Thursday, July 30, 2009

Is your lunch delivering the Value for Money?

Value for Money (VfM) is a concept much older than PPP. You might find yourself, asking this very question, after an expensive lunch “was this value for money?”. Indeed if you can buy the same quality lunch for half of price, you can easily conclude, that this lunch was not value for your money. However the question also is; did you consider the risks? The risks you undertake in perhaps less reputable restaurant or risks related to commuting to a cheaper place or less convenient venue. Did you think about the risk that you shall not get served quickly enough and that you shall find yourself ill with food poisoning? Yeas all these factors have to be considered. On the other hand you can have the same risks in a very expensive restaurant as well –, but perhaps with a different probability.

As you can see, in order to evaluate Value for Money, you have to consider all risks and also the probability related to them. You have to consider the price and compare the quality and find some formula of how to evaluate this. Value for Money measurement in PPPs is no different. UK government started to use as a method to measure Value for Money a reference “lunch”. Reference lunch in this case is a project which delivers public infrastructure or service. This project is examined if being delivered traditionally by public sector and used as a reference. Than the reference project is being compared to options in using different forms of PPP and in the end of the day, comparing the private sector bids. UK Treasury Guidance on VfM has defined VfM “as the optimum combination of whole-of-life costs and quality (or fitness for purpose) of the good or service to meet the user’s requirement”.

The concept had some pedigree and good rational and so number of other countries has adopted Public Sector Comparator (PSC) as a way to ensure Value for Money in all procured PPP projects. One of such countries has been Australia. According to the Technical note of Partnerships Victoria “ The PSC estimates the hypothetical risk-adjusted cost if a project were to be financed, owned and implemented by government. The PSC is developed in accordance with the required output specification; the proposed risk allocation reflected in the contract released with the Project Brief, and is based on the most efficient form and means of government delivery.

However to compare one lunch with another is rather easy – you can actually get both and taste, but with infrastructure projects you can only build the project once, and sometimes you can only procure the project once so all your comparisons are theoretical and leave an open space for questions. Number of issues in PSC has been reported by UK National Audit office and the issues around PSC have been extensively discussed since. PPIAF have discussed this and the relevance of PSC for the developing countries in the article “Is the public sector comparator right for developing countries?”. The conclusion that “the PSC method, particularly as used in some industrial countries, may not be the best way to do all this in developing countries…”

Dutch way of looking at this was a little bit different. Dutch did realize, that there is need, to asses if private sector can actually deliver value, before going in to procurement and focused on cost benefit analyses of the options that are really available prior the procurement and the Public Private Comparator (PPC) has been born. Actually two of them have been born; one focusing of financial aspect and impact to government and the second one focusing on broader economic aspects and impact. For example building the bridge has financial cost to government and financial benefit is the toll charged on the bridge. But the economic impact of the traffic, shorter commuting way or establishment of connection to a remote location is not captured in financial PPC but in the economical PPC. Many critics do find however PPC even more tricky and see PPC even less reliable than PSC (Kramer). Dutch did therefore added also reference lunch for the private sector option and do use PPC early in the process and PSC in the procurement phase to compare public reference with private bids. National Treasury of South Africa in its PPP manual also describes how PSC model and PPP model are to be developed, so that VfM assumption can be made regarding the project. Capital Assets management Framework of British Columbia also in its guidance state that “Agencies should develop and use a Public Sector Comparator (PSC) to assess the financial aspects of value for money – and as a benchmark against which to measure the net value of alternative procurement options.”

Value for Money, PSC and PPC are a way to quantify the potential benefits when considering your options in infrastructure. But in the end of the day, despite all the analyses, it is up people responsible for individual project, to consider all the modalities and make the decision. And concerning the lunch – my advice is; whatever the value for money is, don’t forget to enjoy it.

Monday, July 27, 2009

PPPs endorsed on banks of Victoria Lake

There is a place, where Nile is born and local people can show you exactly where it is. It is such a privilege to see that place, which was searched for, by generations of explorers in Africa. Yeas I am talking about the place on the banks of Victoria Lake. Another perhaps important birth is taking place here at Munyonyo on the Ugandan Banks of Victoria Lake just now.

Ugandan president Museveni is hosting in this luxury resort over 1000 delegates from number of African countries including 4 other presidents to discuss how to go forward in transformation of Africa and the first day of dialogue kicked off with strong call for public private partnerships. When I was in Munyonyo last year, to hold a Regional PPP Forum for Anglophone Africa, we did have no idea, that just a year later will our efforts to push PPPs in Africa be endorsed by the most needed element in PPPs – which is broad political support from the top of the public sector pyramid. This clearly happened in Munyonyo this year and it is not just political endorsement of one country or one president, this is endorsement and consensus of Africa.

PPPs are taking nowadays strong roots in Africa. I remember couple of years ago, African PPPs were about South Africa, which first pioneered PPPs on the African continent, in modern times, establishing strong PPP Unit at the Ministry of Finance. And then I have heard very mixed news regarding PPPs coming over last years from the region. Number of countries transformed their privatization capacity in to a public private partnership capacity, building new institutions and new policies and often needed to adopt a new legislation. South Africa has been followed by Mauritius, setting up its PPP Unit and establishing PPP Policy in 2003. In the meantime number of other African countries got involved in PPPs on the project by project basis. I have to mention Maputo Port concession in Mozambique of 2003, Songas Processing Plant in Tanzania of 2004, Skikda Desalination Plant in Algeria of 2005 and Lesotho National Hospital in 2007 and most recent Ugandan Power PPP project at Bujagali. When you look at the map of PPP in Africa today , you can clearly see that PPPs have taken strong roots here and with the sort of political support that the 19th Global Smart Partnership Dialogue provided in Munyonyo this year, I do expect Africa to become regular player on the PPP global market.

Friday, July 24, 2009

'Let's not go out and throw the word privatization around…

...the way Joe McCarthy used to throw the word communism around.'—Coun. Justin Swandel

Privatization has been once magical word. I remember that, if something did not work in public sector utilities, companies or services, it was quite popular by politicians to call upon invisible hand of market and all powerful capabilities of private sector. And the magical word politicians used was privatization.

After 1980 the popularity of privatization has been decreasing steadily and PPP came in as more popular solution to problems in public services and infrastructure. Number of people is making the same mistake and PPP is becoming “magical word” of the begging of this century.

But there is no magic. There are many issues which can be solved by privatization, which PPPs can’t solve, there are projects, which are ideal for PPPs and there are some, which can’t be PPPs and should not be privatized. We have to evaluate all pros and cons rather than using magical words.

Sometimes people even define PPP as privatization like Kieran Lynch, who in his case study on London Underground defines PPP as “a variation of privatization in which elements of a service previously run solely by the public sector are provided for through a partnership between the government and one or more private sector companies. “ Obviously this kind of definitions is not helping to make substance of PPP clear to public.

As result of confusing PPP and privatization a lot of people in many countries have to explain the difference. Mr. Mitra in India recently commented "Let me make it clear, the Public-Private-Partnership model of financing projects is not privatization ... Besides building the world-class facilities, generating revenue for the Railways would also be the key consideration of the innovating business ideas," John Prescott, former UK Deputy Prime Minister, wrote in a letter to The Guardian “The PPP is not privatization…” and European Parliament explains that PPP is not even “ the first step towards privatization, because it's a contract with an end. “

Wikipedia defines privatization as the incidence or process of transferring ownership of a business, enterprise, agency or public service from the public sector (government) to the private sector (business). In a broader sense, privatization refers to transfer of any government function to the private sector including governmental functions like revenue collection and law enforcement.

Wiki definition is correct, while privatization transfers ownership, PPP does transfer risks. While in privatization public sector delivers assets and gets paid, in PPPs private sector delivers assets and gets paid. I am really surprised people can get this wrong.

Wednesday, July 8, 2009

We will not be silenced

This is the main message I remember from reading about the PPP regeneration project in Dublin, which has acquired great interest of citizens. They went out to the streets and demonstrated. They demonstrated surprisingly in support of the regeneration deal saying” They hope we will go away and stay in our long forgotten ghettos across Dublin City. We will return to our homes not to forget our dreams of a decent place to live but to organise our fight against Dublin City Council. We are asking people to come out and support us, to wear black and bring pots and pans to make plenty of noise. We will not be silenced. We want our 14 acres site developed as agreed.” This shows unprecedented support the community of citizens provided for the redevelopment of brownfield ghettos. This kind of PPP is much closer to hearths of all citizens living in a city under regeneration and every success as well as failure is immediately recognized.

Ireland had its own troubles with regeneration PPPs as well as other courtiers pioneering regeneration projects experienced, and this negative experience has turned some professionals against this concept. Regeneration projects are indeed quite complex going across state and municipal budgets, across number of financial public facilities and government departments. Complexity is also multiplied by large number of stakeholders with often contradictory interest. Stakeholder’s consultations regarding urban regeneration are therefore difficult and lengthy. But this industry has also a lot of successes in for example in US, Canada, Germany and UK.

UK has established special agency English Partnerships (EP) to deal with brownfield regeneration and in 2008 merged EP with Academy for Sustainable Communities creating “The Homes and Comunities Agency (HCA)”. HCA has become the largest regeneration Agency in Europe with annual investment budget over £5 billion.

It is great when you have funds, strategy and institution to deal with brownfield regeneration – this makes much easier dealing with large municipal areas of development and regeneration. It also helps to solve slams and ghettos providing friendly living environment, jobs and housing rather as opposed to poisonous, crime concentrating brownfields on the borders of large industrial cities.

This has also been recently strategy of government in Thailand supporting the bailout of ghettos, which often are located on a valuable development sites and then use the money to pay for the new housing development for the people from ghetto. Example of this is Bang Bua Canal in Bangkok, which has been redeveloped based on 30 years land lease, developing great network out of communities alongside the canal, which in past have been just slumps. Thai PPPs delivering public transport do also help in fighting poverty and regeneration of urban areas. If this becomes government strategy and as such it is successfully applied, people will not have to go to streets and shout “we will not be silenced”.

Tuesday, July 7, 2009

Honduras a dónde vas?

The president of Honduras Manuel Zelaya was kidnapped by the Army on June 28, 2009 and expatriated to Costa Rica. What a great political problem this is for Honduras and Latin America as well. Why do I discuss this on Public Private Partnership blog? Well the reason is very clear – there is a connection between political stability and PPP in particular and foreign direct investment in general. This is also reason why World Bank has set up MIGA to insure this kind of political risks to investors. The Honduras already weak rating S&P long-term debt B+ is the fourth-lowest non-investment grade and can be further downgraded on the basis of political risk, which would make almost impossible for Honduras to refinance its debt and also can have major implications for infrastructure development and certainly will discourage foreign investors from investing in Honduras PPPs.

Honduras has been in past years very interested in developing PPPs. I remember last year, when World Bank Institute hold a capacity building event in Tegucigalpa, how well attended this is event was by the political leaders and personally by president Manuel Zelaya. Manuel Zelaya has participated on the top government “only” seminar and during the lunch he did sit with us and discussed his visions for the Honduras infrastructure development using PPPs. His minister of finance Rebeca Santos has participated for most of the time during whole event and did speak about PPPs with great interest and insight. While the government was at the seminar, they were already working on the action plan, defining next steps to implement PPPs. Rarely seen commitment at the highest political level was very encouraging and at the time I had no doubt, that this government is able to make substantial and quick steps to develop Honduras. Every PPP professional will confirm that political support is a first essential condition to build PPP market and the case of Honduras is teaching us about the second essential condition – and this condition is political stability.

I can hardly judge what is best for the people of Honduras, but I would say that military regime is the worst option and should this situation continue for years to come, one thing is clear as well, nobody will invest a dollar in Honduras, for a very long time.

Wednesday, July 1, 2009

Nigeria has set up a PPP focused association

I did suspect Nigeria is to become leader in African PPPs for some time already. Several projects have been announced, serious government interest demonstrated by discussion on policy, legislation and deal flow. Global Legal Group provided excellent insight to this in their 2007 Guide to PPP/PFI projects. Surprisingly quickly have Nigeria been able to sign a 25-year concession agreement with Bi-Courtney Consortium, concessionaires of the Lagos-Ibadan Motorway (reportedly 27 months). The other areas besides roads in which Nigeria is involving PPP are ports, tourism, healthcare and housing.

Therefore, I was very happy, to hear earlier this year from Saidu Njidda, that he succeeded in forming Foundation for Public Private Partnerships of Nigeria ( FPPPN), to support and advocate PPP development of Nigeria. Personally, I see PPP associations, as an important and integral part of any PPP market. Public sector should be able to consult private sector prior approval of a policy or legislation and also to hear somewhat united voice of private sector in the country. FPPPN as proponents of the concept of PPP's in Nigeria conducts research, publishes findings, facilitates forums for discussion and sponsors seminars/ on topics related to PPP's in Nigeria.

This practice of private sector organizing platform for private and often public entities as well, to promote, discuss and work together is quite well recognized in number of well developed PPP markets.

One of the oldest examples is certainly NCPPP of US (National PPP Council), mission is to advocate and facilitate the formation of public-private partnerships at the federal, state and local levels, where appropriate, and to raise the awareness of governments and businesses of the means by which their cooperation can cost effectively provide the public with quality goods, services and facilities. Canada has developed very large and well functioning Canadian Council for Public-Private Partnerships (CCPPP): the objective of CCPPP is to foster innovative forms of cooperation between the public sector - at the municipal, regional, provincial and federal levels - and the private sector, for the benefit of all Canadians.

UK, the leader in PPP, has IFSL (International Financial Services of London): established to promote the UK-based financial services industry throughout the world. In Czech republic, private sector set up APPP (Asociace PPP): for support and development of public investment and services using the PPP form in the Czech Republic. Australia has IPA (Infrastructure Partnerships Australia): established to brink together the public and private sectors to promote partnerships in infrastructure and provide cross-industry leadership in Australia.

And this is only small example of the world of PPP Associations, PPP market has grown indeed in couple of years and still is growing, let’s hope that the good practice in PPP will also take deep roots in Nigeria and the rest of Africa.