Challenges to increasing the use of Public Private Partnership (PPP) for public sector investment projects & mainstreaming PPPs in Public Investment Plans

Challenges :

Financial Constraints

Capacity constraints

Access to low interest funds:

Nepal lacks country rating which hinders it to access low interest funds via issuance of bonds in the international market.

Lack of proper Insurance mechanisms:

Proper Insurance is one of the credible credit enhancement instruments which are structured mainly to provide a higher protection to lenders, thus increasing the credit rating of the debt.

The PPP route has more visibility and political exposure.

After political change, new government administrations can perceive that they are only paying for an infrastructure project that generated political benefits to others (their predecessors) in the past. Worse, it is also currently reducing their budgets to develop new projects. This negative factor can be mitigated in several ways: proper communication policies, the search for political consensus on the use of the PPP model, and the establishment of a PPP program.

Land acquisition delay

Still constitutes a major cause of project completion delay, requiring heightened focus on project readiness at the outset.

Mainstreaming PPPs

  • Value for money Analysis (that is, incremental efficiency and value for money for society in comparison to a traditional delivery or government financed option for the project) prior to making decision of PPP in Public Investment plans.
  • Proper Assessment of contingent liabilities of government: Even when the assets and liabilities associated with a PPP (in government-pays PPPs) are not reflected in national accounts- so that there is no increase in public debt – there will still be a long-term commitment of public payments (explicit or implicit as contingent liabilities) which affect the government’s long-term fiscal position. For that reason, several jurisdictions impose a legal limit on PPP procurement, usually as a percentage of the total amount of capital expenditure that may be procured through PPPs, or similar methods such as a percentage of the gross domestic product (GDP). So, if we are going to mainstream PPPs in Public Investment Plans, then proper assessment of contingent liabilities is one of the prerequisites.
  • Developing PPP framework for public Investment plans
  • Developing Risk Management Plan for different public infrastructure projects & allocating resources accordingly.
  • Effective risk transfer mechanisms (The private sector is usually considered to be more efficient in managing certain risks (with a lower cost) through better risk assessment and better management of risk events (mitigating the probability and /or consequences of the risk or transferring them to a third party at an efficient cost).

Certain forms of PPP i.e. HAM (Hybrid Annuity Model)[1] have been successful and may be considered by other sectors/countries. Since the introduction of the public−private partnership (PPP) model in procuring publicly funded projects in the road transport sector in India during 1996−1999, several variants of the model have evolved over the years. One of them is the Hybrid Annuity Model (HAM), which arguably takes a more balanced financing risk-sharing approach with the private sector, emphasizes high project readiness, provides early completion incentives, and responds to several other issues facing the construction industry. HAM has been successful in enhancing the bankability of road sector projects and attracting private sector interest. The Asian Development Bank (ADB) has been actively participating in financing HAM-based road projects in India. The HAM concept is also being extended to water sector project implementation[2].

[1] In India, the new HAM is a mix of BOT Annuity and EPC models. As per the design, the government will contribute to 40% of the project cost in the first five years through annual payments (annuity). The remaining payment will be made on the basis of the assets created and the performance of the developer. Here, hybrid annuity means the first 40% payment is made as fixed amount in five equal installments whereas the remaining 60% is paid as variable annuity amount after the completion of the project depending upon the value of assets created. Advantage of HAM is that it gives enough liquidity to the developer and the financial risk is shared by the government. While the private partner continues to bear the construction and maintenance risks as in the case of BOT (toll) model, he is required only to partly bear the financing risk.

[2] https://www.adb.org/publications/hybrid-annuity-model-ppps-india-road-sector