PPP Strategy

Executive Summary
Egypt needs to move quickly to remove the barriers that prevent, or discourage, private investment in basic services such as water, electricity, gas, waste management, road building and transportation. Failure to act is retarding development, arresting social change and threatens to jeopardize the positive results of privatization in other sectors.

This study presents a strategy for promoting and supporting private investment in infrastructure projects. Despite the private sector involvement in infrastructure projects in Egypt, still it remains very limited. Thus, the study analyzed the main challenges facing private sector participation in infrastructure projects and proposed a strategy to promote such participation.

The study main findings were that, the main challenges facing private sector participation in infrastructure projects in Egypt are basically: inadequate legislative system and institutional framework, and unfavorable public opinion.

Then a proposed strategy for promoting private sector participation in infrastructure projects was presented. It basically rests on three pillars. First, reforming and upgrading the legislative system of private investments in infrastructure facilities, second, reforming and improving the institutional framework and third, developing a communications strategy.

1- Introduction

Economic and social development entails parallel and equal investment and development in infrastructure services and facilities. The importance of infrastructure is manifested in its various roles in the economy as it enhances the economy's potential for long- term sustainable growth, increases productivity and income levels and improves the quality of life as well as the overall climate for foreign investments.

Traditionally, the public sector has been more involved in areas where governments formed natural monopolies (such as providing electricity, water sanitation, telecommunications, and infrastructure projects in general) while leaving for the private sector more competitive areas for pursuing economic activity (such as industry, agriculture, and retail operations). Historical evidence in some countries, as well as the current situation in some others, has proven that the public sector alone is unable to provide infrastructure projects in the manner required.

It is fair to say that monopolization in the provision of infrastructure projects by the public sector has on one hand reduced the quality of services provided, and on the other hand severely strained governments' budgets. In addition, the quality of infrastructure provided in any country is considered a prerequisite for economic growth and development, and consequently this fact has raised concern regarding improving the quality of infrastructure projects by finding new means of implementation aside from the conventional method of relying solely on the public sector.

A solution for solving such a dilemma is to break public sector monopolies in the provision of infrastructure projects in a manner that would guarantee the required improvement and efficiency in the provision of infrastructure projects. From this stand point, a major shift has occurred regarding the role of governments in providing infrastructure projects. Many countries and governments have been moving away from owning and operating infrastructure projects to regulating those projects provided by the private sector.

Private sector participation can help improve infrastructure services in several ways. Well-designed public-private infrastructure can increase service efficiency, allowing the private operator to increase profits by reducing costs or improving service quality. The private sector can also offer infrastructure providers much-needed financing, allowing for the provision of services even when the public sector lacks access to the necessary funds. These advantages, plus the greater customer focus of the private sector, can substantially improve the quality of services to customers.

The benefits of private sector participation will be greater if the government also develops supporting policies on competition and regulation, and clarifies the responsibilities of government agencies involved in the sector. Private sector participation contracts are complex. When they are well designed, such contracts allocate risks to the party best able to manage or mitigate them. Finally, in such a complex and long-lasting transaction, the government needs to be sure to choose the right private company. Various techniques are available to select a suitable company through competition and to deal appropriately with unsolicited offers. 

Public Private Partnerships are a world phenomenon. Public Private Partnerships (PPP or P3) are forms of “collaboration or joint endeavor between public and private sectors for the purpose of developing, constructing, operating, and financing infrastructure projects."

There are various types of Partnerships in infrastructure that differs in the degree of private sector involvement. The main types of PPP are as follows:

1-Service contracts: The public authority retains overall responsibility for operating and managing the whole system, but contracts out specific components, such as meter reading, billing, and maintenance. Service contracts usually last between 1-3 years.

2- Management contracts: The public authority transfers responsibility for management of a range of activities in a specific area to the private sector. In such a situation, the public authority often finances working and investment capital and determines cost recovery policy. This ranges from 3-5 years.

3- Lease contracts: Private operators rent a facility from the public authority and assume responsibility for the operation and management of the facility as well as tariff collection. The lessor effectively buys the right to the revenue stream and thus shares significant commercial risks. This ranges from 5-15 years and could be extended.

4- Build Operate Transfer (BOT): BOT contracts are usually used to procure large infrastructure projects. The private operator is required to finance, construct and operate the facility for a certain number of years (from 20-30 years), after which the facility is returned to the public sector. The BOT contract could take other various forms which can also be used to carry out infrastructure projects such as BOOT, BOO.

5- Concession contracts: Private operators become responsible for operation and management and investment, while the public authority retains ownership of a facility’s assets. These concessions may offer a national or city-wide franchise and may last for from 25-30 years. Others are of short duration, such as a concession to provide refreshments, or longer, such as the franchising of the UK’s national, lottery, which is periodically rebid.

6- Divestiture: Full private ownership and responsibility falls under a regulatory regime.

The following table summarizes the key Private Participation in Infrastructure (PPI) approaches.

The different degrees of Private sector involvement are shown in the following figure:

As we move upward and to the right, the private involvement increases.

One solution does not apply to all infrastructure sectors. The appropriate form of PPP depends on the characteristics of the sector; the market it serves and the government’s objectives. All PPPs must offer an investor an opportunity to recover capital costs and make a reasonable profit. The common denominator is transforming the State’s role from direct service provider to controller and regulator.

Stemming from the urgent need to improve infrastructure, the Ministry of Investment’s strategy to attract private investments into public infrastructure projects is designed to improve infrastructure facilities and operate them more efficiently at lower cost so that standards of living rise and development goals are realized.

2. Private Sector Participation in Infrastructure Projects in Egypt

Over the past few decades, the Egyptian government has been the major provider of infrastructure projects. However, with a multiplying population, an expanding economy, and increasing financial obligation, the public sector can hardly maintain its role as the sole provider of infrastructure projects.

 The inability of the public sector to maintain this role is further confirmed by the bad state of the publicly financed infrastructure projects and their inability to meet their economic as well as social goals. Consequently, the Egyptian government has been urged to partner with the private sector in delivering infrastructure projects.

In the past 15 years (1990-2004), Egypt had new projects with private participation in four infrastructure sectors: Energy, Telecom, Transport, Water and Sewerage. In those sectors, 16 projects involving investment commitments for $ 6, 2 Bn reached final closure where the telecom sector received the largest share of investment. 

Greenfield projects were the most frequent form of private participation representing 81% of the projects and 68% of total investment in PPI projects in the country.

Despite the private sector participation in infrastructure previously mentioned, it still remains very limited especially if compared with other developing countries like Malaysia, Philippines, and Czech Republic. During the same period 81, 78, 68 combined PPI projects and total investment in PPI projects during the same period are 37845 , 31533 ,and 16822 million $ respectively.

That is why the Egyptian Ministry of Investment has developed a strategy to promote private investment in infrastructure.

• Motivations for Promoting the Private Sector's Engagement In Infrastructure Projects

1- Remedying insufficiency of government finance
The private sector's inclusion in financing and operating public infrastructure helps to sustain the development cycle by building new facilities such as electricity, water and drainage stations, airports and the like. This does not burden the public purse further and helps restrain governments from resorting to further taxation, and redirect resources to non-profitable social sectors such as education and healthcare.

2- Speeding up the economic and social growth rate
Private sector participation in public facilities is a form of private direct investment with the merits of direct investment. This involvement should create new jobs and real investment opportunities for national contracting companies. Building new facilities in remote areas extends population areas and creates new industrial bases. In addition to that, Participation by the private sector supports tourist development schemes especially transport and airport projects. It also improves the overall climate for foreign investments and stimulates the economy as a whole through improved balance of payments, technology transfer, employment, etc. 

3- Improving the performance of public facilities
The effectiveness and improvement of infrastructure projects-as public assets- increase with private involvement .The private sector has acquired a good deal of financial and technical experience in many sectors. It is also interested in upgrading the service level, which satisfies the public interest. The government and controlling bodies may benchmark the performance and quality of services provided by the private sector. This benchmark can be used to measure the quality of services provided by government agencies. Some forms of private involvement can be used as mechanisms for structural reform, as in the case of economic facilities management contracts.

4- Transferring commercial risk to the private sector

Commercial risks include lack of demand for the services or products provided by the facility, the risks related to the costs of the service or product and fluctuations in foreign currency rates or inflation. These risks may be contained within the existing market mechanism. Private investment in infrastructure facilities is a means to transfer the operating risks related to the market forces to the private sector. This does not mean that the government will disengage itself entirely. In fact, government bears the political risks as well as those caused by amending laws. The government encounters untoward commercial events to sustain services and facilities. Through optimal risk transfer and risk management, better value for money for the taxpayer can be provided.

5-2 Other economic goals 
• Transferring modern technology to economic facilities.
• Extending private ownership and adopting a market-economy approach.
• Stimulating the domestic capital market by issuing new securities.
• Using private investments to enforce some structural reform policies.
• Speedy, efficient and cost effective delivery of projects.
• Competition and greater construction capacity.
• Effective utilization of state assets to the benefit of all users of public services.  

3. Challenges Facing Private Investment in Infrastructure Projects

Despite diligence the Egyptian experience in recent years has uncovered a number of obstacles to promoting investments in infrastructure projects. Private involvement in financing and operating infrastructure facilities is blocked by several factors:
• An inadequate legislative system.
• Difficulties related to institutional framework.
• Unfavorable Public opinion.

1- Inadequate legislative system
• Regulations governing the selection of the most qualified investors and best offers are imperfect. There are no evaluation techniques that comply with the financial, technical and operational aspects of these projects. The fundamentals included in the current law governing bids and auctions are not applicable to these projects.
• Some laws, such as the law governing public facilities, include stipulations that contradict contemporary financial and economic fundamentals and, given the nature of these projects and facilities, their current situation. In fact, these laws are hindrances to private investments in public facilities and infrastructure projects. The legislators have enacted new laws for private investments in some economic sectors such as electricity, communications and airports. The result has been to create some unjustified and contradictory laws.
• Current Egyptian law does not cover all modes of private involvement, resulting in legal ambiguity. Contradictory legal opinions and advice have been given over the validity of some contracts entered into by the government. This has led to more difficulties in raising finance, adding cost to cover potential legal jeopardy.
•  Current laws do not identify the authorities or administrative bodies authorized to make partnership agreements with the private sector.
• Except for the communications and electricity sectors, no controlling or supervisory bodies exist to regulate the establishment and operation of facilities, and to issue licenses that ensure quality and free competition among service providers.
• Current laws lack the objective organization of the rights of the relevant authority and the investor, especially concerning the financial arrangements and the capital being invested.
• Lack of established legal and regulatory procedures that define the means for enforcement of contracts and the resolution of disputes.
• Lack of adequate regulatory structures to control both technical and economic performance. Regulations of tariffs and other economic factors are undeveloped.
 
2-Difficulties related to institutional framework.
In spite of the corrective measures taken by the government, many institutional obstacles confront private investments in infrastructure facilities. The negative impacts of these obstacles have doubled due to the slow structural reform of public facilities. These difficulties can be summarized as follows:

• The absence of a unified strategic vision at the central level to deal with the private sector's involvement in financing and operating infrastructure facilities. There are many institutions responsible for organizing this involvement. Investors are required to obtain several approvals and licenses. These procedures have created contractual complications and prevented the implementation of many projects. Investors received contradicting messages concerning the government stance on private investments in infrastructure facilities.
• Many economic sectors lack the technical, financial and legal experience necessary to offer infrastructure projects to the private sector and organize private participation. These sectors lack strategic planning skills to determine needs and priorities and the ability to judge the social and economic feasibility of these projects.
• The poor economic feasibility and considerable commercial risk involved in operating a number of the projects offered. This has led the private sector to become ill-disposed to investment in these projects with the consequent of fewer projects that were planned being implemented.

3-Unfavorable Public Opinion:
Lack of Public awareness concerning the following issues:
• The importance and advantages of private involvement in financing, improving and operating infrastructure facilities and its positive impacts on economic and social development.
• The different forms of the public private partnership in infrastructure and the dominance of the idea that private sector participation is confined to full privatization. This lack of awareness and negativity are not confined to the public but exist in legislative bodies and local councils as well as some government bodies. It is a matter of urgency to correct this situation and motivate the public and institutions to support the road to private investment.

4. Strategy for Promoting Public Private Partnership (PPP) in Infrastructure

In order to promote private investment in infrastructure projects, a series of economic, financial, legal, and institutional reforms is necessary.
The proposed strategy for realizing the goals set and to overcome obstacles rest on three pillars:

1. Reforming and upgrading the laws governing private investments in infrastructure facilities.
2. Reforming and improving the institutional framework.
3. Developing a communications strategy.

1- Reforming and upgrading the legislative system of private investments in infrastructure facilities

The starting point is the creation of a proper legislative framework that is conducive and supportive to private investments in infrastructure facilities. This entails enacting a comprehensive set of laws regulating the private sector's involvement in financing and operating infrastructure facilities. This law should be based on:
 
• Eliminating undesirable obstacles confronting private investments in infrastructure facilities.
• Developing a clear legal framework for all forms of private involvement.
• Identifying central and local authorities empowered to make contracts as well as the institutions that issue licenses for private involvement.
• Establishing the regulations governing private investment in all public economic facilities and sectors.
• Enhancing "free competitiveness" principle and ensuring quality and fair pricing by creating supervisory and regulatory bodies for each sector independent of service providers. A good example in this regard is the Irish experience where dedicated PPP units responsible for individual sectors are established in key Government departments: department of finance, environment and local government, education and science and transport to oversee the PPP process.
• Creating a legal framework that is appropriate for selecting investors through effective and competitive procedures that match the nature of these projects. Clear criteria for controlling activities should be set at the very beginning. These criteria should be enforced before selecting the successful bidders. Criteria should precede, not follow, the selection or contracting. When evaluating the offers from the private sector, institutions should consider technical accuracy, operational feasibility, type of service, and sustainability factors and the opportunities for social and economic development from the project.
• Sustaining the regular operation of the facilities in question.
• Coping with modern international trends and finance and operational fundamentals in dealing with the contractual rights and obligations of investors.
• Direct investments in infrastructure services should be supported. Reduced-interest finance should be provided.
• The public interest and the consumers’ needs should be weighed heavily.
• Reconsidering the taxation framework and providing preferential treatment for the private sector investing in infrastructure projects i.e. possibility of offering tax exemptions to private parties. This can be done within the context of the new taxation law.
• Develop standard contracts that are internally consistent and meet international standards.

The National Democratic Party's economic committee has finalized a draft law regulating the private sector's participation in financing and operating infrastructure facilities. It is now being reviewed and prepared for publication.           

The law will create a general legislative framework to organize private investments in this field and complement other investment laws. Executive regulations and detailed regulations for each sector should follow.

2- Reforming and improving the institutional framework:

- Political commitment and good governance are prerequisites for
  success. The Private sector needs to know that politicians are committed
   to private involvement and that the government is fair in its dealing
   with the private sector and will meet the commitments it makes under
   PPPs.

-Establishing a central unit to organize the private sector's participation in financing and operating infrastructure facilities removing institutional obstacles. This unit will aim to:
• Create the State's unified vision for organizing private involvement in infrastructure projects.
• Create mechanisms and provide qualified technical, financial and administrative staff to organize private investments in public facilities and infrastructure projects through different stages.
• Support and promote private investments in infrastructure facilities.
• Support economic development.
• Support the structural reform of infrastructure facilities.

The goals of this unit as previously mentioned are highly related to promoting and supporting private investments in infrastructure facilities, extending private ownership and administration and undertaking structural reform of public facilities. To achieve those, the body will be assigned to:
• Enforce the terms of the contract, protect consumers from monopolistic behavior and ensure acceptable service and compliance with environmental standards.
• Prioritize infrastructure projects according to the development plan, finance resources and social and economic needs.
• Prepare social and economic feasibility studies for projects. This should be in co-operation with the relevant sectors and institutions to determine finance options and modes of participation. These studies should be made available to investor enquiries and updated regularly by professional consultants. Costs related to this study can be recovered from investors if they take their decision to invest.
• Prepare forms and guides for private investments in infrastructure facilities.
• Prepare the terms and conditions to offer projects for pre-qualification and bids.
• Set guidelines for technical, financial and commercial evaluations.
• Prepare contract and agreement forms of private involvement, according to existing international codes.
• Coordinate with relevant supervisory bodies in different sectors to ensure progress and performance of facilities, according to current economic and administrative regulations and practices.
• Market project offerings locally and internationally.
• Enforce the finance and credit enhancement mechanisms of infrastructure projects.
• Coordinate and cooperate with international agencies such as International Finance Corporation (IFC), Multilateral Investment Guaranteeing Agency (MIGA) for technical and financial assistance.

The unit will be affiliated to the Ministry of Investment.

3- Developing a communications strategy

The success of PPP programme requires widespread public support. A PPP communications and awareness strategy should be developed and directed to key stakeholders including officials of the public services procuring agencies, employees in sectors where PPPs will be developed and the general public.

The strategy key objectives are:
- Develop a profile for PPP both nationally and internationally to inform      firms and stakeholders of the existence and possible application of PPP.
-Educate participants and interested parties on the potential advantages and disadvantages of PPP.

- Provide a resource for the general public, potential participants to obtain information clarifying all issues related to PPP.

-Motivating the Public to accept the increase in tariff due to the improvement in the service provided and the fact that the private sector is bearing high risks that should be offset by adequate economic and financial return.

Proposed Strategy:

- Develop and implement a promotional programme targeted at key audiences. This will involve developing a national site on PPP, organizing national and regional information seminars, developing and promoting promotional materials; a logo to be used on all projects, tapping national and local media with both planned and reactive articles and speeches.

- Provide information, references and examples. This will involve issuing a report that clarifies the chances available to the private sector to invest in infrastructural projects and placing all publications and training information on the website with other useful links. The communications strategy can be implemented through the promotion department in the specified regulatory body. A good reference in this regard is the Irish experience.