Teshome Taffese (PhD), State Minister of Finance (MoF), is the mastermind who led MoF to institutionalize Public Private Partnerships (PPP), a new model expected to fill the infrastructure financing gap existing in the country. Prior to this political assignment, he has conducted dozens of case studies in numerous countries, particularly on public finance, infrastructure development and PPPs. Teshome stresses that under the circumstances, Ethiopia has no option but maximizing the exploitation of PPPs. EBR’s Ashenafi Endale sat down with him to understand what has been done thus far.
EBR: How do you evaluate the role of public led-infrastructural investment in terms of bringing strong and broad-based growth in Ethiopia?
Teshome: Due to publicly led-investments, Ethiopia has shown promising progress in infrastructure development compared to other sub-Saharan African countries. It is the infrastructural investment that helped Ethiopia register strong and broad-based economic growth. The annual average growth rate, which stood at around 10Pct for the past decade, was higher than the sub-Saharan average of 5.4Pct. Such strong economic growth helped the country reduce both urban and rural poverty. But this had not been without gaps. Although the provision of infrastructure has been the main focus of the government to attract the private sector, very little progress was made in this regard.
What are the pros and cons of developing infrastructure through public and private investment?
Developing infrastructure through public resources is a critical challenge for governments. One of the major reasons is the gap between the ever increasing demand for expanded quality infrastructure from citizens and the limited capacity of the public sector, mainly in terms of finance and efficient management. Though the government remains the sole and traditional provider of public services, involving the private sector with all sorts of risk sharing arrangement has become imperative to bridge the gap.
The private sector engage in infrastructure investment opportunities with the clear goal of maximizing profits, generated in large part through improvements on investment efficiency and operations. Doing so increases the chances that those projects are economically sustainable and provided at affordable rates, even after satisfying the profit requirements of the private sector.
What about Public Private Partnership (PPP)?
PPP arrangements helps the government transfer some development and operational roles to efficient private sector actors while retaining and improving focus on core public sector responsibilities, such as regulation and supervision.
If it is properly implemented, this approach should result in a lower aggregate cash outlay for the government and better and cheaper service to the consumer. This should hold true even if the government continues to bear part of the investment or operational cost. The government’s cost obligation is likely to be limited and structured within a rational overall financing strategy. By tapping into private sector finance and resourcefulness, governments are able to finance critical infrastructure, improve project preparation, execution and management as well as deliver efficient services to the general public.
However, if involving the private sector in the infrastructure development in partnership is not well managed, the arrangement may come with a host of limitations leading to problems. For example, in payments-based PPPs, the government pays for the infrastructure. Even where users are charged for services, the government often has to bear some costs in forex, which create contingent liabilities for the government.
Contingent liabilities are hard to estimate and government may end up bearing more risk than it can effectively manage. Since PPPs involve fiscal risks that may result in outcomes differing greatly from forecasts and expectations, it is important to have clear frameworks to assess these risks. That is why devising clear PPP legal and institutional structures and conducting rigorous feasibility studies of the projects are very important preconditions for its success.
Is this why the government is emphasising on PPPs since last year?
The main reasons as indicated in the PPP policy are filling the infrastructural investment gap and ensuring economic stability. Infrastructural activities cannot be financed from the coffers of the government alone without the involvement of the private sector. Government stopped taking commercial loans due to the debt stress. Government even reserved itself from starting new mega projects. There is no private equity. PPPs are also importants tool for prudent management of public debt. It is also an off-budget mechanism for infrastructure development as it may not require any immediate cash spending.
Globally, PPPs are usually implemented in tandem with the domestic private sector. But, the 17 PPP projects availed by the government needs a minimum of USD200 million with huge foreign currency requirement to import capital goods. This means the domestic private sector is left out due to lack of capacity.
When we evaluate the progress of the first and second phases of the five year economic plans, there is a huge infrastructure gap. There is no other financing option to fill this gap in a short period of time, other than involving the private sector. So, PPPs are the best available tool at hand even though the local private sector is not in a position to benefit from it. Under PPPs, government does not spend a coin. We share risks with the private sector and provide support. We are in dire need of foreign currency and the local private sector cannot do that.
Is there a mechanism that allows the transfer of knowledge, skill and technology from foreign PPP contractors to local private entities?
Our PPP legal regime is well studied and sufficiently flexible to accommodate the interest of both partners. It also prescribes the importance of supporting local private sector development. For instance, an international bidder is supposed to have a local private entity as a partner.
You concluded PPPs are the only available option. But, what about other options such as joint ventures, equity and share/ stock markets?
Stock market is another issue. Project financing in Ethiopia is more related to the vision of the country, which is becoming a middle income country by 2025. There is a critical infrastructure gap that hinders Ethiopia from achieving this target. Roughly, Ethiopia needs infrastructure investment close to USD150 billion to achieve the vision. Other financing models are equally necessary but cannot address Ethiopia’s critical needs. The readily available and more potential option are PPPs.
As a national interest, we wish the local private sector grows faster but it cannot execute its role as it is today. The local private sector needs to create consortiums with foreign private companies to develop itself. There is idle money in the international financial system, but our companies do not know how to bring it to Ethiopia.
What is the progress of the designated 17 PPP projects so far?
All the 17 projects are at different progress levels. For instance, we have successfully managed the tender awarding process of two solar projects (Gad and Dicheto) with 250MW capacity. These projects are estimated to cost USD300 million. Using transparent and fair international tenders, we secured 2.5 US cents/ KWh deal, which is the lowest tariff in Africa and one of the lowest in the world. The remaining six solar projects are in the pipe line. We recently concluded the Request for Qualification (RfQ) evaluation and are planning to issue a Request for Proposals (RfP) in short order. Since sense of urgency to start the power generation projects is high, we are thinking of mechanisms to expedite the tender of these projects in consultation with the Ethiopian Electric Power.
Our PPP policy requires thorough analysis of fiscal and end-user affordability to ensure that the projects are suitable for PPP development and also an attractive investment proposition for the private sector. Equal attention is also given to feasibility studies, among others.
In its nature, PPPs are complex and lengthy because conducting due diligence is an important part of the process. The process is tricky and involves a lot of heavy lifting, particularly in emerging markets like Ethiopia where the market for PPPs and supporting institutional structures are in the process of development.
Corruption is the major problem under the existing procurement system. Some still argue the specifications of PPP tenders (particularly the solar project recently awarded to a Saudi company) are floated targeting specific companies in the bidding pool.
There is no tangible ground to raise this question. It may be in the grape-vine channel. The government has put in place mechanism to safeguard the integrity, transparency and fairness of the PPP procurement process by establishing different bodies to involve in the conceptualizing, structuring and procuring stages.
The law clarifies the role of each institution. The procurement process is also supported by contracting authorities throughout the process. It is also implemented in a transparent and fair manner. Having such a legal environment is important in the procurement process to treat potential bidders equally.
It is also very different from the traditional tender process known in Ethiopia before. The PPP law stipulates five types of private partners’ selection processes, all detailed in the proclamation. There is no loophole that could lead to abuse of the existing procedure. Potential bidders will be selected using the RfQ process followed by the RfP process which is managed via virtual communication (through a dedicated data room on the website) with a single contact person assigned to have access to that communication. Then bidders will submit their proposal in person. The bid officials and bidders never meet physically under the PPP system. But it is not going to be 100Pct free from corruption because corruption can not be avoided when you create a new system. When we strategize, mitigating corruption was on our mind. The more you negotiate, the more people find ways. But transparency solves corruption.
Outsourcing service sectors like documentation and billing systems, can improve the performance of, for instance, the export sector. Will the government start outsourcing such services under PPP?
The government is willing to do so as long as these projects demonstrate PPP suitability (becoming technically and financially viable) and generate value for money for the government and to the public (end-users). Hence, contracting authorities can come up with their request.
Can the PPP strategy support infrastructure development across east African nations and facilitate regional integration?
Generally, implementing cross-border projects under PPP presents specific challenges as these projects are more complex, face several augmented risks, and necessitate higher level of coordination. However, depending on the type of infrastructural project, PPP mechanisms could potentially support cross border infrastructure development across East Africa, granted that the risks are mitigated. For example, projects in the the energy sector and the construction of cross-border toll-roads can be done through PPPs. In fact, the Nile basin countries are studying the possibilities of considering PPPs in the implementation of their objectives. One of the objectives of the Eastern African Power Pool is to optimize the usage of energy resources available in the region by working out regional investment schemes in power generation, transmission and distribution.
8th Year • Nov.16 – Dec.15 2019 • No. 80