International lesson for Namibia on PPPs Part 2 - Lessons from the United Kingdom

08 June 2018
Many public authorities and private parties in the Organisation for Economic Co-operation and Development (OECD) regard the UK as the front runner in the field of concession,
despite the fact that PPP-style projects were commissioned elsewhere prior to its inception in the UK in 1992, often as once-off projects. 
As a result, the introduction of the Private Finance Initiative (PFI) schemes, a UK PPP’s concept, in the early 1990s is making the UK experience impact more globally, following the emergence of PPP concession.
The stage for Model Concession Agreements (MCAs) was set in the 1980s, when alternative forms of procurement were developed such as outsourcing, privatization, and concession.
These rules provided that financed project could only proceed if they offered better value for money than a hypothetical public sector comparator.
This was on the back of the fact that there were budget constraints, which are keen to Namibia’s fiscal constraints situation now, which meant that the public sector alternative would not go ahead.
The two fundamental principles of rules were: First:  private finance could only be introduced where it offered cost effectiveness; and second:  privately financed projects for public sector programs had to be taken into account by the government, in its public expenditure planning (that is there must be budgetary allocations for these projects).
The rules were superseded by the PFI introduction in 1992, launched by the conservative government under the then Prime Minister John Major. 
The PFI scheme was based on two basic principles, which are still valid until today: namely, the genuine transfer of risk to the private sector and generation of value for money in the use of public resources.
Despite this breakthrough, only a few concession projects were implemented in the first five years, notwithstanding the political capital given and the establishment of the Private Financed Panel, a group of private and public officials whose role was to stimulate PFI projects.  
Several barriers to the emergence of PFI can be identified: Ideological opposition, misconceived notions of the ease of risk transfers and a resistance by local councils to the central control of administration. 
Because of the slow development of PFI schemes, in 1997 the Paymaster General decided to introduce new institutional and political rules designed to stimulate the use of concessions.
The Tony Blair’s administration brought in effort that ended the universal testing – the rule that all capital projects had to be tested for private finance potential, the ‘economical viability test’.
The Treasury Taskforce was installed as the central focal point for all private finance projects and the guardian of the policy principles.
The taskforce focused on a number of significant projects helping departments when negotiating with the private sector and with defining the output specifications in order to get value for money.
Partnerships UK is a limited company, 51 percent owned by private investors and 49 percent by government, which has to be funded by project fees on a not for profit basis.
The establishment of the Treasury Taskforce (later taken over by the office of government Commerce), PUK, and local counterparts 4Ps (Public-Private Partnership Programme) all indicate how important knowledge transfer, the professionalization of both the public and private sector, are to the UK government institutions, eventually developing a series of standardized guidelines and public sector comparators.
The historical development in the UK shows that increasing the value for money and the transfers of risk are the key motives for launching concession arrangements.
According to Treasury, MCA are only used if they can meet the requirements of government and deliver clear value for money, while respecting the terms of employment for the employees.
In assessing under which circumstances a concession may be appropriate, the government approach is based on its commitment to efficiency, equity, and accountability and on the Prime Minister’s principles of public sector reform.
For this reason, Namibia needs to take note that PPP implementation, will surely invoke perceived and real conflict guarantee to shape discourse and debate, due to information asymmetry inherited over the MCA life course.
Lessons from the United States
The USA legal landscape has historically allocated the private sector an important role in the construction, financing and operation of economic infrastructure.
Dating back to the 1800s, private companies built roads that were financed by tolls, but the private sector involvement declined due to competition from the railroads and greater State and Federal involvement in the construction of tax-supported highways.
In 1956, for example, the Federal Aid Highway Act established a tax supported road system with revenues from motor fuel taxes rather than from tolls.
While the role of the private-sector in highway financing and operation declined in the mid-part of the 19th century, in the late 1980s, there was notable resurgence of private-sector involvement.
Many people in the public sector saw little or no need to change their traditional ways of operating.   What’s known as institutional inertia and misunderstanding of the private sector methods of operation, were creating fear of poor performance quality, employment losses, and a cabal of other perceived ills.  
Contrast this to the last decade, where several concession efforts were postponed or failed, for instance, the Pennsylvania Turnpike project and the Chicago Midway Airport, due to political wrangling and legislative hurdles at both State and Federal levels, the economic downturn and the lack of long-term debt financing.  
It is argued that large differences in legislation and policy on private finance projects can be detected among the various state body statutes.
Virginia, for instance, has a comprehensive concession legislation that has been amended in recent years as it gained more experience with PPPs.
The state of Indiana boasts large concession contracts, such as the Indiana toll road with a lease of 75 years.
These stumbling blocks necessitated the 2005 Federal Transportation Act, aimed at eradicating various federal restrictions for design-build contracts. 
The Act further authorized the US Department of Transportation to issue US$15 billion in private activity bonds and tax-exempts for private projects with a public purpose, i.e. for highways, railways and freight transfer facilities.
Lessons from Portugal
Portugal, as a small European economy, has embraced the PFI model for infrastructure finance most enthusiastically as pioneered in the UK.
The proportion of concessions in the Portuguese market was over 1.2 percent of GDP during the early years of this century, twice the level of the UK, revealing that Portugal relies more on PPPs to meet the public investment needs than most other European countries.
Namibia perhaps is prime for a shadow toll system, through providing toll free access to the motorways and consequently avoiding any reluctance to pay by the potential users.
The system is likely to transfer to the private sector a lower traffic risk, as estimated level of traffic is relatively easier to determine. Under shadow toll, payments from the Portuguese government are based on the number of vehicles using the motorway.
The level of shadow tolls to be applied, which is measured in euros paid per vehicle km, depends on the traffic volume band that each vehicle km falls into.
Only restriction from the government was that the tariffs could only decrease over time and that traffic flows above the top band would be assessed for each year, starting from the beginning of the concession and would be updated each year in order to reflect inflation.
Since 2002, the government has been stimulating the use of toll roads over shadow toll roads.   Shadow toll roads are considered a form of financial support from the government, which is, according to the public agents in Portugal, not viewed favourably in the European Union.  
Moreover, public parties state that shadow toll roads are not financially attractive for the government because in the past, the government had to pay more when traffic increased.   The risks with the introduction of shadow toll roads are high and hard to predict at the beginning of the project.
Notwithstanding the eagerness of the Portuguese Government for PPPs, several concession tenders have been delayed due to the existing difficult financial situation.  
In addition, some larger projects and proposed refinancing have also been deferred because of difficult market conditions.
Despite various hostile public debates and some criticism of major infrastructures project, the Portugal governments have demonstrated their commitment, by launching tender procedures for some of the major transport projects as well as by implementing legislative and institutional reforms designed to improve the execution of concession projects.
Traditionally in Portugal, the government handles all risk of acquisition with concessionaires’ deal, all matters from planning to implementation.
In fact, it reached a point that most concessions have involved transferring more and more of the expropriation activities to the concessionaires. Lessons should be drawn from Portugal as Namibian concessions may encounter rights violations with legal recourse as the only remedy.
*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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