Partnerships for Transformation - Using Public–Private Partnerships in the GCC
In the coming years, GCC nations are set to spend over half a trillion dollars on national development plans which aim to promote the growth of the private sector as well as significantly decrease the countries’ dependence on natural resources. In fact, much of this development expenditure will center on infrastructure and key public services such as health and education. Building upon this premise, Management consulting firm Booz & Company has found that one method of investing this money effectively – from both fiscal and development perspectives – is through the establishment of Public-Private Partnerships (PPPs). As collaborative mechanisms between the public and private sectors, PPPs have been successfully applied in myriad countries at all levels of development for over two decades. Indeed, by drawing in private-sector expertise and capital while adjusting the risk to the public purse, well-implemented PPPs can undoubtedly further advance the GCC’s national development agenda.
The Rationale for PPPs in the GCC
When used in a rigorous and targeted manner, PPPs can ensure efficiency, speed, transparency, and economic impact in the delivery of services or vital infrastructure. In truth, the GCC countries’ particular economic profiles make PPPs an attractive transformation mechanism – helping governments better achieve their national development plans and introduce foreign capital into priority areas. An additional benefit is that, through this process, the state retains ultimate control over projects, thereby avoiding certain privatization pitfalls.
“PPPs can also improve national competitiveness by bringing in topnotch foreign companies with transferable skills and superior practices,” explained George Atalla, a Partner with Booz & Company. “By encouraging legislative and governance changes, this mechanism will create an investment-friendly climate as well as enhance the delivery of services such as education and health.”
Furthermore, GCC countries’ natural resource endowment makes PPPs a development option rather than a fiscal necessity. “Thanks to trade surpluses and manageable public debt profiles, these nations have the relative luxury of selecting PPPs that will actively promote long-term economic development,” said Karim Aly, a Senior Associate with Booz & Company. “Today, the use of PPPs in the GCC is set to considerably increase with states such as Saudi Arabia, Kuwait, Qatar, and the UAE currently engaged in massive development programs which aim to change their economic structures.”
PPPs Benefits: PPPs combine the public and private sectors in projects that the state needs but that private companies can best deliver. In fact, experience stemming from countries who have employed this mechanism shows that the public sector reaps the following benefits from PPPs:
- Fiscal benefits: PPPs free public funds for other uses
- Risk allocation: When properly vetted and structured, PPPs allocate risk to the party best suited to handle it
- Economic benefits: PPP projects increase efficiency by accelerating the speed of delivery of services and improving service coverage and quality
- Technological benefits: PPPs facilitate the transfer of technology and know-how from the private to the public sector
- Social benefits: PPPs improve service coverage, quality, and timeliness.
Key Frameworks to Consider
“It is pivotal that governments planning to launch PPPs consider the legal, governance, and supervisory frameworks within which projects will occur, so as to provide the public and private partners with defined roles and responsibilities” said Atalla.
The frameworks to examine include:
- The legal framework: While the success of PPPs as a tool is not directly linked to having or lacking a dedicated legal framework, countries forming such partnerships should, nonetheless, still recognize that PPPs involve legally complex aspects that may not be covered by existing laws. Currently, in the GCC, only Kuwait has a well-established PPP framework of legislation, governance, and execution structures. And while the UAE and Saudi Arabia have managed without such laws, Dubai and Qatar are in the process of developing their own PPP legislation
- The governance framework: Another important consideration is the governance framework, which monitors the overall performance of PPP projects. Implemented through independent regulatory agencies, governance provides checks and balances for the government and the private providers
- The supervisory framework: The supervisory framework’s role is to carry out PPP projects on a daily basis, as these long-term agreements require regular liaison between the government and private sector. The framework’s main feature is a unit dedicated to overseeing PPPs and ensuring that procedures and execution principles continue – consistently – from one project to the next. Appropriate procedures must also be established for each phase of the project cycle. Those phases – which come into play only after the government has developed a road map that identifies what projects are needed and when – include: project assessment, detailed preparation, procurement, and project implementation.
Developing a Multisector Road Map
Indeed, for GCC countries, the most important step in creating PPPs is the development of a multi-sector road map which connects this mechanism to national developments goals. “The GCC needs to use this rigorous methodology because it identifies where PPPs are most likely to succeed and helps their governments focus their limited specialized expertise in this area on high-impact projects,” said Aly. “Similarly, the road map will alert investors to the government’s objectives and allow them to mobilize for upcoming projects.” In actuality, the road map is a top-down analysis that breaks down the economy into sectors, points to projects suitable for PPPs within these sectors, and then filters them according to priorities, before finally plotting them on a schedule.
Its development entails five phases:
Governments have to decide which economic sectors would benefit from PPPs by answering two questions: How willing is the public sector to reduce its control over a particular activity? What is the role of each sector in the national development plan?
Finding opportunities inside a sector requires analyzing its value chain and identifying priority PPP projects using five key criteria of value chain readiness, which include: Scale and long-term nature, clearly defined service needs, clear risk allocation, well-defined costs and stable requirements. Next, an external assessment evaluates the “readiness” for PPPs of each part of the value chain based on lessons learned from international benchmarks. The value chain steps identified by the external assessment then undergo an internal assessment using three country-specific criteria to winnow the results of the external assessment. These are measured by observing: demand and supply, government capabilities and legal structure and finally, private-sector capacity.
This rigorous sector analysis allows the government to compile a national registry of potential projects – the long list – and subsequently, decide whether or not a project should be considered for the final road map. The government should also ensure comprehensive coverage of the economy and alignment with national development plan objectives.
National Project Prioritization
The long list of projects is ranked according to private and public-sector priorities using five private-sector and three government criteria. Officials can, of course, assign weights to each of these criterions as is necessary for their country’s particular circumstances. The private-sector criteria evaluate the attractiveness of projects to private partners and comprise private-sector availability, size of demand, urgency, ease of implementation and revenue source. In parallel, government-sector criteria estimate the project’s socioeconomic benefits and consider impacts on private-sector employment, GDP and competitiveness.
Once projects have successfully passed through the national project prioritization filters, the government then lay out the PPP road map timeline. During this process, decision makers can select top priority projects and schedule their implementation using realistic timeframes that accommodate the government’s implementation capabilities.
Treading a Careful Path
GCC governments certainly need to proceed with caution when implementing the road map. In particular, they need to carefully manage the fiscal consequences of PPPs in order to avoid long-term budgetary liabilities as well as build their capabilities to execute and monitor projects.
Adopting the Correct Approach: The government should use three criteria to assess whether a PPP is the correct approach for a given project. These include:
- Affordability: This relates to the capacity of the end-users or the public sector to pay for the building, operation, and maintenance of the project. The government must take into account the effect on the budget if the PPP will rely either on government subsidies or purchase agreements
- Bankability: This determines whether lenders are willing to finance the PPP and obliges the government to thoroughly assess financial risks
- Value for money: This requires a cost-benefit analysis as to whether the project costs less than the best realistic public-sector alternative. In general, PPPs are likely to provide value for money if the following conditions are met: they are implemented by capable private-sector partners; risk is clearly allocated between the public and private sectors; and the public sector defines its service needs as outputs in the contract.
Building Government Capabilities: In order to manage PPPs, governments need to build capabilities, especially ones related to managing the project cycle – perhaps the most testing aspect of PPP deployment. There are four project steps in this cycle that require government agencies to have a spectrum of capabilities: project assessment, detailed preparation, procurement, and project implementation.
Fiscal Impact: A final concern for governments is how to record the long-term fiscal liabilities from PPPs. While the two main fiscal accounting approaches are cash and accrual, most governments in the Middle East use cash accounting. “However, the particular danger for governments with such systems is that they lack formal mechanisms to capitalize and record the long-term liabilities from PPPs,” added Aly. “They can also make the mistake of treating PPPs as off-balance-sheet debt, which shows misleading and illusory improvements in budget deficit and debt figures.”
“GCC countries can improve the use of PPPs as part of their ambitious national development programs if they adopt the road map method. However, these nations must also consider that PPPs are not the answer to every development problem. Governments must therefore proceed with caution and complement the road map with meticulous assessments of the financial viability and fiscal impact of PPP projects, while building the public sector’s planning and oversight capabilities” concluded Atalla.