October 6, 2008

Yielding New Benefits from Public—Private Partnerships

Funding Infrastructure as a Catalyst for Economic Growth.

Opportunities to drive economic growth with infrastructure public-private partnerships (PPPs) are numerous in the Middle East and North Africa (MENA) region. Many government organizations are tapping the private sector for capital, technology, and expertise to finance, develop, and manage public-sector infrastructure projects for water, transportation, energy, and telecom, which can become catalysts for economic growth, found a new study by Booz & Company.
PPPs - mutually beneficial relationships between the public and private sectors - are an effective way to bridge gaps between demand and resources, quality and accessibility, and risk and benefit. The ability to share risk, tap external financial resources, and profit from private-sector invest­ments and intellectual capital, gives public-sector policymakers greater flexibility in allocating both human and financial resources.
The number of PPP projects under way, the types of PPP contracts in use and the country’s political and economic policies and institutions enable PPPs to stimulate a country’s economic growth, with success dependent on the right framework and knowledge­able and trusted advisors - public and private - to assist with structuring, screening, and procur­ing high-value PPP projects.
“With the right circumstances, PPPs can be winning partnerships; governments meet obligations without debt, the public receives better or more services, and the private sector is presented with a wider market,” explained Richard Shediac, partner at Booz & Company.
PPPs as a Remedy for Budgetary Constraints
Many governments in the MENA region are under pressure to develop necessary infrastructure with limited resources, investing annually an estimated 5 to 7 percent of gross domestic product (GDP) in new infrastructure projects. Non oil producing economies are particularly pressed to fund growing infrastructure - creating numerous opportunities for private-sector investment.
Governments face a number of challenges in delivering services in the water, transportation, energy and telecom sectors: public pressure results in lower prices and loss-making services; overstaffing, mismanagement, and corruption means inefficient spending and budget shortfalls; available funds, technology, and human resources don’t keep pace with demographic change and limited ability to invest restricts the public’s access to diversified products and services.
Relationships with private-sector partners are therefore a natural remedy:
  • Private-sector governing principles minimize mispricing, cost overruns, and lack of transparency.
  • Sustainable financial expertise provides a larger pool of investment funds, eliminating financial constraints on government entities.
  • More robust investment sources enable partners to meet increased demand and channel resources to previously underserved consumers.
  • Private-sector organizations can attract and offer new services.
The 11 types of PPPs, classified into four categories, provide several options and opportunities for structuring agreements that best fit the project. Greenfield agreements are the most utilized PPPs - especially for build, own, and operate (BOO) and build, own, and transfer (BOT) agreements.
PPP Participation Varies across Sectors
“A necessary service to which the public has an inherent right is considered a “public good,” but projects with a greater degree of public good tend to have lower returns, and inspire less interest from the private sector,” explained Rabih Abouchakra, partner at Booz & Company.
Water, a pure public good, must be affordable, but its low ROI makes it unattractive to the private sector. Transportation projects are also a public good and with a stable, dependable cash flow, they are attracting a greater percentage of private dollars. Telecom has received the most investment. Its lower degree of public good makes it attractive, with a high rate of return. “The energy sector however has the greatest number of projects, and when broken down into generation, transmission, and distribution subsectors, it creates numerous ventures for private investors,” explained Rabih Abouchakra.
PPP Projects Vary by Nation
Evidence suggests PPPs may be on the rise in MENA, sub-Saharan African (SSA), and South Asian (SA) countries. Traditionally these countries have lacked the right political and economic environment for PPP investments.
How PPPs Fuel Economic Growth
PPPs can free up government resources and fuel growth if the right factors are in place: the number, value, and type of PPPs, combined with supportive policies.
The number of PPP contracts.The more PPP projects launched, the higher the rate of GDP growth. They bring capital into the market while creating long-term employment, in turn driving consumption, generating more wealth and fueling a stronger economy.
Value of the PPP projects.Higher-value projects inject financial resources and investment into the economy. As PPPs introduce additional financial resources, government expenses decrease.
Type of PPP contract.The type of PPP contract has the greatest influence on economic growth, as the contract will determine the level of private-sector involvement. As private-sector involvement increases, so does the quality of the project and knowledge transfer.
How the Type of PPP Contract Improves Quality and Standard of Living
Countries with a large number of PPP projects generally enjoy better infrastructure. This means a higher standard of living, better prices, and elevated levels of productivity.
PPPs foster service expansion.Private partners are driven to invest more resources in expanded services and improved customer service to generate profit.
PPPs operate with greater efficiency.Private-sector partners find opportunities to introduce more efficient practices to reduce waste and improve revenue collection.
PPPs deliver in less time.Private firms have many incentives to deliver on time, and greater efficiency and more resources and capital means they can expedite financially lagging projects.
PPPs offer more choice and modern services. Private investors have the capital to invest in special­ized training, resources, and technology, enabling them to offer more choice in terms of service provision.
PPPs assign risk based on resources and ability. The public sector bears risks related to politics and the private sector bears commercial risks related to financing, developing, and managing a project. Other commercial risks are shared between the public and private sector. Risk that is not adequately dealt with can cause the PPP to collapse.
Government Policies Central to Attracting PPPs
Lack of a regulatory framework; fragile institutional setups and questionable financial stability are symptomatic of some countries in the MENA region, while possible threats of war and weak governance and no widespread vision for a PPP network, all make it hard to attract private investment. “Although infrastructure PPPs can offer positive results, they carry a fair amount of risk for investors,” said Richard Shediac.
A three-step decision-making process generally occurs before entering into a PPP; with choices affecting the PPP’s potential to positively influence overall economic growth.
Countries with large markets and low political and economic risks are most attractive to investors.
  • Enter the country or not?
  • Based on the sector, level of risk, and the potential to generate revenue, this is where the investor will decide its level of commitment to the market, which determines the type and value of the PPP contract.
  • What is the optimal mode of entry?
    This step may be the most important. The level of commitment and knowledge transfer is what most affects the PPP’s influence on the economy.
  • What is the level of resource com­mitment and knowledge transfer?


The government’s role is clear:
Governments need to minimize economic and political risks. Investing in an infrastructure project is risky for the private investor and the government must minimize risks to attract more PPPs to its market.
Governments need to optimize private-sector commitments to maximize the PPP’s effect on the economy. PPP arrangements with greater private-sector involvement will contribute to GDP growth. “The government needs to promote and negotiate contractual agreements that encourage the private sector to invest more money, transfer expertise, and increase accessibility and product choice,” commented Richard Shediac.
Governments should secure a sound regulatory system to maximize resource commitment and transfer of know-how. Competitive markets yield benefits for consumers and government alike by reducing prices, creating more services, and providing greater accessibility, but the government must also establish a number of policies that encourage competition.
PPPs Lay the Groundwork for Global Development
PPPs can help increase a nation’s GDP, but this is dependent on the number and value of PPPs in the country, the type of contract, and the policy and institutional environment. Policymakers must evaluate these factors, and craft a strategy for infrastructure development, then ensure their actions can sustain the strategic goals. A PPP-friendly environment must exist to attract investors, encourage public support, and ensure long-term project success.
“At every step, private investors’ interests must be balanced with public safety and access. Because every PPP prospect presents a new and different opportunity to guide economic development, every prospect must be evaluated, vetted, and selected on its own merits,” said Rabih Abouchakra.
Third-party advisors with knowledge about the intricacies of PPP structures and the factors that drive economic growth can provide assistance with creating PPP-supportive frameworks. Once the ideal circumstances are in position, public-sector policymakers can chart a course for a stronger, more vibrant future where pri­vate investors improve public infra­structure projects. In return, the government invests more resources in other areas of public interest in anticipation of a thriving and open economy that is better positioned to extend its global reach.