JEDDAH – There is a vital need for the GCC countries to adopt a partnership approach between public and private sectors as an effective means of promoting national development goals in the region, management consulting firm Booz & Company said in a new study released Monday.
The GCC countries’ particular economic profiles make Public-Private Partnerships (PPPs) an attractive transformation mechanism - helping governments better achieve their national development plans and introduce foreign capital into priority areas, it said.
An additional benefit is that, through this process, the state retains ultimate control over projects, thereby avoiding certain privatization pitfalls.
In the coming years, GCC nations are set to spend over half a trillion dollars on national development plans which aim to promote the growth of the private sector as well as significantly decrease the countries’ dependence on natural resources. In fact, much of this development expenditure will center on infrastructure and key public services such as health and education.
Building on this premise, management consulting firm Booz & Company has found that one method of investing this money effectively - from both fiscal and development perspectives - is through the establishment of public-private partnerships (PPPs). As collaborative mechanisms between the public and private sectors, PPPs have been successfully applied in myriad countries at all levels of development for over two decades. Indeed, by drawing in private-sector expertise and capital while adjusting the risk to the public purse, well-implemented PPPs can undoubtedly further advance the GCC’s national development agenda.
When used in a rigorous and targeted manner, PPPs can ensure efficiency, speed, transparency, and economic impact in the delivery of services or vital infrastructure. In truth, the GCC countries’ particular economic profiles make PPPs an attractive transformation mechanism - helping governments better achieve their national development plans and introduce foreign capital into priority areas. An additional benefit is that, through this process, the state retains ultimate control over projects, thereby avoiding certain privatization pitfalls.
"PPPs can also improve national competitiveness by bringing in topnotch foreign companies with transferable skills and superior practices," said George Atalla, a Partner with Booz & Company. "By encouraging legislative and governance changes, this mechanism will create an investment-friendly climate as well as enhance the delivery of services such as education and health."
Furthermore, GCC countries’ natural resource endowment makes PPPs a development option rather than a fiscal necessity. "Thanks to trade surpluses and manageable public debt profiles, these nations have the relative luxury of selecting PPPs that will actively promote long-term economic development," said Karim Aly, a Senior Associate with Booz & Company. "Today, the use of PPPs in the GCC is set to considerably increase with states such as Saudi Arabia, Kuwait, Qatar, and the UAE currently engaged in massive development programs which aim to change their economic structures."
PPPs combine the public and private sectors in projects that the state needs but that private companies can best deliver. In fact, experience stemming from countries who have employed this mechanism shows that the public sector reaps the following benefits from PPPs:
• Fiscal benefits: PPPs free public funds for other uses
• Risk allocation: When properly vetted and structured, PPPs allocate risk to the party best suited to handle it
• Economic benefits: PPP projects increase efficiency by accelerating the speed of delivery of services and improving service coverage and quality
• Technological benefits: PPPs facilitate the transfer of technology and know-how from the private to the public sector
• Social benefits: PPPs improve service coverage, quality, and timeliness.
GCC governments certainly need to proceed with caution when implementing the road map. In particular, they need to carefully manage the fiscal consequences of PPPs in order to avoid long-term budgetary liabilities as well as build their capabilities to execute and monitor projects.
The government should use three criteria to assess whether a PPP is the correct approach for a given project. These include:
• Affordability: This relates to the capacity of the end-users or the public sector to pay for the building, operation, and maintenance of the project. The government must take into account the effect on the budget if the PPP will rely either on government subsidies or purchase agreements
• Bankability: This determines whether lenders are willing to finance the PPP and obliges the government to thoroughly assess financial risks
• Value for money: This requires a cost-benefit analysis as to whether the project costs less than the best realistic public-sector alternative. In general, PPPs are likely to provide value for money if the following conditions are met: they are implemented by capable private-sector partners; risk is clearly allocated between the public and private sectors; and the public sector defines its service needs as outputs in the contract. – SG