HomeBusinessStrong legal framework is the backbone of PPPs

Strong legal framework is the backbone of PPPs

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The major driver of public-private partnerships (PPP) in most countries was the government’s inability to satisfy the demands for all infrastructural requirements from the public purse. The demand for state-of-the-art and the need to expand infrastructure in general ignites the growth of PPP world over.

PURCHASING & SUPPLY: NYASHA CHIZU

Issues of corruption in the design and award of PPPs need to be managed and the government under whatever circumstances should not guarantee any risk associated with a PPP project if the implementation is based on viable projects
Issues of corruption in the design and award of PPPs need to be managed and the government under whatever circumstances should not guarantee any risk associated with a PPP project if the implementation is based on viable projects

Successful implementation of PPPs is only possible when there is strong national legislation governing their implementation. China faced numerous challenges in the implementation of their PPPs. The major source of their quandary traced back to the non-availability of strong PPP legislation in that country.

The initial PPPs that were implemented by China in the late 1990s were based on a rather weak legal framework.

Chinese PPPs are governed by three instruments, Local Administrative Measures on the Concession of Municipal Public Utilities in Huer-haote and Hainan of 1994; Circular of the Ministry of Foreign Trade and Economic Co-operation Concerning the Absorption of Foreign Investment by means of BOT (Build-Operate-Transfer) of 1995, and Circular on Several Issues Concerning the Examination, Approval and Administration of Experimental Foreign-Invested Concession Projects issued by the State Planning Commission, the Ministry of Power and the Ministry of Transport of 1995.

Chinese PPPs in utilities reportedly ran into problems that included changes in laws, unreliability of the government, poor political decisions, projects being opposed by the public and changes in tariffs.

All these challenges could be attributed to the poor legal system that should direct and limits the actions of government including politicians.

From the Chinese lessons on their failures, the takeaway is that undue or unbridled political influence on the implementation of PPPs has dangerous pitfalls. This then calls for strong legal framework to manage PPPs in countries going through on era of fiscal austerity.

This is against evidence from various research that point to inconsistences in statutes on the allocation of risk on government guarantees. It is reported that the local government use government guarantees to attract investments against central government directive to desist from such practices.

China opened up PPP projects for the implementation of infrastructure in telecommunications, power, oil and transport. This is evidence that PPPs can be implemented in all viable sectors of the economy.

However, implementation of PPPs in viable sectors would only be successful if decision making is not bureaucratic.
Unnecessary bureaucracy in the implementation of PPPs leads to corruption since an audit in China revealed that over 60% of the projects investigated around 2008 had signs of corruption.

A notable case of corruption in China was the He-Chao Expressway in Anhui province. The project was a Transfer-Operate-Transfer (TOT) where the local government transferred an existing facility to a private company to operate and maintain for a specific period of time.

The government would be paid a lump sum and subsequent operating revenue for a period of time in exchange of toll revenue. The project was then to be handed back to the government at the expiry of the contract tenure.

The private company got bankrupt and due to the nature of the project, the government had to buy back the project two years later.

Audit of the project revealed that the government paid double what is received on the project.

The private company was reported to have paid some government officials to undervalue the project so that the franchise payment was lower.

Similar situations can happen to our infrastructure projects where government officials can be paid to unnecessarily increase the costs to government in a reverse situation to the China experience.

Such projects would include clauses that are not favourable to the government such as revenue guarantees.

It is assumed that PPPs are undertaken after feasibility studies and the projects risks would have been assessed by the private sector such that government revenue guarantees is not necessary.

Issues of corruption in the design and award of PPPs need to be managed and the government under whatever circumstances should not guarantee any risk associated with a PPP project if the implementation is based on viable projects.

Allowing government guarantees on risks in PPP projects gives birth to implementation of white elephants.

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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