Risk allocation a key value for money driver for PPP

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Edgar Brandt

Windhoek-Risk allocation is one of the key value for money drivers in a public-private partnership (PPP) as it allows the public party to transfer risks to the private party, relieving it of bearing the cost of risks that it cannot manage. For the public entity, efficient risk allocation is key to creating a ‘good deal’ for society while for the private entity, efficient risk allocation is key to ensuring that the project is financeable and the risks allocated to it are rational and controllable by the private sector.

This is according to Minister of Finance, Calle Schlettwein, who at yesterday’s third annual PPP conference said that although a PPP delivery model allows certain project risks to be transferred to the private party, many risks are still retained by the public entity. These risks are typically aspects related to project development and operations that remain within public control or areas of responsibility.

“Risk allocation should be about managing not only occurrence, but also assessing which party is better able to control the occurrence of the risk and secondly, which party is better positioned to manage the outcome of the risk, or control its ultimate cost. This enhances the chances to maximise value for money by ensuring that the party that manages the risk also bears its financial cost. At the same time this will incentivise preventative risk mitigation or seek the most cost-efficient solutions,” said Schlettwein.

During the keynote address at the PPP conference, Schlettwein noted that over and above the need to manage the direct financial risks of PPPs it is important to be prudent about taking on contingent liabilities induced through PPPs.

“In the case of government guarantees, we are of the view that these should be extended with due caution to ensure that we manage our contingent liabilities responsibly. Therefore, we will be very vigilant in the scrutiny of all guarantee requests and we must have compelling reasons for approval of guarantee requests and taking on additional contingent liabilities,” he said.

Schlettwein further emphasised that harnessing alternative means of financing through leveraging private capital is key to lifting the growth potential of the domestic economy.

“The PPP platform is an important dimension in this growth narrative. We are also finalizing the establishment of an Infrastructure Fund hosted at the Development Bank of Namibia, which also offers investment space for private capital to finance domestic economic development. The envisaged changes to domestic asset requirements are taking place amidst these diverse investment platforms,” said Schlettwein.

“There is no doubt that PPPs, especially meaningful partnerships, are the foundations for success, and by sharing economic opportunities and responsibilities with the private sector we can direct limited available resources and capabilities to prioritized national projects,” Schlettwein noted.

He added that a prerequisite for successful PPPs is that the objectives of both the public and private sectors are common and mutually beneficial. They therefore should include that PPPs ensure public services are delivered economically, effectively and efficiently, the interest of the public and the private sectors is served through an appropriate allocation of risks and returns between the two parties, and projects are developed in a bankable manner such that there is a true investment opportunity for the private sector.

The third annual PPP conference was jointly organised by the Ministry of Finance in collaboration with Standard Bank and PwC Namibia.

The PPP Bill was signed into law by President Hage Geingob in June 2017. The Act, known as the Public Private Partnership Act (Act No. 4 of 2017), establishes institutional roles – including PPP functions at the Ministry of Finance – and mandates the constitution of a PPP Committee that shall be hosted at the said ministry.

Also, the Public-Private Partnership regulations as per Section 40(1) of the PPP Act have been drafted. These draft regulations have been submitted to the Office of the Attorney General for initial scrutiny and once appoved will will assist the implementation of the Act, by providing guidelines to be followed throughout the PPP process. The regulations are anticipated to be gazetted by December this year.

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