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Public-private partnerships can be risky for Egyptian government

While the government seeks private investment for infrastructure projects, some fear that regulations in place do not protect the government against dangerous risk

Marwa Hussein, Sunday 19 Dec 2010
Road
Roads present few risks for Public-Private Partnerships.
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No pain no gain, as far as the Egyptian government is concerned. The government is ready to endure risks and pay subsidies, but in exchange extend utilities to deprived regions.

A week ago, Minister of Finance Youssef Boutros Ghali announced that the governement is aiming to draw LE100 billion ($17.3 billion) of investment into public-private partnerships (PPP) over the next five years.

The projects will mainly be in infrastructure projects like sewage plants, water stations and electricity generating units. Many indicators show, however, that the benefits of PPP can't make up for its high risks. 

The main merit of PPP projects is that they give the population access to services that governments are not able to finance.

The government passed a law in May 2010 to accelerate the pace of such deals, to facilitate launching private infrastructure projects, while normally procedures to launch such a project could take more than one year. 

The upcoming projects will be the first PPP initiative in Egypt to be planned according to the new law on public-private partnerships the parliament passed last May. The Ministry of Finance expects the cabinet to approve executive regulations for the law by the end of the month.

A unit for PPP initiative was created within the Ministry of Finance four years before the promulgation of the law. The Ministry of Finance announced the first tender for the building of 300 schools by PPP back in February 2007. 

The plan is to build 2210 schools according to the same system. The PPP unit prepared 32 files on infrastructure projects, looking for interested partners.

So far, only one contract was signed (before the law was passed), to build a station for the treatment of wastewater in the suburbs of New Cairo, which was signed in February.

Governments like PPP projects because they allow the state and local government agencies to be indebted without this debt appearing on their budgets.

“The government uses PPP to solve problems of temporary budgets, but in the long run the budget is weighed down. The current persons in charge delegate their problems of financing to their successors,” says Ahmad Galal, managing director of the Economic Research Forum.

Privately managed utilities are also criticised for offering highly priced products, a critical issue when the product is water, electricity or transportation. Minister of Finance Boutros Ghali soothed worries by saying that the new law entitles the government to fix the price of services. 

Moazzam Mekan of the International Finance Corporation approves, adding that some governments offer services at prices below their market cost. The difference is subsidised. "The same thing can happen in the case of the private sector.”

But for Ahmad Galal, the government's approach lacks good planning and transparency. He refutes that the projects will be negotiated on a case by case basis. 

“You need first a clear sectorial policy in each sector, electricity, water, roads, etc. Each sector should have a clear regulation defining pricing, the quality of the services, the risks etc.” He added: "Why depend only on negotiation skills in such sensitive services like electricity and roads?"

Galal is also critical of what Egyptian law proscribed in terms of fixing material and input costs, and final product price.

“Fixing prices in advance of long term contracts leaves no risk for the private sector. This is against the essence of private investment,” he adds.

The higher price of services is not the only risk of PPP projects. The World Bank warns that such projects are associated in many cases with corruption.

The World Bank published in December 2008 a paper entitled "Grand Corruption in Utilities," underlining: “Evidence suggesting widespread corruption related to privatisation processes is considerable. There is also a growing body of anecdotal evidence suggesting that corruption contributes to sub-optimal public-private investment decisions and high costs to government for privately generated electricity supply.”

Cases of controversial privately-run infrastructure projects around the world are many.

The World Bank study points to Canada, Australia, France, England, Zimbabwe and Tanzania among other examples. Some are connected to corruption while others are not. High cost, delays, and inefficient services are reported in many developed and developing countries.

In the case of Tanzania, the president dissolved the cabinet in February 2008 after it was alleged that the prime minister’s office improperly awarded a contract to a US-based electricity company. "It is the effectiveness of the private sector and its capacity to deliver a service of better quality that was questioned in certain cases," the World Bank report states. 

The study gave the example of the construction project of the Bridge of the Confederation in Canada that was finished in 1997. The inspector of the Canadian government claims that the cost of the project could have been reduced $45 million if it had been financed directly by the government.

The same for a network of aqueducts in France. A study of the Inter-University Research Centre (CIRANO, France) revealed that companies provided water unfit for consumption. In July 1994, the Compagnie Générale des Eaux (Vivendi) was condemned after having provided polluted water to the inhabitants of Tregeux in France.

The World Bank notes that private sector recurrently evades its contractual obligations in PPP projects. Moreover, a survey by the international institution showed that in 2006 one in 10 projects of water and sewage PPPs was cancelled, and around 25 per cent of investments in water were annulled.

Egypt already had an experiment similar to that of PPP during the 1990s, and which showed its failure. They were projects known as BOT (Build-operate-transfer), which are a contractual form of PPP. After signing 13 BOT contracts, they were revealed as too costly for the government, so much so that President Mubarak in 2001 put a freeze on BOT projects.

At that time, it was interpreted that the government assumed, according to the contracts, all risks related to fluctuations in foreign exchange markets. When exchange rates went up, the government found itself hard pushed to finance the projects.

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