ability to develop necessary infrastructure projects in tandem with the population growth. PPP allows them to tap into private capital to develop the projects and deliver the services in a more efficient way.

GCC countries have been exploring PPPs for many years and they have been particularly successful in the energy and water co-generation sector. Countries such as Saudi Arabia, UAE, Oman and Qatar have established track record of independent water and power projects. For many years, all of these countries were on high growth trajectory, fuelled by massive construction activities.

On top of that, if we consider the population growth, demand for power and water are always on the rise. On the other hand, falling oil prices caused a strain on many of these countries to deliver infrastructure projects – making a natural cause to resort to PPPs.
*As a PPP consultant to The World Bank, what is your advice for organisations that are moving into the PPP arena?
PPP projects are capital intensive in nature, requiring large-scale funding to construct. The spur of PPP projects in many countries started in the early 90s when international and regional banks, including development financial institutions started big ticket lending for infrastructure development. To pave the way, those countries went through a number of policy and regulatory changes, making them conducive for PPP investments. Overwhelmed by these success stories and driven by the dire necessity of providing essential public goods and services to the people, governments of many developing countries started designing large scale infrastructure projects in PPP fashion.

Setting up a dedicated PPP centre brings together the necessary skills to deal with the policies and projects across various sectors of the country. A well-designed PPP project in a sound policy context makes it easy to attract investors and lenders alike.
*Can you share with us an example of a PPP project that you’ve worked on previously? How was the impact on the economic growth?
The Konya PPP hospital project in Turkey is worth mentioning. The government there had launched a comprehensive transformation/restructuring programme of its healthcare system 12 years ago, with the aim of providing citizens with comprehensive and quality healthcare services. Under the Healthcare Transformation Programme, the government aimed to capitalise on private sector’s investment capabilities and experience in healthcare services to meet the significant capital expenditure necessary to implement the program. GoT aims to develop 35 new integrated PPP health campuses.

Konya PPP Hospital is the first such hospital financing project in Turkey that successfully used Islamic finance. Other MDBs who will be providing funding to this project alongside the Islamic Development Bank include European Bank for Reconstruction and Development and Black Sea Trade Development Bank.
*Generally, how do organizations assess external risks in PPP projects?
Managing external risks is a challenging task for PPP projects. With external risks, most of the time practitioners refer to uncertainties that are beyond the control of a PPP project itself, but affect the economics of the project. These risks can manifest through fluctuations in price and/or demand of the service or goods the project is offering and the cost of delivering those.

External risks are difficult to hedge against. Here comes the challenge for a PPP project that relies on direct cost recovery method for its sustainability. In most of the cases, the answer to the problem is in the project’s contractual design for risk allocations, predominantly through off-taker agreements.

In many countries, for example, the off-takers are either state-owned entities (SOEs), government parastatals or quasi-government. Many of these entities' financials are not strong enough to support a long-term commitment for PPP projects. These entities rely heavily on support from the central government or line ministry. Unless the off-take agreement is backed by a guarantee from the government of line ministry, there remains the chance that the project might not become bankable.

Tags: Water | government | Infrastructure | electricity projects |

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