International lesson for Namibia on PPPs - Part 1

01 June 2018
The Public Private Partnership Act of 2017, which was promulgated into law early June 2017 by President Hage Geingob,
guarantees to usher in consequential changes into the Namibian social, political and economic milieu.
The ‘PPP’ model intends to regulate projects’ value chain from initiation, preparation, procurement, operation and close out stages, effectively harnessing the relationship between public and private sectors in infrastructure development.
The ‘PPP’ concept was birthed in 1960 by the Organization for Economic Co-operation and Development countries (OECD), coinciding with the independence of most African states.
With reference to the above, I aim to review literature pertaining to PPP implementation, highlight gains and pitfalls, while simultaneously deriving lessons for Namibia as we embark upon this profoundly pivotal project.
Through engaging Model Concession Agreements (“MCAs”) fashioned and referenced on Fédération Internationale Des Ingénieurs-Conseils (FIDIC) relevant suites namely Yellow, Silver or Gold books, these private-public liaisons can be nurtured with deliberate and equitable risk allocation from project financing, design, execution and maintenance. 
Equipped by the new PPP law, Namibia can apply the formula akin to the original concept drawn by OECD countries in the quest of becoming an ‘entrepreneurial and developmental state.’
The complexity of modern urban and rural infrastructural problems is growing as public authorities are increasingly relying on the knowledge available in the private sector, hence the need to offer further incentives in MCAs, including tax breaks, etc.
While the motives for authorities in launching concession projects are similar, various approaches and procurement methods may be distinguished and define project success or failure.  To understand the different motives and approaches, one has to look at successful global initiatives and the emergence of infrastructure concessions in OECD.
This article gives a progression in various countries to paint the picture of the range of policy motives and approaches, which Namibia’s PPP authorities can emulate as good practice. 
Policies such as a strict utilisation of PPP’s MCA documents to allocate risks between PPP Authority (Public Entity) and PPP Contractor (Private Entity) in such critical issues such as site risks (such as planning, physical conditions, sufficiency of title, access to site, environmental risk, archaeological risk, etc.) ; Design and construction risks, economical demand risk, availability and performance risk, change of law risk (discriminatory change in law, expropriation, frustration, change in law involving capital expenditure during the service period, general change in law other than that involving capital expenditure, change in VAT), residual value, maintenance risks, insurance risk (increase in premiums, in-insurability) refinancing, compensation on termination for PPP Co.

PPP in Spain dates back as back as 1953, when the first toll highway concession was conferred as tunnel at Guadarrama. This was due to budgetary constraints, as public expenditure stood at less than 25 percent of GDP from 1950 to 1970.
This low investment lends space for the private sector (Torres and Pina 2001) to take responsibility over other public service provision.   Indeed; this period was characterized by few control mechanisms for cost efficiency and the quality of the service provided.
It’s interesting to note that even during the later years, when public sector expenditure grew to more that 40 percent of GDP, concession contracts were still accommodated and supported.
In 1992, the Plan Director de Infrastructures estimated the total amount of budget needed for infrastructure works at around 171.3 billion euro for the period 1993-2007; and projected that 30 percent of this investment was to be from the private sector.
In 2005, the Spanish Ministry of Development published a strategic plan for infrastructure and transport for the period 2006-2020, of which more than 40 percent also had to be privately financed. 
In 2010, a new strategic plan was published stating that in the coming years, 70 percent of planned railways and 30 percent of planned roads will be privately financed.
A brief scan of Spainish laws in the past 55 years reveals several legal mechanisms that the government introduced to stimulate concession PPPs. These laws still offers favourable conditions to the private concessionaries as, for example, government aid in the form of subventions, deposit, adoptions of exchange rate risk and tax advantages. 
With high and escalating costs of developing Namibian road infrastructure, for example, Namibia should utilize Toll MCA for roads infrastructure, thereby making heavy users such as heavy freight haulers, to substitute with rail, which is suffering from low utilization.
 In contrast, the Spainish government has supported the programme by taking over the risks of fluctuations in exchange rates (which might not be necessary in Namibia as borrowing should be done in Namibia dollars). 
Failing specific legislation, concessions were given by specific Decree issued for each one of them, including advantages such as state guarantee fiscal exemptions and advantages and the new model of Exchange insurance which guarantee the remaining debt currency.
1972 saw a major step forward in the development of toll roads.  The Act of 1972 provided a clear and stable framework, facilitating the use of various forms of private finance system.
Spain’s project consortium was tasked with design, build and finance; as well as managing and operating the service provision of the given infrastructure.   It thus required the operator to recover investment cost through direct payments by the service end-user.
 Further changes were made in 1996, with a new piece of legislation stating that the concessionaire may enlarge its activities from construction, operation, and maintenance of motorways to construction and operation of service stations and other real estate projects within the motorways. 
Thanks to these laws, private involvement in the planning, financing, construction and operation of infrastructure flourished. 
Contrary to the ‘free-standing projects’, the private sector recovers the investment through the sale of service to the public sector under defined terms in the contract.  
With the introduction of shadow toll, however, new highways have been implanted in certain ‘autonomous’ communities. This road is one of the four shadow roads endorsed by the Comunidad de Madrid.  
In 2003, a new law was passed aimed at modernizing the existing regulation by introducing a common framework for all public administrations and applicable to all public works. 
This law was followed by a new legislation in 2007 adapting the Spain law to the European regulatory framework.   The number of shadow toll roads implemented by the Spanish ‘autonomous’ communities have been rising due to an increase in the knowledge and practical experience of each administration’s experts ,with respect to shadow toll concession.
A public debate and jury is still out as whether there are tangible public financial gains in shadow toll.   This is because the government does not have the advantages of the end-user paid toll system in which price regulates demand.  
Also worth noting is that shadow tolls require more rigorous planning in order to maintain the long-term financial equilibrium. 
However ,the government argues that this system allows it to carry out certain projects that would never have been executed by other means alongside the flexibility in the maturing of the projects and the construction of the infrastructure significantly reduce the normal periods of time for project executed with budget financing.
Unlike other European countries, little attention has been paid to the development of competence at a central level.   Until recently, system knowledge dissemination or general guidelines did not exist, primarily due to the decentralized structure of the institutional system in Spain.
 At public works (ministrerio de Femento), a special unit for the promotion of PPPs exists, but this unit is more an engineering (planning and design) unit than a financial expertise centre.
It is worth noting that there are challenges such as the expropriation regulations that have not been upgraded for half a century in Spain.
The deadline for submission of tenders for this toll road was delayed in 2008 due to uncertainty about the contract and responsibilities of the concessionaire regarding expropriations.
These lessons from Spain utilizing PPPs as an off-balance financing mechanism should be mirrored by public authorities in Namibia as they implement the PPP Act 4 of 2017.
*Iyaloo ya Nangolo is a Registered Professional and Practicing Quantity Surveyor, Entrepreneur, and Financier. He holds an MBA in Finance and Entrepreneurship from the University of Cape Town Graduate School Of Business and the London Business School. He writes in his own capacity.


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