Private financing needs to be mobilised for projects

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NORTHAMPTON: 

The recent demise of Carillion, one of the biggest integrated business service providers in the UK, has raised some important questions.

The company was involved in providing support services, construction services to the Middle East and beyond and most importantly, in big Public Private Partnerships (PPP) with the UK government in defence, education, transport and energy.

Considering the breadth and scope of its activities, why was no measure taken to tackle a significant £2.6-billion deficit?

How will the government take into account its own monitoring and decision-making failure when the company gave an initial profit warning last year? And ultimately what does its demise say about public private partnerships in general?

Public-private partnerships: an overview

Although there is no one definition of public-private partnerships, it is defined by the World Bank organisation, the PPP Knowledge Lab, as a long-term contract between a party and a government entity for providing a public asset or service in which the private party bears significant risk and management responsibility, and remuneration is linked to its performance.

Normally, utility restructuring, civil works and service contracts, concessions, Build-Operate-Transfer (BOT), Design-Build-Operate fall under the domain of PPP projects. Important examples of BOT projects are that of the private party delivering a service to the public sector in the form of bulk supply such as a water treatment plant or the management of a hospital against a fee.

Besides these projects, other types of agreements might also fall in the domain of a PPP depending on the country’s legal and institutional setting. One of the most crucial components of the PPP agreement is the contract itself. The delineation of the terms of the contract is where responsibilities of each party and a clear allocation of risk are outlined.

Pakistan’s case

Pakistan, like most other developing countries, faces a large infrastructure deficit with the need for infrastructure rising with economic growth and burgeoning size of the population.

The country’s poor performance on the infrastructure front can be witnessed by the fact that it has a score of 2.71 out of 7 on the Global Competitiveness Index Infrastructure Score. This score is a component of the overall Global Competitiveness Index and covers transport, electricity and telephone infrastructure.

The score compares poorly relative to other South Asian neighbours such as India and Sri Lanka who have scored 3.7 and 4.2, respectively.

The above-mentioned facts make a compelling case for greater mobilisation of private finance to cater to the rising demand. Some efforts have been undertaken to achieve this.

At the state level, the Private Power Infrastructure Board and Infrastructure Project Development Facility exist whereas Sindh and Punjab provinces have their respective PPP cells to deal with PPP projects.

A total of 77 projects have reached financial closure worth $16.7 billion since 1990. The earliest amongst these was the Hub Power Company which achieved financial closure in 1994 and was built at a cost of $1.6 billion. This project has been one of the largest PPP project in Pakistan’s history.

Currently, 76 projects are active or under construction, while the active investment in these projects is equivalent to $16.5 million. Most of these projects are energy related with the Engro Thar coal-fired power plant of 660MW, the most expensive being built at a cost of $1.1 billion.

There are other clean energy projects in Sindh and Punjab in the form of tapping wind energy.

Some issues related to PPP projects

It is imperative to note that at the heart of the PPP arrangement is the government. The government will remain a crucial player in infrastructure finance. The relation between the government and the private sector is at the core of the infrastructure financing problem.

Infrastructure policy lies exclusively in the domain of the government and requires long-term planning regardless of ultimately how it is financed.

The writer is a doctoral candidate at The Bartlett, UCL

 

 

Published in The Express Tribune, February 12th, 2018.