On the eve of reaping dividends of peace in the aftermath of a 3 decades’ long civil conflict, Sri Lanka is steadily marching for a higher growth trajectory. With traditionally low participation in most of mega development initiatives by the non-public sector and with fiscal revenue being insufficient to fund for such investments, the Government of Sri Lanka (GOSL) has largely been resorting to raising debt for funding those investments both locally and externally.
In the past, Sri Lanka, as a low income country had access to low interest foreign debt for investment initiatives. However with the graduation of the country to a lower middle income category, it is no longer entitled for loans on concessionary terms from bilateral and multilateral sources and the foreign borrowing at commercial rates is in the increase. Such borrowings may carry the risk of increasingly elevating the country’s foreign debt service obligations with high exposure to foreign exchange risks, while adding to the burden on the government budget. In this context looking for alternative means of project financing is vital to maintain the growth momentum needed for achieving development objectives of medium to long terms without having to alter the foreign debt profile of the government.
A viable option that is being entertained by most countries recently is the Public-Private Partnerships (PPPs). It is as an effective mechanism of designing, financing, constructing and operating large infrastructure development projects, harnessing the resources and expertise of both private and public entities. The term PPP refers to a contractual agreement between a public sector and a private sector entity, through which the skills and assets of each sector are shared in delivering a service or facility for the use of the general public(1). As per the World Bank, PPP is a long-term
contract between a private party and a government agency, for providing a public asset or service, in which the private party bears significant risk and management responsibility. PPP does not mean privatization, which is commonly used to refer outright sale of public facility or service to the private sector. Ideally, PPPs are aimed to combine the expertise, capacity and experience of both the public sector and private sector in achieving opimal outcomes for public needs, while allocating risks, resources and returns between parties appropriately in a mutually agreed manner. In a PPP, there is greater participation of private sector in design, financing, construction, operation and management of public utilities or services while government involvement is mainly limited to guiding, facilitating and regulating. At the same time, government service delivery objectives are aligned with private partner’s profit objectives.
There are several “value drivers” behind the use of PPPs by the governments worldwide as off-budget mechanism for infrastructure development which increase value for money spent for the provision of more efficient, lower cost and reliable public service. Some of them are improved service quality, reduced life cycle costs, sharing risks with the private sector, quicker delivery, increased financing certainty, technology transfer and enhanced public management.
However, PPPs are not a panacea. Hold-up problems could arise with long term and often complex PPP contracts due to difficulty in disclosing information on effects and risks associated with them. These problems can be overcome by offering renegotiations, higher compensations by the public entity and asking for surety bonds. If the projects are not properly structured it will make more damages to governments than projects implemented using traditional public procurement methods.
PPPs can be of many forms, depending on the degree of involvement and risk shared by the private entity and the duration of the contract. The most suitable model could be selected considering financial and technical features of the project with the prevailing economic, political, legal and social conditions of the country. Among the PPP models,
• Supply and management contracts are the simplest model with least risk taken by the private investor, which involves in functions like design, labour management, procurement and operational activities for a fee paid by the government during a short period of time of 2-3 years.
• Turnkey or Design–Build contracts are with less innovation and investment by the private sector which only involves in designing and construction of the facility and taking risks for that for a short period of time.
• Lease or Affermage contracts, are where government takes the investment risk while operational risk is borne by the private investor who involves in the operation and maintenance of the infrastructure facility. The revenue collected from customers is either retained by the operator (in Lease) or shared with the government (in Affermage).
• Concessions are agreements that private investor constructs and operates infrastructure facilities for a longer period of time ranging for 5-50 years. There is high level of private investment, innovation, technology and skills while a significant level of risk is taken by the private investor. Some types of concessions are Build-Operate-Transfer (BOT), Build-Rehabilitate-Operate-Transfer (BROT) and Build-Lease-Transfer (BLT) in which the ownership of the infrastructure facility is transferred from the concessionaire to the government after the concessionaire builds and operates the facility for a fixed period of time. These PPPs require long period of time for the negotiations while close regulatory oversight and longer term contingent liabilities should be supplied by the government. The revenue is generated from managing and marketing the facility.
• Private Finance Initiatives (PFI) are agreements where government purchases the infrastructure facility through a long term agreement after the design, construction and operation are carried out by the private investor. This is most suitable for social infrastructure like hospitals, prisons, schools, etc and high level of investment, innovation and risk sharing is by the private investor.
In Sri Lanka, potential Public - Private Partnerships exist in areas of upgrading roads, ports, airports, power generation, water supply, telecommunication, hotels, healthcare and prisons, etc. Construction of star class hotels and domestic or international airports where the government can provide land or property, construction of modern highways for which passengers pay toll and port with enhanced ports services and terminals comprising of improved handling capacities and accommodating modern container mega ships, introduction of Mass Rapid Transit (MRT) systems in congested city areas, provision of cargo and passenger transport from ports and airports to city limits and electricity generation using alternative energy sources are among the priorities for investment. Public services like healthcare, prisons and higher education can also be provided as PPPs with enhanced service delivery.
Sri Lanka has very successful stories on PPPs in the ports sector. The Queen Elizabeth Quay (QEQ) of Colombo harbour was transferred to a private consortium on a Build Own Operate and Transfer (BOOT) concession. The terminal will be handed over to the government after 30 years of operation by the concessionaire. Started in 2011 was another PPP project involving construction of
three terminals in the Colombo South Harbor on Built, Own, and Transfer (BOT) agreement financed by China Merchants Holdings (International) Co. Ltd. (CMHI), Aitken Spence PLC and Sri Lanka Ports Authority (SLPA), and the terminals will be transferred to Sri Lanka Ports Authority SLPA after 35 years.
Around the world raising funds for development projects through public-private partnerships without excessively burdening governments are time tested. At present with the emergence of Sri Lanka as an investment jurisdiction with promising prospects, greater potential is available for long outstanding mega projects especially in the infrastructure sector to be commenced under such partnership that would help in realizing the country’s development targets.
(1) Adapted from the definition of PPP provided by the National Council for PPPs, in Arlington, USA (see the Council’s PPP definition at http://www.ncppp.org/howpart/index.shtml).