Govt.-Pvt. sector partnerships for infrastructure projectsJanuary 16, 2013, 8:12 pm
By DR. M. Haris Deen
Ph.D., MBA., BSc., LLB (Hons)., FRICS
During my present visit to Sri Lanka, I had the privilege of travelling to Trincomalee and from there to most parts in the Eastern province. What I saw was an amazing transformation of the major infrastructure of Sri Lanka. The Colombo-Galle expressway from Kottawa and other massive road developments around the vicinity of the Sri Lanka parliament are signs, that Sri Lanka is proving that it has the will and resources to attract tourism and most importantly private sector investments.
I was informed that many of the road development and reconstruction is funded by foreign aid. There is absolutely nothing wrong with obtaining foreign aid but at the same time the government must encourage private finance initiatives (PFI’s) from within the country. Even developed countries like the United States, The United Kingdom, many countries in Europe and closer to home, Australia and Malaysia have encouraged private finance initiatives in their infrastructure development.
There is no doubt that Sri Lanka’s major infrastructure is archaic. The network of roads, surface and storm water drainage and sewerage systems are all outmoded. The sewerage system in most major cities like Colombo, Galle, Kandy, Negombo, Trincomalee and others are as yet those designed and constructed during the Portuguese and Dutch regimes. This is certainly true of the drainage system in most parts of Colombo. Very little had been done by the British and thereafter independent Ceylon (now Sri Lanka) to replace or improve these. Even as late as the 1960’s I can remember parts of Maradana particularly in Panchikawatte in a place called "Siripina Mudukku", the toilets were buckets which were regularly emptied by some people employed by the Municipality. I am informed that thankfully it has now changed and proper sewerage disposal facilities have been provided. In parts of Dehiwela and beyond in the South Western Province there are no sewerage disposal facilities except septic tanks. The caving in of part of Second Cross Street at the dawn of the 2013 New Year has been attributed to the failure of deteriorating ancient underground services. It is heartening though that most areas in the Island have pipe borne water supply. Nevertheless there is so much more that is needed to be done.
In my experience working in most parts of the world apart from Sri Lanka, the United Kingdom, Saudi Arabia, Malaysia, Dubai, Abu Dhabi, Kuwait, Iraq, Qatar and Bosnia Herzegovina, I found that a major slice of each countries budget has to be siphoned for expenditure not only in providing the required infrastructure but also regularly maintaining them. Even oil rich countries are now finding it difficult to fund these projects from their Treasuries. All Malaysian highways I am in informed had been constructed on a government – private partnership on a Build Operate and Transfer (BOT) arrangement, where the entire funding has come from private institutions without any strain on the exchequer. The trend world over is for governments to seek co-operation from private institutions who are willing to invest in the short, medium or long term. Apart from obtaining financial relief, what governments expect from such participation is efficiency, accountability for performance, productivity and monetary policy. Australian governments in the different states have embarked on involving participation of private firms in social and economic infrastructure. The privatization and fragmentation of the British Rail system is also one of these initiatives.
Engineering infrastructure such as roads, sewerage treatment works, airports, electricity and water supply can be conveniently constructed and managed by private enterprise.
In a report dated March 23, 2012, the United States Department of the Treasury along with the Council of Economic Advisors listed the following advantages for the private sector in their partnership with the US government in infrastructure development:
Many studies have found evidence of large private sector productivity gains from public infrastructure investments, in many cases with higher returns than private capital investment. Research has shown that well-designed infrastructure investments can raise economic growth, productivity, and land values, while also providing significant positive spillovers to areas such as economic development, energy efficiency, public health, and manufacturing.
However, not every infrastructure project is worth the investment. Investing wisely in infrastructure is critically important, as is facilitating private financing for public infrastructure. Traditional funding methods limit the flexibility and cost-effectiveness of infrastructure financing.
Besides financial gains for the investor and benefits for the country and its people, the US government report has highlighted other sociological gains as follows:
Employment as a result of additional infrastructure investment creating particularly low and middle class jobs.
Construction and associated costs are usually low in private partnership projects, where the tendency is options of economies of scale and curtailing waste, and optimum production.
The use of technological advances effectively and efficiency through the application of best practices.
Sri Lanka can benefit from a variety of transportation choices. These should include mass transit and high speed rail by which Colombo and its immediate suburbs can certainly profit from a network of Light Railways (LRT) to ease the congestion caused by motor vehicles. Furthermore, as stated in the US report, a more efficient transport infrastructure will reduce Sri Lanka’s dependence on oil. In the US it was found that the average family spends more than $7,600 a year on transportation "which is more than they spend on food and more than twice what they spend on out-of-pocket health care costs". If that is the case in a highly developed country like the US, the situation in Sri Lanka must certainly be worse.
There is no doubt that even with the best will in the world the scarcity in Sri Lanka’s financial resources restrict government expenditure on new major projects. Nevertheless, I hasten to add that improvements to existing roads and beautification projects in Colombo and its immediate suburbs are taking place. This by itself is not enough as it does not help to ease traffic congestion and failure of other vital utility services.
Private infrastructure investments
In 1994, the then Additional Secretary to the Ministry of Housing, Conrad Herman De Tissera, made an excellent presentation detailing ways of encouraging both local and foreign private sector participation in expanding Sri Lanka’s infrastructure needs. All that looked very good in paper and certainly realistic and attainable. However, there must be some sort of government willingness without any "strings attached" to offer concessions to prospective investors. Similarly, the government must offer incentives, assurances and concessions in a manner that is mutually beneficial. Investors in such projects are usually real estate developers, companies with excess profits, pension funds and similar institutions with accountability to their shareholders or stakeholders. Therefore they would in the first place expect a return on investment at least equal to what such investments in other profitable ventures would yield. In BOT projects they would expect to recover their investment and profits, allowing for inflation within a minimum of 15 years. The problem that such investors will face in a country like Sri Lanka is the recovery factor. The recovery on investment is normally calculated on the basis of "selling the service" to the people who utilise such services. For example, everyone who wants to save time in their journey to Galle will have to pay the toll for use of the highway. Those who cannot afford the toll will use the alternative Galle Road. Such alternatives cannot always be provided when common utility services such as sewerage treatment plants, alternate electricity supply system etc., are to be constructed with private sector financing. The new Galle Road highway experience may provide useful information as to recovery rates. I do not have any figures to provide my readers with. In any case with such major developments it would be necessary for the government to provide assurances of subsidies.
According to a preliminary report on a survey conducted in 2009/10 by the Department of Census and Statistics on household income and expenditure, it was reported that the "mean household income per month in Sri Lanka is SLR 35,495 and the Sri Lanka Central Bank in its 2004 annual report stated that Sri Lanka’s population below the poverty level of US$ 1 a day in 1995 was 6.6% and those below US$ 2 a day was 45.4%. The mean household income in 2003/04 according to the Central Bank report was SLR 17,114. According to my discussions with the people here, the situation today is not much different. Therefore it would be futile to expect any major financial contributions from the masses for funding or recovery by charging them for use of such new infrastructure services.
One way the difficulties can be overcome is by a partnership between the government and private sector investors by which the government will subsidise by a contribution to the concessionaire towards recovery costs. The concessionaire while providing the entire funding will then be ensured recovery of projected income over the concession period before transferring the assets (on BOT projects) to the government. The advantages to the government on such an arrangement is that it does not have to find initial financing resources and would get a dividend of part of the costs from users which the government would otherwise have to provide in any case under Sri Lanka’s welfare system. This I believe will be a "win/win" situation for all. Of course the logistics will need to be properly worked out.
There are of course many factors that worry prospective investors. Without mincing my words, I would say that the major constraint in the forefront, not only in Sri Lanka, but in many parts of the third world, is the requirement for investors to give "backhanders". Funders, who are accountable to their shareholders or stakeholders, are wary of giving commissions, bribes, backhanders etc. They want complete transparency. Also when investing in projects requiring a strict regime of time, quality and costs they would expect that all bureaucratic barriers for obtaining permits, approvals and consents are removed in order that the aims and objectives of both parties in the implementation of the project are achieved.
My discussions with senior politicians indicate that the present government is prepared to go the "extra mile" to provide the people with an efficient infrastructure. In my humble view this can only be achieved by opting for a partnership with the private sector, taking into account the solution and constraints that I have pointed out in the foregoing paragraphs.
The writer was an Advisor in the Public Works Authority State of Qatar, now in private practice.
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Last Updated May 26 2016 | 09:19 pm