The future of infrastructure

(2nd of two parts)

On profit, a fixed performance-based return for some infrastructure projects may be worth considering. The payment by the government would be linked to the performance and/or availability of the project (i.e. the private sector will be incentivized to design a robust project that is fit for its purpose and well operated and maintained or their returns are jeopardized), and if the return from actual operations exceeds that figure, the excess goes to the government. If it’s less, the government makes up the difference. The commercial risk is removed. While the government gets a facility delivered on time without spending on it, its funds can be used for something else that’s needed. The level of fixed return can be the determinant factor of a competitive bidding process.

I think one of the problems is that the PPP (private public partnership) framework is seen as a commercial venture, not a public service. It may reduce some of the attractiveness for the entrepreneurial investors if a fixed return is specified but I think there would be enough who would prefer a relatively risk-free investment, so they would build, and this is quite normal for infrastructure projects. The problem here is that a less scrupulous contractor might be tempted to scrimp on construction to realize profit. Hence, the need to deal only with reputable contractors with a history, and a good regulatory oversight on the part of the government.

Whether to use this fixed return concept versus subjecting the project to market risk would depend on the type of project and what the government wants to achieve. There is another disincentive too, where the government goes hybrid (the government builds while the private sector operates and maintains). I wouldn’t want to look after something someone else built on a fixed price contract I’m committed to from the start. Who knows what unexpected hidden faults may lie in a government- or third party-built piece of infrastructure that will surface later on.

This risk can be reduced, even eliminated by having the winning bidder for the operations and maintenance (O and M) to get involved in the construction to ensure the project meets specification. There is actually no reason why the winner of the O and M couldn’t also win the construction contract, assuming the government does contract it out instead of doing it itself. In fact bidders could offer a discount if they are awarded both. If the hybrid is a financial one, where the government provides low cost funds for the private sector to build and operate, then I see no problem. Actually, this can be a win-win formula since the government will achieve its objective of using low cost funds while benefiting from having a single-point of responsibility, faster completion, lower life cycle costs and more predictable implementation of a project.

So much work has already been done in projects under the PPP framework, with many at the advanced stages [of planning or preparation] that to change the policy now would be wasteful.
I don’t think the government has the manpower or capability to take on all the PPP projects that were in the pipeline. I hope the idea is not to bring in foreign governments and foreign laborers (under ODA) with tied loans where they’re the supplier and builder. Except in some cases. I’d like to hope there can be a rethinking on this. I would suggest the government economic team to sit down with the major PPP players and the line agencies for a lengthy, free-wheeling discussion of what’s really best for the country. For me, it should be one where each project is evaluated to determine what mode would fit with all options open.

I think it cannot be questioned that the private sector builds faster and better (with reputable contractors). It operates and maintains better, too. But there are advantages to the government providing the facility or the bulk of the funding in some instances. Hence, the “by project” approach is recommended.

Although admirable progress has been made in the past 12 months, we’ve not seen as much action with the government bargaining capability as we should have. A multi-mode policy that leverages private sector capacity and know-how, and a “take no prisoners” approach could speed progress considerably.