Is it the right model to sustain Ethiopia’s growth momentum?
A year after parliament legislated a proclamation governing Public Private Partnerships (PPPs), a Saudi firm has become the first to be awarded the construction of two solar power projects under such scheme. Another 15 projects, on the basis of PPPs, will soon be awarded to winning companies. While such a move is expected to fill the huge financing gap in the electricity sector, there is hope that this will have a positive impact on the efficiency, equity and quality provision of services.
While the idea of PPPs in general is theoretically appealing, its practical implementation in developing countries is not as easy as theory suggests. Perhaps partly for that reason, a large number of implemented PPPs have left the contractual parties dissatisfied, indicating that either developing countries, investors, or both may have had unattainable expectations. Experts fear this may happen in Ethiopia as well. EBR’s Ashenafi Endale explores.
State-led investment, particularly in infrastructure and mega projects, has been the main driver of the economic growth Ethiopia has registered over the past decade. But currently, the economy is no longer on the same track. While the government is under critical debt stress, rising inflation and depletion of foreign currency reserves is limiting the government’s access to additional loans as well as its capacity to import capital goods, which is crucial to undertake infrastructural development projects.
The tax revenue also does not match the cost of state-run projects, which escalates daily, due to delay and inefficiency of projects. Government projects incurred ETB44 billion due to the delays of mega projects, according to recent report by the Office of the Auditor General. Despite such loss and inefficiency, the government still needs to invest at least USD120 billion in order to join the club of middle-income country by 2025.
The government seems to understand this huge investment gap, which cannot be fulfilled from its coffers only. It would also be difficult to sustain the economic growth witnessed over the past 15 years if infrastructural investment cannot be maintained. So, it is trying to fill the huge financial gap with the help of the private sector. In fact, it was three years ago that the government came up with the idea of pursuing Public Private Partnership (PPPs) to fill this investment gap. To this end, parliament legislated a law that governs projects implemented under the PPPs scheme a year ago. Coupled with reforms undertaken by the government in the political and economic realms, the administration of Prime Minister Abiy Ahmed (PhD) is hoping PPPs will bridge the finance gap. While a separate section led by a state minister to approve and regulate PPP projects is established under the Ministry of Finance (MoF), a new board responsible for approving projects under PPP scheme was also set up. Comprised of seven ministers and two representatives from the private sector, this PPP board is led by Minister of Finance, Ahmed Shide. Having the largest pool of ministers next to the council of ministers, the board has the final say in the PPP institutional hierarchy, from evaluating tenders to awarding projects.
Although not fully practiced nor institutionalized for long in Ethiopia, PPP is a public management concept which emerged in the 20th century. Practically, PPP does not have a single pin of definition because it has various contract management modalities. But in general, it entails a wide range of arrangements in funding modalities, risk sharing, and procurement transparency. As a result, PPP can have hundreds of interpretations and implementation modalities as it differs across countries. Most of the railway infrastructure in the United States, for instance, developed during the country’s early economic growth stage is built via the alignment of the private sector and government. From recent experiences, China can be noted for effectively exploiting PPP to develop infrastructural and other mega projects.
In Ethiopia, the proclamation ratified in 2018, which was then followed by strategy and directives, details how PPPs should be implemented. The private partner, if it won a tender for a project under the PPP, would bring finance, develop the project and administer it until it recovers the investment and the determined profit margin. On the other hand, the government is limited to regulatory affairs, averting risks and determining tariffs on behalf of the public or the final user. “Once the private partner recovers its money, which will take 30 or more years, the respective public institution will take over the projects or extend the management contract. But the public remains owner of the projects,” explains Ashenafi Abera, director of PPP Capacity Building, Knowledge Management and Communication Directorate at the MoF.
Recently, the PPP board approved 17 projects as part of the first phase. Seven of these projects are solar projects while there are five hydro projects, three expressway projects, and one transmission line project. Housing, schools, higher education institutions and hospitals are among projects expected in following phases. So far in the first phase, the board has awarded the Gad and Dicheto solar projects located in Somali and Afar states to a Dubai-based company, which won the projects after offering USD2.50 cents per kilowatt hour selling price to the Ethiopian Electric Power (EEP), one of the lowest tariffs in Africa and globally. “The production cost of the winning company is less than half the cost potentially incurred if developed by the EEP. The tariff offered for Dag and Dicheto will help create a benchmark for remaining PPP projects’ negotiations,” says Ashenafi.
Studies indicate that PPPs guarantee value for money—broadly defined as the ability to improve the delivery of benefits relative to the associated costs across a range of alternatives. Infrastructure projects implemented through this scheme are more likely to reach the desired level of performance as contract agreements require private partners to deliver assets on time and within budget, manage project delivery, and maintain and refurbish assets, according to a study published by Asian Development Bank last year.
Tsedeke Yihune, founder and general manager of Fintstone Homes and one of two members in the national PPP board representing the private sector, has no doubt PPPs will bring forth an economic revolution. “The PPP board closely follows up on projects and decides, so they do not fail once the private partner starts with a low offer and gets stuck in the middle. I am over confident PPPs will be successful in Ethiopia,” he says.
Zemedneh Nigatu, an investment consultant and managing director of Fairfax Africa Fund, agrees. “PPP financing proved effective in many countries especially in airports, railway, toll roads and many other areas,” he says. “PPPs also open opportunities for the private sector, in addition to reducing government’s debt burden.
But, Kebour Ghenna, director of the Pan African Initiative, stresses that this is not applicable to economically weak countries, like Ethiopia. “It is a game for big corporates, which command big money. Since power resides on the private side, it is not a balanced partnership. Local private sector actors could participate in the PPP if there is local input supply. But since Ethiopia imports capital goods, PPPs are only suited for foreign private sector entities. This aspect also makes the country liable to pay them in foreign currencies in order to recover their investment,” Kebour says. “Under such circumstances, Ethiopia has no bargaining power, making it a one-sided PPP.”
Of course, the experiences of China and the United States show that it is the local private sector that is involved in projects together with the government. But, the practice in Ethiopia seems to overlook this monumental fact from the outset. The proclamation ratified in 2018 states in its preamble that ‘participation of the private sector is recognized as an essential strategy to realize the country’s development objectives, including the infrastructure system’. Yet, Alemayehu Geda, professor of economics (macroeconomics and international economics) at Addis Ababa University questions the fundamental motive behind the PPP proclamation and the ongoing economic reforms. “Who is behind the PPP proclamation, the privatization and the reform? It is the World Bank, IMF and western powers? The Ethiopian government is using the scheme to usher in foreigners into the economy, totally outplaying the domestic private sector. Clearly it is ‘public foreign private partnership’,” he says.
For Alemayehu, the government is making such decisions bluntly just to satisfy western capitalists who are behind the economic liberalization to find more economic space for their corporations. “The Ethiopian government chose PPPs without first exploiting other financing models like joint ventures, equity financing, and share/ stock markets,” he says.
But PPPs are not totally new to Ethiopia. Despite not being considered as PPPs, projects like the Lehulu payment system and the La Gare real estate project, in which the Addis Ababa city administration has a 30Pct share, are built using such an arrangement.
Yet, Alemayehu argues PPPs are not the best model recommended for project efficiency. “In China, the government was better than the private sector in some sectors and vice versa. But in Ethiopia, there is no area where the government is better, so there can be no balanced PPP,” he says. This is the part where the government attempts to reduce the role of the state in the economy, which will result in a nose-diving economy.”
With the minimum cost of any of the 17 projects estimated around USD200 million, awardees are expected to come up with 30Pct of the project cost, which it can raise by selling shares in the name of the new project, and raise the remaining 70Pct using loans. But with the huge finance required by the projects, the government is criticized for tactically crowding out the local private sector. “The projects will be directly given to foreign companies as there is no domestic company with such financial capacity. There is no private entity that is able to get the huge foreign currency needed to import the capital goods that big projects demand,” argues Kebour. This does not seem convincing for Alemayehu who argues it will not elude the private sector as the tariff is determined by the government. “The private sector tends to choose projects that have quick returns. If the government is smart, it reserves itself only by setting a price ceiling that is affordable for the public.”
Experiences of developing countries, which managed to transform their economy, show that the private and public sectors have their own motivations for using PPPs for infrastructure development. The desire of the private sector is to profit from building the infrastructure and delivering services. The government also want these projects to be more efficient because of private sector participation. In fact, the effectiveness of PPPs lies on the shared goals of both the government and the private sector in quality, efficiency, and accountability in building infrastructure and delivering services, according to studies conducted by different scholars.
“The private partner knows what a viable price is when it offers the least price during the bidding. If such infrastructures are totally left for the private sector, end users cannot afford the services because of their expensive prices,” argues Tsedeke.
Despite such an assurance, however, empirical evidence suggests there are many other determinants affecting the decision of private entities to pursue PPP projects, beyond price. For instance, according to a study entitled Determinants of Public–Private Partnerships in Infrastructure in Emerging Economies, macroeconomic factors such as economic growth and inflation are the most relevant determinants of the PPP model in developing countries. For macroeconomic stability, inflation and exchange rate instability could discourage private investment, according to the study. Yet, with the lack of transparency, high corruption risk, and Ethiopia’s centralized public procurement system, the implementation of projects using PPP can be another bone of contention. “Obviously specifications in the tenders of the projects are asserted targeting a company the government wants to win. Companies who get more information during pre-tender discussions and negotiations will have more chance to win,” argues Kebour.
Be that as it may, to ensure the participation of the local private sector in PPP projects, Alemayehu recommends the government must put in place an article that mandates partnership between local and foreign private entities with a well-defined percentage share. Zemedeneh concurs, recommending that “Ethiopia must make it mandatory for foreign partners to give partnership space for the local private sector to have 20Pct to 50Pct stake, at least, based on the type of the projects and the sector and that is the way to build local capacity.”
8th Year • Nov.16 – Dec.15 2019 • No. 80