By Hassan Abdulrahim

KUWAIT: In this section, we will discuss, what we believe at Visionary Consulting, the essential steps required to develop a Public-Private Partnership (PPP) program. The primary questions we’ll address are: How can governments best facilitate the development of PPP projects? What can governments do to foster a PPP enabling environment?

Governments can establish an environment favorable to PPP development by taking four primary steps: formulating a clear policy, ensuring legal and regulatory frameworks are compatible with PPPs, ensuring relevant institutions can support PPP implementation, and securing sufficient resources to finance PPP projects and make them attractive to private partners. Let’s examine each of these elements in detail.

1. Policy formation

The government must develop a vision and strategy for using PPPs to deliver public infrastructure services. This involves addressing the objectives of the PPP program, the targeted sectors, the types of PPPs envisioned, and the implementation strategy. This can be done through a policy document or a dedicated PPP law. High-level political support is crucial due to the sensitive nature of PPP projects. Public opinion can easily sway towards the belief that too much favor is given to the private sector, leading public authorities to question their commitment to a PPP project. Political support is often the primary roadblock to successful PPP transactions.

Strong, consistent, and stable support from top policymakers is essential. Support from senior politicians is required to build consensus among different ministries and agencies and to address internal resistance. Without internal buy in, government officials may only submit projects feasible via traditional procurement methods, dooming the PPP program to failure. An official PPP policy sends a clear message to the private sector about the government’s intention to develop a pipeline of PPP projects, encouraging long-term investment.

A well-prepared pipeline of projects is essential to convince investors of the viability of PPPs in a country. Starting with the easiest projects, those most likely to succeed, is a good strategy to build a convincing track record progressively.

2. Legal and regulatory frameworks

The legal and regulatory frameworks must be compatible with PPPs to attract private investors. Legislation might need adjustment to make private sector involvement possible. Key considerations include defining the competent authority to approve PPP projects and sign PPP contracts, authorizing private involvement in various sectors, and addressing limits to foreign investment in infrastructure. A clear legal framework is essential to prevent parties from using legal arguments to exit PPP contracts. Adequate procurement rules are also crucial to establish a fair, transparent, and competitive bidding process.

Adjustments to public procurement rules may be required due to the complexity of PPP projects. Dispute resolution mechanisms, such as arbitration, should be in place to deal with differences between public and private partners over long-term contracts. Regulation of tariffs is another key consideration. If a private operator is authorized to collect fees from users, the method of setting and adjusting fees over time must be clear. Sector regulations are often necessary to establish methodologies for tariff setting and review.

3. Institutional arrangements

Adequate institutional arrangements are crucial for PPP enabling environments. A clear allocation of responsibility is required to implement a policy. Government officials must have the capacity to implement PPP projects and access the required expertise. Many governments establish PPP units to provide necessary institutional support. These units typically perform three broad functions: supervision, facilitation, and promotion.

Supervision: PPP units screen project proposals to assess their suitability for PPP implementation. They advise approval committees at different stages and may also monitor if the PPP program meets its objectives.

Facilitation: PPP units provide technical support to government agencies in identifying PPP opportunities and developing PPP projects. They facilitate coordination among various government agencies and rely on external expertise for technical support. Standardized procedures and documents can reduce transaction costs.

Promotion: PPP units support the development of well-prepared pipelines of projects and market them to investors. They promote PPP solutions internally, raise awareness among government officials, and manage public perception by providing information on the benefits of involving the private sector in public infrastructure delivery. The location of PPP units varies by government. They are often close to the Ministry of Finance due to the budgetary implications of PPP projects.

To prevent conflicts of interest, assessment responsibilities may be allocated to another institution, like a National Audit Office.

4. Financial support mechanisms

Developing a PPP program requires funding to prepare projects. Some countries establish project development facilities to access expertise not available internally. These facilities recruit consultants to draft PPP contracts, develop project specifications, and evaluate financial proposals. Dedicated facilities ensure resources can be quickly mobilized, independent of the yearly national budget cycle. Financial support mechanisms may include tax exemptions, reduced import duties, and guarantees to cover risks the private partner is unwilling to take. Governments may also cover partial project costs through viability gap funding.

This funding fills the gap necessary to make economically viable projects financially feasible. Having said that, we believe that the success of a PPP program is influenced by the economic and business climate of a country.

PPP project viability depends on the overall macroeconomic environment, the availability of a qualified labor force, a large enough customer base, and economic activity that creates demand for infrastructure. The state of the local financial sector also determines whether the private sector can easily access long-term funding for projects. Private investors are more likely to invest in countries with a favorable business climate. By addressing these key steps, policy formation, legal and regulatory frameworks, institutional arrangements, and financial support mechanisms, governments can create an enabling environment that fosters successful PPP programs.

Note: Hassan Abdulrahim is Senior Instructor, Economics & Finance, at Canadian College Kuwait and Deputy CEO at Visionary Consulting Company