Sunday, 21 June 2015

Can Public Private Partnerships (PPPs) Help Reduce Ethiopia’s Infrastructure Gap? Opinion Piece!

Trend in the Economy:

For over a decade, Ethiopia’s public sector led pro poor development strategy with a focus on heavy infrastructure investment underpinned the country’s economic growth and this pace of accelerated growth is forecast to sustain in the years ahead. According to African Economic Outlook (AEO) 2015 Report, Ethiopia’s economy grew by 10.3 percent in 2013/2014 making the country one of Africa’s top performing economies.

Fig 1. Ethiopian Economy’s growth (Taken from AEO 2015)

At this juncture, when growth and transformation plan one, GTP 1, is expected to expire in a matter of days, and the next phase of it is eagerly awaited by many to be endorsed by the parliament and publicized, the country’s economic think tank in Addis Ababa knew what worked well in the past and took considerable time to readjust the course for the failures. 

The Infrastructure deficit:

Ethiopia has made a lot of progress in its infrastructure investing heavily on developing its national carrier, upgrading and expanding the road, ICT and rail  networks, access to power, water and sanitation,  and housing for over a decade.

Fig 2. Ethiopia’s Infrastructure Improvement (Taken from deloitte):

Given the high magnitude of the infrastructure deficit or gap prevailed in the country however, it still requires to invest more and will be a challenge to address all with the current trend, through public investment.

Relying heavily on the publicly borrowed money to address the existing infrastructure gap will drive the already rising debt to GDP ratio, 24.3% at the end of 2013/2014, even higher resulting in a credit downgrade - which in turn either increases the cost of borrowing or makes the access to capital more difficult

Considering the IEA’s Africa Energy Outlook 2014 Report for example, only about 30 percent of the Ethiopian population has access to grid electricity alarming the nation for an extraordinary effort to light the bulb for an additional 2/3 of the population. Similarly, according to deloitte, up until 2010, only 10% of the population live within two kilometers of an all weather road posing a serious challenge considering that 76% of the population lives in rural areas-requiring an investment that should triple the road network. This is where PPPs could play a fundamental role for Ethiopia in changing its infrastructure landscape for the better if the guiding principles of PPPs are established, developed and practiced well.

To add one more example where PPPs could work in Ethiopia is football stadiums. Ethiopians are mad for football but lack of quality stadiums has been hindering not only the progress and development of the country’s football but also the business opportunities that could follow as it has not been a priority to build stadiums with the public money. One of the best stadiums in Brazil where the last world cup took place was born out of such arrangements. The private company was allowed to design, build and operate for a long term contract with the public authority with just its own capital.

Fig 3. Share of Ethiopia's population without access to electricity (IEA AEO2014)

Hence, for Ethiopia to sustain the current economic growth and to be competitive on the regional and international trade, it would be worthwhile for the country to complement the public sector led investment with private sector led investment through public private partnership arrangements. It would also be an advantage to the country if public money is prioritized to less financially feasible but economically beneficial projects. In addition to tapping the private capital for provision of public services, public private partnerships will bring opportunities for Ethiopia in the form of efficiency, effectiveness, speed, innovation, transparency and competitiveness to the procurement processes and the likes. Moreover; PPP implementations will send a clear message to the cautious external business communities that its door is open for business

What are Public Private Partnerships and PPP frameworks ?

Depending on the context and where it is applied, Public private partnerships could have a variety of definitions but basically it is a contractual arrangement between the public sector and the private party where both parties share rights and responsibilities over the life of the contract for the latter's provision of public services. While privatization involves the permanent transfer of previously publicly owned asset to the private sector, PPP necessarily involves a continuing role by the public sector as a partner in an ongoing relationship with the private sector.

For Public Private Partnerships to succeed, we should first enabled PPPs- often involving introduction of PPP specific processes, rules, institutions and developing frameworks. As per the World Bank’s Public Private Partnerships reference guide version 2.0, frameworks should be comprehensive enough including the components of policy, legal, processes and institutional responsibilities, public financial management approaches, and broader governance arrangements.

Given the growing demand in infrastructure facilities and provision of basic services, the private sector will design, finance, build and operate a public facility bringing speed, efficiency, local innovation and etc for a financial return in the form of user fees or direct payment from the government through public private partnership arrangements, which would otherwise be difficult to satisfy only with the latter’s pocket.

Public Private Partnerships in Ethiopia:

Based on the openly available data resources, and against public perception, public private partnerships have been practiced quite for some time in Ethiopia although the extent of application has been extremely limited. Other than the recent power purchase agreements for geothermal power generation and smart power meters production deals, most of the public private partnerships have been focused on grant based projects and programs whose scope was again insignificant.

PPP Approach Recommended:

Considering the limited experience of the country and the complex nature of Public private partnership programs and projects, starting small, learning from practice, building capacity and scaling up the program will help address the challenges and tap the benefits of PPPs overtime. Centralizing the system, and crafting a clear and common processes as opposed to what has been happening to date, noting that the ongoing PPP arrangements are too decentralized, will facilitate the monitoring and evaluation of the financial implications of each PPP in the short term and long term scenarios.

On the one hand, by building partnerships with the private sector, the government will alleviate the problem of crowding out of the private players and achieve the intended objective of better services for the general public, and on the other hand, public private partnership programs will push the private sector to build capacity, and consequently the opportunity to work with the government for a long term sustainable profits. Besides, through formation of Consortia, the private sector will develop the culture of working together amongst themselves bringing healthy environment to the business community.

In both cases, taking the complex nature of public private partnerships in to account, they should fundamentally change the skills and compositions of their teams for a success in PPP. Public private partnership champions are most often the difference between a success and a failure among countries around the world and should be made an agenda in Ethiopia as well.

Until the required capacity is built, experienced advisory groups such as the International Finance Corporation, IFC, could be employed. With the necessary set up in place, the expertise in the private umbrella organizations could also play a major role in bridging the gap between the two. The existing public private dialogue forum is also an opportunity not to be missed to develop public private partnerships in Ethiopia.

Allowing and encouraging the private sector to come up with unsolicited proposals, saves a considerable amount of funding for the government which would be spent on research and identification of financially feasible projects. The government will then focuses and spend the scarce resources only to evaluate the proposals if they are economically feasible too.

According to the World Bank, implementation of Public private partnership programs and projects have seen a rise since the last two decades or so and are becoming complementary solutions to traditional public procurements contributing a significant percentage in infrastructure investments even though designing, structuring and implementing them  remains a challenge and a complex issue, still.

In that regard, learning from other countries’ experiences will be decisive. In my extensive readings during the course on PPP: How can PPPs help deliver better services? provided by the World Bank Group in collaboration with Coursera, I found the experience of Chile quite impressive and important for Ethiopia to look in to as a model except for some minor changes in the structure of the government sectors.

Fig 4. How Chile succeed in PPP:

Firstly, Chile not only enabled the PPP program by a decree but also defined the PPP framework well.

Secondly, they updated the decree in to a concessions law to accommodate the challenges they faced along their way, and through the law they set out the institutional responsibilities and processes for developing and implementing PPPs. They formed a Concessions Unit in the Ministry of Public Works (MOP) that act as an implementing agency for all PPPs in the country. They then authorize this unit to manage the PPP programs from start to the PPP’s lifetime with clearly-defined processes.

Thirdly, the National Planning Authority is tasked to review and approve the technical and economic analysis of the project employing the advisory of technical groups.

Fourthly, the Ministry of Finance is tasked to approve PPP tender documents before they can be published, any changes made during the tender process, and any significant changes made through the lifetime of the contract. To manage these oversight responsibilities, the Ministry of finance established a Contingent Liabilities Unit, which reviews all projects in detail prior to approval, and calculates the value of the government’s liabilities initially and throughout the contract.

Fifthly, the Treasury makes all the payments established in the PPP contract in accordance with the procedures and milestones stipulated in the PPP contract.

Finally, they formed a technical panel to resolve disputes that emerge during the implementation of the project. If the solution proposed by the technical panel does not resolve the problem, the parties are allowed to escalate their complaints to the Arbitration Commission or the Appeals Court of Santiago.

In conclusion, a clearly defined PPP framework, institutional responsibilities, processes and top government commitments, builds the confidence and trust of the private sector in Chile to put their capital to projects of total investment value of USS$14 billion to public private partnership arrangements for a longer term, and ultimately a success for Chile.

Like the case in Chile, there is a lot of potential for public private partnership arrangements particularly in the infrastructure sector of Ethiopia. The experience and expertise of partners and donors could be leveraged at least in the beginning to build capacity and establish the good practices and PPP frameworks well for a success in PPPs in        Ethiopia.

Written By:  Tigabu Atalo 
                                            Power, Energy and Infrastructure Consultant
                                           Experienced Projects Manager


Public private Partnership Course- by the World Bank in collaboration with Coursera

Ethiopia a growth miracle-Deloitte

Ethiopian Economy Country note

What Power Africa Means for Ethiopia
Ethiopian Energy Sector Overview

Africa Energy Outlook 2014 report-IEA

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