Monday, June 29, 2009

PPP Policy...where does it put the youths?


INTRODUCTION
The Government of the Republic of Zambia has recognised that the national treasury has limited resources to be able to embark on all economic programmes that include infrastructure development and delivery of social services. Realising that infrastructure development is a key factor in linking business activities that contribute to the growth of an economy, therefore the need to urgently address this problem. Thus, facilitating the provision of infrastructure development through public-private partnership (PPPs) has been necessitated. PPPs have identified as a viable means of infrastructure development that can effectively address the constraints of finance and management faced by the public sector. Further, PPPs enable the public sector to streamline the Government’s functions to that of facilitation, monitoring and evaluation; ensuring efficiency and accountability. Reliance upon a delegated management framework by whatever form of PPPs as a means of improving the quality of public services has come to the fore as one of the basic tools of economic modernisation.


A PPP is an arrangement between the public and private sectors (consistent with broad range of possible partnership structures) with clear agreement on shared objectives for the delivery of public infrastructure and/or public services by the private sector that would otherwise have been provided through traditional public sector procurement. PPPs are therefore a contractual arrangement between a public entity and a private party for the provision of assets or services. In return, the private entity receives a benefit/financial remuneration according to predefined performance criteria, which may be derived entirely from service tariffs or user charges, entirely from Government budgets, or a combination of both.


Government retains a significant role in the partnership as main purchaser of services or main enabler of the project. The PPP concept allows the public sector to source private sector providers for the delivery of public infrastructure and related services which the private sector can provide more effectively and efficiently. It is also worth noting that PPPs do not only signify reliance upon the private sector for financing capital investment projects on the basis of revenue streams to be generated by the future facility, but also incorporates the use of private skills and managerial expertise in building and operating public service projects more efficiently throughout the project life-cycle. In this respect the core of PPPs encompasses more the notion of service provision than simply infrastructure financing and construction. PPP’s also offer opportunities for local authorities to adequately address their infrastructure and service delivery requirements. PPPs are therefore, a viable tool for development in a decentralized system. To this end Local Authorities will be able to engage the private sector to undertake PPP type projects for local infrastructure. PPPs would thus be one of the most effective means of achieving this. In an effort to make Zambia a hub of economic development in the region, Government has taken steps to improve infrastructure and services. The intention of Government is to engage the private sector in the development of infrastructure and services through Public-Private-Partnerships. Government will continue with its facilitative role of encouraging and enhancing private investment in the sector. Most construction, rehabilitation and maintenance of infrastructure is being contracted out in order to further increase private sector involvement. The development of socioeconomic infrastructure through PPP’s will be tailored to enhance Zambia’s strategic and geographic position in the sub-region as a hub of socio-economic activity. This policy outlines the framework for the implementation of public-private partnerships in Zambia.


SITUATIONAL ANALYSIS
After independence up to the mid 1970s, the Government was able to provide infrastructure where it was needed through the use of public funds mainly generated from mineral tax when the mining sector and metal prices were favourable. However, when this trend became unfavourable, due to economic hardships and increased demand for social and services, Government was not able to provide as much infrastructure as was needed through the use of public funds and the national budget as before. Economic hardships were mostly brought about by the oil crisis of the early 1970s which happened at a time when the price of Copper on the international markets was declining thereby reducing the export earnings base of the country. This resulted in the country experiencing huge balance of payments deficits, thus the need to secure borrowings from multilateral institutions was required. However, this led to high fiscal deficits for the country thereby creating an environment of macroeconomic instability.


The country’s economic situation was made worse after the Unilateral Declaration of Independence (UDI) in Southern Rhodesia which was heavily condemned at international political levels resulting in sanctions and commencement of liberation struggles within the region. Thus Zambia as a country was surrounded by countries with unstable political and social activities which adversely affected the economic growth of the country. As a result, there have been a lot of delays in completing public infrastructure projects. The numbers of projects which have been delayed or shelved have increased, resulting in backlog due to limited financial resources. In addition key infrastructure such as airports, railways, clinics, hospitals, schools, bridges and roads have not been maintained over the years resulting in a need for major rehabilitation to bring them back into acceptable working conditions. The limited availability of such infrastructure has resulted in inefficiency of operations. This has in turn put pressure on Government to continue providing the services through external and internal borrowing leading to Government accruing huge domestic and international debt.


From the early 1990s, the country embarked on economic liberalisation which entailed institutional set up and reform that led to market oriented policies and private sector investment. Over the years this has steadily led to macroeconomic stability thus resulting in continued investments in key sectors of the economy. However, like many countries particularly in the developing world/low income countries, the Zambian Government faces challenges in the delivery of public services and infrastructure. New infrastructure and services need to be provided and existing infrastructure rehabilitated and maintained to deliver public services more effectively and extend access to services to a greater number of the population than currently have access to these services.


To realise the possibility of using PPP’s, Government recognises the need to create the appropriate policy and provide the institutional and legal framework for encouraging the private sector to play a larger role in procuring and financing public infrastructure projects and services in the public sector through well designed PPP’s. PPPs will provide Government with some relief in that it will not be required to invest 100 per cent (%) upfront in the project, as the private investor will take up significant risk by investing more in the project. Through PPP, the delivery of public infrastructure and services may be enhanced by creating a framework that would allow both the private sector and the public sector leverage on their abilities to manage and deliver such infrastructure and services through the use of financial, managerial, professional and technical expertise. The necessary maintenance and operation of infrastructure and related services may also be enhanced by leveraging on these resources. This allows public services to be delivered more efficiently and effectively, which allows Government resources to be channeled into other areas where direct public investment and intervention is required.

VISION AND RATIONALE
Vision
A well developed and maintained quality socio-economic infrastructure and related services that enhances the Zambian people’s livelihoods and effectively contributes to National Development through PPP frameworks and initiatives

Rationale
The Government faces challenges in the delivery of public infrastructure and services. There is an on going need for provision of new infrastructure and services, rehabilitation and maintenance of existing infrastructure and services. This is in order to deliver public services more effectively and extend access to services to the citizens. It is important to note that the increase in population has not been matched by increased capacity in infrastructure delivery and services provision by Government. In view of the fact that various sectors of the economy require resources which are rather limited, PPPs would provide Government with an alternative means of providing new infrastructure as well as rehabilitation and maintenance of existing infrastructure through involvement of the private sector that will provide requisite finance and expertise for such investments. Through these initiatives, Government can foster economic growth by developing new commercial and investment opportunities for domestic and foreign direct investment. PPPs would also provide opportunities for efficiency gains in form of better quality and more cost effective delivery of services by private sector participants. Internationally and regionally, PPPs are used effectively as a means of providing economic assets such as roads and railways, and social assets such as schools and hospitals. The Government shall endeavour to ensure that the services are derived within a PPP framework are cost effective, thereby ensure access and value for money for the citizens in general.


By careful design of PPPs, the delivery of public infrastructure may also be enhanced by accessing the private sector’s financial, managerial, professional and technical expertise. The necessary maintenance and operation of this infrastructure may also be enhanced by these private sector resources. This will allow the public services to be delivered efficiently and effectively thereby allowing Government to channel limited resources to areas where direct public investment and intervention is required. It is envisaged that through PPPs, there is an opportunity to develop and strengthen the local capital markets which may stimulate additional local and foreign investment. There are a lot of bond and equity investment opportunities for the institutional investors both local and international, to trade on the Lusaka Stock Exchange (LuSE), except that few companies are listed. Through PPPs it is possible to induce trading on LuSE thereby creating liquidity which is currently lacking.


PPPs would form an integral part of Government’s overall strategy for the provision of public social services and infrastructure development, across all appropriate sectors. As experience elsewhere has shown, PPPs can offer value for money benefits and also reduce budgetary pressure whilst improving service delivery. The potential advantages from PPPs may not be an answer to all Government’s project delivery needs and should be investigated in the first instance when suitable projects are being evaluated. It should be noted that not all projects will be suitable for PPP arrangement and suitability must be tested against set criteria by the PPP Unit.


PPP GUIDING PRINCIPLES
The fundamental goals of both public authority and the private sector firm normally tend to be in mutual opposition. This is mainly due to the fact that the public authority will primarily focus on the long term which materialises through physical infrastructure that is developed by minimising reliance on public sector funding. On the other hand the private sector firm places emphasis on the short and medium term in order to get their return on investment. While the benefits and advantages of PPPs can be significant, they are not automatic. Rather, the positive outcomes have to be earned through well-designed projects, thorough due diligence and competitive and transparent procurement. There are thus certain key pre-conditions critical in delivering successful outcomes. These have been identified as:


Feasibility
A good and comprehensive feasibility study has to be undertaken to assess among other criteria:

Affordability
PPPs should be affordable. The assessment of affordability by the procuring body is as important for privately or partly privately financed projects as it is for those which are publicly financed. Affordability will need to be the cornerstone of all PPP projects. PPP options must be affordable both to Government and the general public, given other priorities and commitments. The rationale for PPPs is improved management of scarce resources, better risk allocation and more efficient and cost-effective delivery of services. It will always need to be borne in mind, however, that while the private sector may be willing to finance and deliver and services through PPPs, only users or taxpayers can pay for them. Affordability thus acts as a real constraint, and public bodies will need to give serious consideration to the selection of potential PPP projects, ensuring always that their choices are in line with Government’s policy priorities and objectives. PPPs provide real, significant prospects for new forms of procurement, financing and operation in ways that are likely to result in improved management of scarce resources. Government’s PPP programme should not, however, be seen simply as an opportunity for public bodies to undertake projects that would ordinarily not get approval through normal budgetary processes.
Bankable Projects for Financiers and Developers


PPP’s should be bankable as financiers will be reluctant to commit finance when a project entails high participation costs, unreasonable risk transfer or lengthy and complex contract negotiations. PPP Projects will remain attractive to the private sector through cost recovery pricing policy and an allowance for a return on investment. This is critical to ensure that the project developer or investor is assured of steady and predictable tariffs over the life of the project in order to guarantee service delivery. In order to assure project developers or investors of the cost recovery pricing policy, it will be important to develop, implement and enforce a comprehensive and coherent legal and regulatory framework which would include: -
• Contract regulation;
• Contract transparency;
• Minimisation of contract disputes or contract breakdown; and
• Efficient and effective local dispute resolution mechanism.

Value for Money
PPP’s should provide value for money, i.e. good economic value which is not necessarily the same as least cost and PPP’s should focus on service outcomes or outputs rather than on the provision of assets. Value for money will be manifested through the following:
• Better coordination and greater synergy between the phases of design, construction and operation;
• An innovative design, application of reengineering principles and efficient management techniques;
• Emphasis placed on quality of service offered to the end user/ customer;
• An approach aimed at minimising total project costs throughout the entire project life cycle (capital investment + maintenance + operations); and
• A more effective use of capital coupled with the generation of revenue.

Risk Allocation
PPPs should provide for optimal risk allocation between the public and private sectors. PPP type projects always comprise a high level of risk due to the magnitude of the financial stakes involved, uncertainties over construction and operating costs, vandals, enforcement of laws, political stance/political will and revenue related uncertainties. PPPs rely on balancing the allocation of risk and enables transfer of the same to the private party when the said party is better able to mitigate/manage the risk than the public authority. In return, the public authority significantly reduces its risk exposure while overseeing project optimisation efforts.
Economic and Social Benefits


PPP projects should always be evaluated for economic and social benefits rather than focus on the financial considerations. PPPs’ underlying principle stems from the fact that the public authority remains responsible for service provided to the public, without necessarily being responsible for the corresponding investment. Through PPPs the public authority is relieved of a bulk of investment related obligations and as such is able to concentrate on service quality control, while the private operator seeks to optimise its capital outlay.

Citizen’s Empowerment
The implementation of PPP projects shall have due consideration for the empowerment of Zambian citizens as a strategy for economic growth and sustainability. As such, PPP undertakings need to provide for the participation of local investors in line with the Citizens Empowerment Act.


Decentralisation
PPPs should be extended to Local Government. Councils should be able to provide infrastructure and social services through PPP schemes at local level.

Corporate Social Responsibility
The ultimate goal of PPPs is to enable effective provision of infrastructure and related services, thereby ensuring that these amenities are also made available to all levels of society, with due consideration to the protection of the environment.

Unsolicited Bids
Potential PPP Projects will not always be known and tendered to the public for submission of bids. It is possible that a PPP Project could be initiated by the Private Sector where no bids have been requested. Such a proposal from a developer or investor will be treated as an unsolicited bid. This PPP policy will allow for unsolicited bids in line with relevant regulations. It is important to note that unsolicited bids will encourage creativity and innovation on the private sector and will lead to quality bids being submitted.

POLICY OBJECTIVES AND STRATEGIES
Goal
The Government of the Republic of Zambia has set out to facilitate for the provision of infrastructure and effective delivery of social services through Public Private Partnerships (PPPs) in order to ensure that there is economic growth through enhanced productivity, improved competitiveness and wealth creation.
Policy Objectives and Strategies
i. To promote efficient use of resources in infrastructure development and management and delivery of services through:
a. Development effective and efficient procurement procedures;
b. Attracting private sector financing/investment; and
c. Creation of capacity for effective contract management.
ii. To provide and services and delivery of services in accordance with international standards as follows:
a. Enforcement of standards and Laws; and
b. Establishment of effective networking among key stakeholders.
iii. To promote sustainable socio-economic Infrastructure Development and related services through:
a. Strengthening of public and private institutions in the development and management of Infrastructure and services;
b. Creation of awareness on environmental issues; and
c. Promotion of the use of appropriate technology.
iv. To obtain value for money from investment in infrastructure and services through:
a. Promotion of competitive pricing that would ensure reasonable return on infrastructure development and related services;
b. Establishing favourable fiscal policy to encourage private sector investment; and
c. Providing risk hedging mechanisms for PPPs.
v. To promote effective and efficient delivery of public infrastructure and related services through:
a. Providing appropriate incentives to respective stakeholders to encourage high level of performance;
b. Minimising costs and time in processing PPP transactions; and
c. Establishing accountability mechanisms for end-users.
vi. To promote innovation in the development of infrastructure and services through:
a. Establishment of framework for technology and skills transfer;
b. Strengthening research and development institutions; and
c. Facilitating skills training.
vii. To enhance confidence between the public and private sectors for development of infrastructure and service provision through the promotion of public-private sector consultation and dialogue.
viii. To create employment opportunities for Zambians through:
a. Promotion of equal opportunities for men and women;
b. (b) Ensuring the employment of indigenous expertise in PPP projects; and
c. Encouraging partnerships between Zambian and foreign firms.
ix. To administer the implementation of PPP Infrastructure projects through the establishment of a PPP Unit as an independent statutory body that will be housed in the Ministry of Finance and National Planning and will provide technical support on PPP and services development related issues.


TYPES OF PUBLIC PRIVATE PARTNERSHIPS
It is Government’s intention to encourage innovation in as many areas as possible. Traditionally, PPPs have been applied to infrastructure and service provision – in particular in the electricity, telecommunications, water, transport and solid waste sectors and increasingly in the social (health and education) and Information Technology sectors. A wide spectrum of PPP arrangements exists, differing in purpose, service scope, legal structure and risk sharing. One end of the spectrum would be an outsourcing of some routine operation, while the other could involve the private sector conceiving, designing, building, operating, maintaining and financing a project, thereby taking a considerable proportion of risk. Additionally PPPs can take the form of partial or complete divestiture/privatisation. The choice of the PPP arrangement for a particular project will depend on Government’s policy in the related sector and on potential value for money to be generated under such an arrangement. Some of the examples of PPPs are listed below.


Service contract
Under this option, the private sector performs a specific operational service for a fee.
For example in the utility based industries such as electricity, water and telecommunication for such activities as meter reading, billing and revenue collection usually for a period of one year.

Management contract
Under management contract, the private sector is paid a fee for operating and maintaining a Government owned business and is totally responsible for day to day management of the business in line with set targets agreed by both parties usually for a period of two to three years.

Lease
Under a Lease arrangement, the private sector is responsible for operations and maintenance and the Government or public sector still retains ownership of the asset usually for a period of 3 to 5 years.

Concession
This is where the private sector finances a project and is responsible for operations and maintenance. The Government retains the ownership of the asset and all full use rights revert to Government after the agreed period of the concession. The private sector is expected to provide long term investment capital over the period of the concession usually 20 to 30 years, in return for fees from service users.


Build Operate Transfer (BOT)/Build Own Operate Transfer (BOOT)
The private party agrees to perform construction work and operate a service. Key obligations for the private party include:
· Building the infrastructure;
· Maintaining the infrastructure;
· Providing service; and
· Transferring control of the project facilities to the public authority upon expiry of the contract period.
BOT or BOOT are similar to concessions except they are applicable to Greenfield projects. Like concessions, the private sector receives fees from service users. The private sector builds, operates and transfers the asset to Government after the expiry of the concession period usually 20 to 30 years.
Divestiture – (Privatisation)
This option can take two forms – partial or complete divesture. A complete divesture, like a concession, gives the private sector full responsibility for operations, maintenance and investment. Unlike a concession, divesture transfers ownership of the assets to the private sector.


IMPLEMENTATION FRAMEWORK
Institutional Set Up
A PPP unit to be established in the Ministry of Finance and National Planning as an Independent Statutory Body will coordinate, administer and monitor PPPs in Zambia. International experience suggests that identifying and establishing clear and unambiguous institutional functions in relation to PPP at the onset of a country’s PPP programme can greatly assist in successful PPP implementation. At the same time, it is useful to have a degree of institutional flexibility in the early years of a country’s PPP programme, to encourage experimentation and innovation, and importantly, to ensure that public bodies that have capacity are not delayed while institutional capacity elsewhere is being developed.


The PPP unit shall clearly determine which investments shall be undertaken by both local and foreign partners from the private sector. The rationale shall be that focus would be given to local partners from the private sector. The profile of the PPP unit as an institution shall be clearly spelt out in the Act that will establish the PPP unit. While institutional roles and responsibilities may change over time as Government’s experience with PPP grows, the following public institutions will play important roles in the programme:


§ Ministry of Finance and National Planning will play a key role in assessing the budgetary implications of PPP projects. The PPP Unit will work in association with key departments of the Ministry of Finance and National Planning in the assessment of PPP project affordability, value-for-money, feasibility, and contingent liabilities associated with PPP projects.
§ Contracting Ministries, Local Authorities and other public bodies, will play a lead role in the identification, selection and monitoring of PPP projects in their sectors. Sectors with capacity will be encouraged to move forward with their projects, subject to them being affordable and generating value for money. Sectors with less capacity will benefit from the assistance of the PPP Unit and external transaction advisers.

Legal & Regulatory Framework
The country already has many of the ingredients required for a successful PPP programme i.e. a stable Government, independent judiciary and relevant public institutions. However, political and regulatory risks remain potential barriers to effective PPP implementation. With this in mind, new PPP legislation will be enacted to provide further and concrete evidence of Government's commitment to its PPP policy and to provide an opportunity to establish in law a set of general principles and rules for PPP procurement that all public bodies will be expected to comply with, thereby ensuring some degree of consistency in approach across sectors.
Public Awareness and Stakeholder Consultation


The success of the PPP programme requires widespread public support. A PPP communications and awareness strategy led by the PPP Unit will be directed at key stakeholders, officials of public service procuring agencies, employees in sectors where PPP will be developed and the general public. Information on progress in assessing and implementing the various PPP projects should be made available to all those interested in the PPP programme, using project trackers posted and updated regularly with the national media.


Capacity Building
As PPPs represent a substantially new paradigm for Government and private sector, capacity building will be necessary for all stakeholders in the PPP process. The general level of awareness and understanding of PPPs will be improved among all stakeholders to facilitate sound policy development and constructive discussion and debate. There is an urgent need to ensure a sufficient level of resources to deliver good PPP projects. The success of the PPP programme will depend on the development and retention of appropriate skills and expertise in the public and private sectors. To this end the PPP Unit will need to be adequately resourced with key skills in legal, technical and finance.

Monitoring and Evaluation
A comprehensive and regular review of the overall process should be a core responsibility of structures managing the development of PPPs. Reviews should be prepared openly and transparently within an appropriate time-frame. The review should specify implications for the procurement of assets and the delivery of quality services helping to shape the future evolution of the PPP programme. The implementation of, and adherence to, the PPP Policy Framework will be monitored and reviewed by the PPP Unit focusing, in particular, on the consistency of conduct of the PPP process with the Framework and the need for any revisions required to maintain its consistency with ongoing developments and expansion of the country’s PPP programme.


Resource Mobilisation
The Government will finance the operations of the PPP Unit. The Unit will also mobilise its own resources from PPP transaction fees. The financial institutions will be encouraged to provide loans for local businesses in order for them to participate in the PPP initiatives. The Government will work-out appropriate incentives to lenders engaged in PPP projects, particularly those institutions providing suitable financing as required by PPP projects. A Special Purpose Vehicle (SPV) may be created to allow for the financial structuring of transactions with the objective of resource mobilisation, within a PPP framework.

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