CAIRO: Egypt is experiencing a transformation at the core of its political, economic and social systems. While the path to change may be long and unpredictable, economic growth will ultimately increase as the country introduces needed reforms. Consequently, as the population grows wealthier, demands on the country’s ageing infrastructure will grow too. To facilitate and accelerate economic growth, however, it is essential to have the infrastructure to support it.
Infrastructure improvements, it can be argued, create a virtuous circle of increased economic activity that drives further infrastructure investment. In Egypt, public-private partnerships, also known as PPPs, will play an important role in delivering that vital infrastructure for the country’s bright future.
Improved infrastructure services play a dual role: they facilitate early economic expansion and then prevent bottlenecks from forming as the economy grows. Experience in Europe, North America, Latin America and the Asia Pacific region shows that transferring the delivery and cost risk to the private sector, while maintaining tight regulation, allows governments to deliver mass infrastructure programs on time and on budget.
These PPPs, which transfer delivery and cost risk to the private sector, are working arrangements between the public and the private sector to provide basic public services such as utilities, health, housing and transport. The forthcoming Alexandria University Hospitals project in Egypt is an excellent example of a well-structured PPP project where the private sector is responsible for the construction and facilities management of the hospital building, and the public sector is responsible for the provision of health services within it.
By combining the respective skills of the public and private sector, governments receive the best of both worlds: efficient management teams bring best practice operating standards and the financial acumen of the business community and the public sector brings in-depth experience, control and regulation. This combination of the public and private sector brings about cost savings and improved services. As such, PPPs bring increased value for money to the taxpayer. There are many examples around the world of countries in low and middle income brackets that have PPP programs delivering real benefits, Advantages of the PPP path include better value for money, foreign investment and freeing up scarce public resources.
Concerning value for money, a recent study by the World Bank showed that costs for road maintenance in Latin America under a PPP arrangement were between 25 percent and 50 percent less than for maintenance procured directly by the government.
On the subject of attracting foreign investment, PPP contracting arrangements usually see the private sector responsible for financing the project. While the government will ultimately pay this cost back through usage charges, the private sector is incentivised to bring long term, often foreign, investment to the project. Additionally, evidence suggests that PPPs generate additional employment opportunities and act as a catalyst for other local development initiatives.
Finally, PPPs generally spread the cost of the project over a long period of time. As such, public funds do not have to meet heavy upfront capital costs and are thus freed up for investments in other sectors. As governments partner with the private sector, they themselves must acquire skills in finance, law and contract management that are sometimes poorly developed in government agencies. PPPs are generally long term contractual arrangements, often 20 years or more, so projects must be properly defined and structured.
IFC believes that successful PPP implementation hinges on clear, well-defined and transparent procurement processes for new projects that have clear public benefits and development impact. Straight privatizations of existing assets generally do not yield any new public benefits and can expose governments to accusations of ‘selling the family silver.’
Therefore, IFC generally advises that PPP procurement be executed through an open tender based on a set of contracts that are negotiated in an open forum by all bidders prior to the submission of bids. After the bids are submitted, no material changes to any of the contracts are allowed — especially changes with respect to tariff — and all proposed prices are made public.
The case for PPPs in Egypt is stronger than ever. Developing the country’s infrastructure is an essential step in developing the economy and improving people’s lives. Few governments, if any, are capable of delivering large infrastructure programs on their own account and it is unlikely that Egypt will be different. Furthermore, Egypt has a highly qualified, dedicated PPP unit within the government that has a track record of successfully delivering PPP projects. PPPs must therefore form an essential part of the country’s infrastructure financing and service delivery plan.
Scott Mills is an Investment Officer with IFC’s Public-Private-Partnerships Advisory team based in Dubai. He has covered public-private partnerships in the Middle East and North Africa for several years as both an equity investor and financial advisor. This commentary was written exclusively for Daily News Egypt.
The findings, interpretations and conclusions expressed in this article are the author’s own and do not necessarily reflect the views of IFC, a member of the World Bank Group.