I chatted recently with David Baxter, an infrastructure specialist with significant experience in public-private partnerships. He shared some of his insights with me.
He gave me some meaningful comments regarding challenges facing governments in providing public infrastructure and how commercial interest can be created, risks shared and benefits for communities achieved.
So how would you characterise recent PPP activity in the Pacific?
Much of the activity seems to be focused on small island nations or be tied into China’s Belt and Road Initiative. Although there is great merit in building up these island nation trade capabilities through the improvement of port and airport facilities, the following questions need to be asked:
- Are these facilities being constructed in the interest of the host nations or are they being built for geopolitical leverage?
- Can these small island nations and even bigger nations afford these projects?
- Are adequate feasibility studies being done on the financial and commercial viability of the projects?
- Are full and competitive procurements being pursued?
- Is the long-term sustainability and resilience of PPP projects being considered?
Many countries have PPP policies in place and a PPP unit located in their Treasury or Finance departments. What are some of the biggest mistakes you have seen in implementing PPP policy?
The following are the most common that I see:
- In many instances, the PPP Units are the initiators of PPP projects when they are imposed upon unwilling line ministries which have not always been consulted on the viability or desirability of projects.
- Often the laws and best practices that are introduced, get ahead of institutional ability to implement the laws accordingly and so delays occur as everyone tries to meet requirements imposed by regulators.
- In some instances, the PPP Units try to be autonomous of the Treasury or the Finance Ministry (for political reasons) and this then leads to conflict between the institutions that is not healthy in the long run.
- Often the PPP Units do not have well define mandates and this leads to confusion on whether they should provide technical support to government institutions or whether they should be the initiator of PPPs. It is important that they realize that their activates should subject to national procurement laws and they are not a law unto themselves.
What characteristics do you think differentiate infrastructure PPPs from other types of PPPs?
Primarily the greater level of due diligence that needs to be completed on private sector partners due to the long-term commitments that are required and their ability to manage risk for 30 + years. Most typical contracts rely on the design-build element. PPPs require financing and O&M on top of this which requires that the public sector must monitor the performance of its long-term partner and the performance-based parameters.
What are the most significant conditions necessary to ensure an infrastructure PPPs is successful?
Appropriate allocation of risk during the feasibility, procurement, and contract award stages and monitoring and immediate mitigation of risk when it occurs.
PPPs are often seen as a panacea for difficult national budget circumstances. What are the risks around developing PPPs with this as the prime consideration?
In many instances, PPPs should not be implemented because they do not pass the litmus tests required such as Value for Money, commercial and financial feasibility, etc. They cannot be seen as an automatic panacea, it needs to be proven that proposed projects are viable and feasible as well as sustainable to be a panacea.
What governance arrangements are more effective for infrastructure PPPs?
Governments need to be fully engaged in the management of PPP contracts. They cannot step away and only engage the private sector partner when the close-out phase is reached. Many government employees do not understand the level of commitment required from their side and the need to have a technical understanding of PPPs to ensure that they are implemented correctly.
Is a rigorous public sector comparator really that important for an infrastructure PPP?
Most certainly in countries that are still developing or which are launching their first PPP projects. As PPP national markets mature, the private sector can become a more competent partner and this leads to a more trusting and professional collaboration.
PPPs often address a particular infrastructure service or need. How effective are they in addressing asset maintenance and preservation of benefit streams from existing infrastructure?
Brownfield PPP projects can be a minefield due to many unknowns. However, experience gleaned from existing projects and infrastructure can be beneficial – so it depends. However, I believe that every PPP project is unique and thus a certain amount of innovation is necessary to improve asset preservation and to do it better than it was done in the past. The goal should always be simple – do it better each time.
PPPs are inherently commercial in nature, as risk along with return is transferred to the private sector. How can social benefits and returns be properly incorporated in the development of PPPs?
I believe that this has to do with a mature and well-defined understanding of Value for Money: adherence to people first PPPs is an option as well as incorporating the SDGs into project goals and objectives. This can help project proponents determine the non-commercial elements of risk transfer in socially beneficial projects and the possible subsidies that might need to be introduced to offset non-commercial vitality pertaining to certain risks.
If every PPP had to contain one mandated element, what would that be?
By answering the following questions –
- Why are we doing this as a PPPs?
- Are we confident that this should be a PPP?
Good answers require completion of due diligence, gaining political support, full stakeholder engagement and full disclosure of all information to all private sector parties equally, so that they all understand the merits of the project.
If these answers cannot be motivated and supported fully – do not do it as a PPP.
David, thanks so much for making the time available to talk with us and share these insights.
Very pleased to see PNG and Australia have signed an Agency Support Arrangement for the PNG Department of Transport this month. I led an earlier Agency Capacity Diagnostic of the Department for the PNG Transport Sector Support Program.
“These diagnostics are undertaken by independent consultants and provide the agency management with objective assessments of capacity, including through the identification of existing strengths and skills gaps. The diagnostics also provide recommendations for addressing agency needs. TSSP then works closely with the Australian High Commission and agency heads to develop programs of structured capacity support to improve performance and address identified priority capacity gaps. This is formalised through Agency Support Arrangements (ASAs) which detail the multi-year frameworks for funded activities to bridge some of the gaps highlighted by the diagnostics.” (Source: TSSP website)
A great outcome which also included a lot of hard work from senior officers in the Department, the Transport Sector Support Program and at the Australian High Commission.
Installation of new infrastructure assets creates streams of services and improvements to existing services for users. Benefits accrue to these uses as well as a wider set of stakeholders. Maintaining the service potential is a critical element in ensuring that value for money is achieved from the initial capital investment.
However, many governments and asset managers are under significant pressure to trim maintenance budgets and scrimp on operating costs. In some contexts, this emerges as an extreme build-neglect-build scenario. Many Pacific Island nations experience this, as do a number of smaller Australian local government authorities. The full lifecycle cost of infrastructure assets is not factored into the budget planning processes of these organisations. Similarly, many private sector operators of infrastructure have commercial and financial incentives to focus on next quarter financial performance rather than long-term service provision from these assets.
The back end of infrastructure is seen as much less interesting, but it is where all the benefits are generated. So approaches to operating and maintaining these infrastructure assets is as equally critical as the planning and investment decisions to deliver them.
Two broad maintenance strategies are predictive maintenance and condition based maintenance. Predictive maintenance is like regular scheduled servicing based on the design performance of an infrastructure asset. It is less costly to implement but also less likely to match the actual performance of the asset. Condition based maintenance requires the collection of data and information about the actual performance of the asset and provision of a tailored asset maintenance response.
The approaches set up an economic challenge. Should an infrastructure manager simply maintain its assets according to schedule and only collect data and information on condition at the times of regularly scheduled servicing? Or should some initial data costs be incurred to change and adapt design-based, predictive maintenance? Decisions to underfund reasonable maintenance activities need to be made with good information and in an appropriate strategic context.
So it depends. In one sector, for example, the response is clear but not clear-cut. Analysis of wind turbine maintenance to address gearbox, generator and blade failure scenarios shows that for small wind turbines, predictive maintenance is more cost effective than condition based maintenance. Condition based strategies were based on an array of sensor data (optical, oil, vibration and temperature). However, for larger turbines, condition based maintenance where there is a high expected gearbox failure rate is a much better approach. In that instance, the cost of collecting additional data and information enables timelier and more appropriate servicing of the turbines.
For these reasons, infrastructure owners and managers need to ensure there are effective asset management and maintenance policies included in their strategic asset management frameworks. It is not enough to supply the assets, as only the services from them will be able to generate the full suite of expected benefits. This can only be achieved when the design potential of these assets is realised over time.
Recently I was up in Papua New Guinea for work. The PNG government has an ambitious policy of free primary school education. This requires more education infrastructure right across the country. I had an opportunity to look at how education infrastructure is being improved through an Australian government project with PNG. The following photos show how classroom conditions have changed through some simple design measures. Use of the old classrooms only stopped a couple of months ago.
The new school buildings were erected to Australian construction standards. The design featured higher ceilings to improve air flow, fans, and electrical lighting. Blocks of four classrooms and teachers prep rooms were constructed using Besser block. This made better use of the site. Also, ablution blocks at some schools were upgraded, which has a significant positive impact on female participation in education.
These clean, functional classrooms provide a much better learning environment for students. This is infrastructure that should last a long time in a very challenging environment.
While working recently in Kuwait, I was privileged to be invited to a diwaniya (https://en.wikipedia.org/wiki/Dewaniya) along with colleagues from my project team. This type of forum is fairly unique to Kuwait and it a key element of their civil society.
For around an hour we discussed industry policy with a number of leading lights from Kuwait’s business community. I learned a lot from them. The discussion took our project team beyond the numbers and statistics we were considering to just how the reforms might actually be implemented. The exchanges were robust but expressed in good humour and with great politeness.
I think these kinds of gatherings are extremely important in shaping consensus. Kuwait has hundreds of diwaniyas and candidates for public office often seek to turn up at as many as possible around election time. In my view, it removes a lot of the adversarial nature that characterises public discourse in Western countries. Where hard decisions are needed to effect significant change, a consensus based approach may deliver better outcomes than a crash or crash though approach.
Australia used to do evidence-based, consensus-driven public policy quite well. It was grounded in clearly explaining the need for change. I fear now that the people putting themselves forward for public office are increasingly driven more by populism and a startling touch of irrationality.
I am currently on assignment Kuwait, one of the oil drenched Gulf states. The economic incentives at play here are unlike anything I have ever seen. At university years ago we spent a couple of hours in undergraduate economics talking about rent seeking – looking for an economic gain without a reciprocal return to society through wealth creation.
Laid out before me is a whole economy resting on this premise and driven by the distribution of oil rents. Kuwait has been pumping around 3 million barrels of oil a day and is targeting 4 million with some urgency now oil prices have collapsed. Currently this earns them an oil rent (after costs of production and depending on the price) around US$60 million a day. When oil prices were over US$100 a barrel they were getting US$300 million a day. Kuwait has one of the highest dependencies on oil – some 93% of its revenues come from oil rents.
Some indicative figures provide context. The population of Kuwait is about 3 1/2 million people. Around one third of residents are Kuwaiti citizens, the vast majority of the remainder are guest workers. Guest workers remit around A$25 billion a year to their home countries. This is equivalent to 55% of the Kuwait national budget. Nine in ten Kuwaiti citizens are employed by the government. The country rests on a cash reserve of around US$600 billion.
All businesses, with a few limited exceptions, are required to be 51% owned by Kuwaitis. So there are a range of business partnerships that are not strictly commercial but compliance-based. At any stage, the dominant partner can take control of the business.
This creates some very peculiar incentives. Lack of permanency for guest workers provides little incentive to save, spend or invest in Kuwait. So Kuwait misses out on retaining a significant proportion of their remittances.
With significant reserves in the ground – over 75 years – there is little incentive to move away from this rent-seeking model and the inherent imbalances it introduces. However in the long term that transition will be necessary.
It will be fascinating to see how this plays out over time.