Value for money a crucial aspect of PPPs – Schlettwein

by Edgar Brandt

Value for money a crucial aspect of PPPs – Schlettwein

Windhoek

There is a need to acknowledge and embrace the dichotomy that through public-private partnerships (PPPs) expensive private capital is channeled for developing projects that would serve the public at large, which makes affordability an important consideration for these agreements.

“Given this key consideration, a PPP project will be a suitable solution only if we are able to derive substantial efficiencies from the involvement of the private sector. We believe that value for money can be further enhanced by the two fundamental principles of output orientation and competitive procurement,” said Finance Minister Calle Schlettwein.



Speaking at the national annual PPP Conference in Windhoek this week, Schlettwein said by emphasising clear and upfront output requirements, private sector participation can bring about innovation and come up with the most efficient means to achieve desired outcomes. Such efficiencies, he said, may be brought about by the private sector utilising the most suitable technologies, innovative design, superior operations or a combination of these factors.

Also, he noted that clear output specifications provide the groundwork for competitive procurement, where the government invites competing commercial offers from firms assessed to be technically and financially competent to develop the project at hand. This allows for the discovery of a second set of efficiencies relating to financial return expectations.

“It is observed that in a competitive bidding scenario, private sector firms seek to explore the most efficient sources of finance (including concessional loans from their host countries of development finance institutions) and importantly, have conservative profitability expectations. We are also cognisant that in many instances, achieving greater value for money can mean not undertaking a project through the PPP route. This would often be true in the case of short duration and simple-to-execute projects, since in these instances, there shall be inherently limited avenues to extract higher efficiencies,” Schlettwein stated.

The finance minister said PPPs play a role in promoting investment, and net economic gains and efficiencies cannot be overemphasised. “Briefly stated, private sector investments and partnership in developing public infrastructure and the delivery of related public services as a result of PPP formations are envisaged to be a key building block in the economic progress of the country,” he noted.

Another critical issue regarding PPPs relates to affordability. “Given that the Ministry of Finance holds the mandate of promoting PPPs in the country, we are often presented with project proposals for our consideration. We observe that in many such instances, the central premise for why the private sector believes that it is proposing a PPP project to us is purely because instead of the government paying for a given asset or service immediately, repayments from public funds will be modelled as periodic future payments,” he stated.

He added that these proposals are made without regard to, or even an assessment, whether such an arrangement will be financially sustainable and that it would not overwhelm the government’s fiscal space or crowd out opportunities for development in the future; or if it will be efficient, that is, if the proposed project financing route is assessed to be the most cost effective way to obtain the service under consideration.

“I think this phenomenon speaks to a relatively weak understanding of what PPPs are and why we do them. In terms of ‘what PPPs are’, a mere postponement of payments from the government does not transform a public procurement of asset or service into a PPP. Principles or risk transfer and performance-based payments would necessarily need to be satisfied. In terms of ‘the why’, a substantive motivation for undertaking PPPs is that we are able to facilitate projects that are additional to the scope of public funds. You will therefore notice that the government lays an emphasis on PPPs that have a potential natural revenue inflow base,” said Schlettwein.

He explained that PPP contracts in most cases create financial obligations for government in the form of ‘direct’ funding commitments or ‘contingent’ liabilities. Treasury is therefore interested in understanding the financial obligations and minimising risk factors related to specific PPP project initiatives. He added: “Even more importantly, the ministry is interested in the acceptance, proliferation and success of PPP projects in Namibia as these are the best opportunities to create public infrastructure with a minimal draw on limited financial resources from the treasury.” Government has made steady progress towards its PPP agenda as the National PPP Policy was approved in 2012. In line with this policy, the Public Private Partnerships Directorate (or the PPP Unit) was set up at the Ministry of Finance since April last year. The formulation of the PPP legislation is also at an advanced stage with the draft bill currently before the National Assembly.

“The overarching intent of the PPP legislation is that we aim to ensure that best practices are followed during all phases of a PPP project development cycle. To ensure this, the legislation contemplates that a sequence of reviews is made and corresponding approvals or disapprovals are provided by a PPP committee that is constituted as per provisions of the legislation,” said Schlettwein.

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