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Public-private partnership lessons from China

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Public-private partnerships (PPP) contracts like any other procurement contracts have their own dynamics. They borrow from the same procurement constraints where PPP opportunities are limited the same way as procurement opportunities.

PURCHASING & SUPPLY: NYASHA CHIZU

China developed Qingdao Bay Bridge a six-lane and 41km bridge that crosses the Jiazhou Bay at a cost $2,3 billion
China developed Qingdao Bay Bridge a six-lane and 41km bridge that crosses the Jiazhou Bay at a cost $2,3 billion

This increases the appetite by the private sector to win projects at all costs including the use of unscrupulous methods. Most African countries use politicians to drive award of contracts or in some cases, to block implementation of contracts by competition. Such scenarios present a number of challenges that include rampant corruption, introduction of unfair competition, hidden expropriation and implementation of projects in excess in the implementation of PPPs.

The He-Chao-Wu Expressway project in Anhui province of China audit exposed some elements of corruption. The project was a lease project in which the local government transferred existing facilities to a private firm to operate for a specified period in exchange for a specified lump sum payment. The corruption was exposed when the private sector partner got bankrupt and the government had to buy back the project to salvage its existence. The private sector company, Shanghai Eastern Holding Limited had paid to government, according to published reports, $230 million plus a further $72 million in maintenance expenses for the project duration that was due in 2003.

In buying back the project after the private sector was now incapacitated, the government paid $433 million, a price that was almost double the amount that it had received.

The audit revealed that in an act of corruption, Shanghai Eastern Holding Limited had paid public officials to undervalue the project, so that it could be possible for them to acquire the franchise at a lower price. With such lessons, we need to look out on the valuations done by public officials on the public sector contribution to any project, to minimise the risk associated with under valuations.

The objectives of engaging in PPPs are to facilitate the private sector to participate in sectors that would be ordinarily serviced by the public sector, where there are opportunities for return on investment.

The government in such instances should not unnecessarily create competition on a PPP project to reduce its viability. The PPP project for the Citong Bridge by Quanzhou province in China is one good example. There were changes to the original project that transferred the revenues from the original beneficiary. The unit that had suffered revenue loss from the project rearrangement constructed another bridge to compete affecting viability of the original project.

New projects should, therefore, be built to complement and not to extinguish or compete with existing PPP contracts. In under no circumstances should existing PPP contracts be ignored or set aside or made to compete with new projects if the government is serious about attracting investment in PPP projects. A similar situation to competing projects is the case of expropriation in the Xiang-Jin Expressway in Hubei province.

The project was on time and viable, but faced problems with toll collections. The government had issued an excessive number of free-toll cards. Over 10 000 cars had been issued with such cards prejudicing the project an estimated $5 million between 2006 and 2008. The actions or omissions by the government should never compromise the existing PPP projects viability.

Building excess projects is another challenge in the design of PPP projects. China developed Qingdao Bay Bridge a six-lane and 41km bridge that crosses the Jiazhou Bay at a cost $2,3 billion. Another similar project for the same reason is the six-lane Qingdao Jiazhou Bay Tunnel running parallel to the bridge. Projects should be designed to provide adequate solutions to national problems. There is need to match anticipated demand with the expected project capacity. This include the design of roads and rail networks where consideration such as whether to construct dual carriage way against dualising certain sections of the road or rail network is appropriate in view of the revenues expected in view of project durations of up to 35 to 40 years for PPPs.

The danger of over-designing or excess capacity would lead the private sector demanding the government to guarantee revenues a practice that is not consistent with PPP projects. PPP projects must be self-sustaining.

Excess capacity, expropriation, unfair competition and corruption affect the effectiveness of PPPs and the lessons learnt from China are vital to all countries walking that route.

Nyasha Chizu is a fellow of the Chartered Institute of Procurement and Supply writing in his personal capacity. Feedback: nya.chizu@gmail.com Skype: nyasha.chizu

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