PPP arrangements and its advantages for Sri Lanka


Research Intelligence Unit – www.riunt.com

The following article is taken from the forthcoming RIU publication on Public Private Partnerships in Sri Lanka and is authored by Pauline Mattihas, Executive Director (Finance), Board of Investment, Sri Lanka.

Over the last ten (10) years there has been a global increase in public private partnerships (PPP)’s for the development, financing, & operation of infrastructure. These PPP projects are being primarily driven by Governments wanting to implement projects without recourse to public funding. The array of projects, which has been developed on PPP basis range from tollroads, water & sewerage treatment plants, ports, waste disposal, power stations, hospitals, schools & prisons etc.

The investment in PPP projects over the last fifteen years in Sri Lanka amounts to 15 projects with total investments of US $1651.9 Million. When compared with others in the region Sri Lanka is placed behind India & Pakistan in terms of Investment & behind India, Pakistan & Bangladesh in terms of number of projects implemented.
Why are Governments moving away from the traditional method of financing of infrastructure projects & encouraging more & more projects with Private sector Participation? To understand this first we must understand what is meant by a PPP. Public-private partnerships" (PPP) refer to contractual agreements formed between a public agency and private sector entity that allow for greater private sector participation in the delivery of infrastructure projects through providing design, financing, construction, operation & management of infrastructure for a specific period of time. By adopting the concept of Public-Private Partnerships in the delivery of infrastructure services, the Governments change their role from that of ‘rowing’ to ‘steering’.

Sometimes the term Public Private Partnership is increasingly used to include what is traditionally been called privatization. Whereas full privatization entail a transfer of ownership of a state owned enterprise from the public to the private sector, a PPP focus on the on-going of state or public sector in the partnership through infrastructure sector policies, regulations, & tariff setting & licensing such as through concessions.

The benefits & advantages of projects structured under PPP basis can only be achieved if the projects are structured & finalized & if the procurement process is transacted in the most transparent, competitive & efficient manner. There are several examples of PPP projects in the world, which have been transacted either hurriedly or in shady manner ending up in conflicts or renegotiations. But PPPs are not a panacea. These contracts are long term & often complex. If the projects are not properly structured it will do more damage to Governments than projects implemented in the traditional public procurement methods.

Another key factor in implementing projects on PPP basis is to adopt transparent procurement methods. In the absence of clear policies in the development of key sectors lead to an influx of un-solicited proposals from the private sector. Often these proposals are backed by political powers & leads to corruption & also not obtaining the best value for the country.

The newly established National Procurement Agency (NPA) has been working proactively to set standards in transparent & efficient government procurement procedures. Government Tender Guidelines were first introduced in 1997 & recently being revised, supplemented by a Manual. Several training programs are also being conducted by the NPA to educate the State sector employees to achieve efficiency & obtain best value for Government procurements.

In terms of FDI Sri Lanka is lagging behind its counterparts in the region with only US $ 240 Million of FDI in 2005. 2006 seems better with US $ 600 million achieved up to November 2006. India boasts of US $ 6.000 Billion, Bangladesh US $ 800 million & Pakistan US $ 2.2 Billion. Lack of infrastructure in terms of road access, ports, industrial parks, high costs of power are some of the major obstacles identified in achieving the targets. Budget constraints, long drawn procurement processes, delays in completion of contracts, management inefficiencies, lack of clear policies, labour resistance are some reasons attributable for the slow growth in terms of infrastructure. On average the Government spending on infrastructure is only about 5% of GDP annually. The investment in infrastructure in 2004 has amounted to Rs. 90.3 Billion & for 2005 (provisional) it is Rs.137.9Billion. (Source; Central Bank of Sri Lanka Annual Report-2005). Board of Investment of Sri Lanka (BOI) has set up an ambitious goal of FDI of US$ 1billion for 2007. Further the Government’s priority of developing the rural sector can only be achieved if the infrastructure is in place in terms of roads; power & industrial zones.

Contract management & regulation is another essential factor in the PPP Process. However much the structuring of the project was done, lack of proper regulation will result in not achieving the objectives of the project.

Regulation by contract & regulation by an independent regulator are two common methods adopted in practice. Regulation by contract uses the contract itself as the primary regulation instrument. In this case the rules that govern the roles & responsibilities of the parties as well as any performance expectations must be clearly defined in the contract, & regulation is carried out through a combination of contract monitoring & management.

Independent regulation entails the establishment of an independent entity charged with conducting technical & or economic regulation of the private partner in accordance with predefined rules. These rules are set out in the regulatory framework using such instruments as laws, regulations, & licenses. Independent regulation is most commonly employed with the objective of de-politicizing the setting of tariffs or user fees& thus the form of economic regulation used is critical to the success of this approach.

Role of the PPP Unit

The PPP Unit in the BOI was established in November 2006. This Unit is planned to be equipped with qualified & experienced staff with skills in financial analysis, legal, transaction & sector specialists. The PPP Unit plans to be a facilitating Unit to other agencies, in implementation of infrastructure projects on public private partnership basis. The National Procurement agency (NPA) is presently redrafting the guidelines for the procurement process of PPP Projects. The PPP Unit will function as a member of all project Committees appointed to handle PPP Projects. Already several large-scale infrastructure projects are underway. A 300 MW Power Project on dual power basis, Development of the Colombo South Harbor Terminal & the development of a MRT in the Colombo metropolitan area are three large scale projects each costing over US 350 million. In addition there are twelve Special Economic Zones to be developed by the Board of Investment of Sri Lanka (BOI). Several Donor Agencies have expressed their intention of assisting the PPP unit in their future activities. The BOI is working with them to obtain their assistance in the development of staff skills, preparation of standard bid documents & obtaining transaction advisors on a case-by-case basis.

At present the Government is facing a daunting challenge. There is a massive need to augment the existing infrastructure, extend public services to those who are currently not receiving them, & improve the quality of services received by all of the society. The projects have to be identified, feasibilities carried out; commercial viabilities worked out & then offered for bidding. The role of the PPP Unit is to coordinate this effort with the relevant ministries & obtain the assistance of the donor agencies in this effort & then offer to the public for their proposals.

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