A partnership in risk

Photo by: Greg Demarque/Executive

This summer, Lebanon ratified a new law enabling the government and private sector to share risk in investing, building, and operating infrastructure projects. The legal framework, known as a public-private partnership (PPP), encourages companies to provide services that the government cannot afford to deliver at efficient costs to end users (see article).

To understand the applicability of the new law and its potential, Executive met with Ziad Hayek, the secretary general of the Higher Council for Privatization (HCP), the public agency now responsible for coordinating new PPP projects with the private sector.

E   Lebanon has infrastructure projects that have had at least elements of PPP. What difference will the new law make?

We do not have PPPs that have worked out well. That was the main problem. PPPs are a very special type of procurement, and they really involve a dialogue about the sharing of risks and the mitigation of risks. And they’re done on the basis of the specification of outputs rather than inputs for a particular project. Instead of saying, ‘I want this project to be built by the private sector,’ you say, ‘I want this service to be provided by the private sector,’ so that’s output as opposed to input specification. It’s not a partnership in equity or investment. It’s not a partnership in revenue. It’s not a partnership in profits. It’s a partnership in risk. This is the definition of PPP.

Until now, PPP has been approached in Lebanon like normal procurement. It’s always been done wrong because there’s been a tender to find out the price—who is going to offer the lowest price. This is not what PPP is about. This is what we tried to do in this legislation: insist that from now on, PPP projects have to be subject to international practices in tendering. And the main aspects of that are, first, insistence on transparency because this is paramount for the success of PPP; and second, having an organ within the government that has the expertise to deal with PPP projects and with the private sector—the Higher Council for Privatization.

E   What role will the HCP play, as per the new law?

The HCP’s role is to assist the government in tendering projects that are PPP in nature. We’re still a small team; we’re in the process of drafting the Council of Ministers’ decisions that enable us to increase the size of our team, and adjust our budget so that we can cope with new responsibilities. We couldn’t do that until now because there was no legal basis for us to do this. Now there’s a legal basis for us to have these responsibilities. Until that is done, we have a very small team, so we cannot manage more than three projects at this point in time.

I’d like one of the projects to be related to infrastructure—most likely in transport—and one project to be related to public buildings because that, I think, will be one of the ways to introduce PPP to the nation. And the third project could be what we call people-first PPP, a project having a social dimension like a hospital, or school, or rehabilitating a sports facility, or something like that. But I don’t know what projects they will be. They will have to be presented by the ministries and agreed [to] by the HCP, which is not just me. The HCP [is governed] by a permanent ministerial committee. And I head the staff of that committee.

E   You’ve been the HCP secretary general for nearly 10 years, and the law was in draft form for nearly as long. In Lebanon, there really never is a clear path to legislating, but is there any reason that August 2017 was the month the PPP law was finally ratified by Parliament?

I think it has to do with the nature of PPP. First, it’s not a concept that’s easily understood by people. I faced a lot of objections. The public sector was like, ‘What, you want to let the private sector do such things? This is privatization.’ And the private sector was like, ‘Partnership with the government? You want a government representative to sit on the board with us? We’ll never finish with the  bureaucracy. No, we don’t want anything to do with government.’

It took almost three years to get people to understand [that] when we talk about PPP, no, we don’t mean mixed investment companies. We’re talking [about] the private sector providing a service to the government, which then provides that service to the citizens. And then it took us a long time to get the legal community to agree that it will not violate the constitution—because there’s an article that states [that] you cannot give concessions without a specific law—and [to agree] that PPP is not a concession. Then, it took time to get to the Council of Ministers, and then  [the government] changes all the time. Every time it was presented to cabinet, a committee would form to study it, then the government would change, and then we would wait for another government. Then it took a long time in Parliament.

E   As you put it, the HCP is now scaling up its institutional capabilities to advise the government, and it will take a lot of time to develop potential PPP projects. In doing so, what’s it’s interaction with the private sector?

Presenting a proper PPP offer or bid can cost upward of $1 million, versus the cost of around $10,000 when preparing a bid on a tender under normal procurement rules. [Under procurement rules], if the government is buying a power plant where it will determine all the variables and specify exactly what it wants, it will then offer a tender, and whoever gives the lowest price wins the bid. In this scenario, a bidding company will take the list of what the government is asking, make a few phone calls to get the pricing, add in a profit margin, and present the bid. It costs like $10,000, and if the process is not transparent, at the end of the day somebody wins the bid, but no one knows how; $10,000 is an acceptable cost of doing business when failing to win the bid.

“When we talk about PPP, no, we don’t mean mixed investment companies”

In PPP it’s not like that. If I’m bidding on a power plant, I don’t know what the power plant is going to be—I just know that the government wants to buy the cheapest electricity possible. How am I going to produce it, and what technology am I going to use; how many turbines am I going to have; how much fuel storage will I use? Consulting firms for designing a power plant is not cheap, and then I have to sit and negotiate with banks because even if I have the same design as a competitor, if that competitor has financing at a quarter percent less than mine, they’re going to win. So I have to negotiate [with] the banks, and to do that, I need financial experts with me to structure the bid, whether this is going to have mezzanine financing or Islamic financing as part of the structure. These cost a lot, and it takes a long time, so when I present my bid, I’m not willing, if I’m a serious participant, to participate in a tender where I don’t know at the end of the day how the bid will be awarded.

E   Is the PPP law a first measure in this path to correction that needs to put in place, and are there other laws that you see could help the private sector flourish again? Regulations?

What makes me excited about PPP is that as you invest in infrastructure, you create jobs in large numbers. A major infrastructure project is going to employ thousands of people, and not all are going to be construction workers. You’re going to have accountants, managers, IT, architects, and engineers. And investing in infrastructure is, by definition, the basis on which you then build your economy. When you invest in infrastructure, you’re investing in things that are going to stay. We ran a study: If we invest $6 billion in infrastructure projects, how many jobs would we create? Our analysis showed—and it depends on the type of projects that you invest in—that we would create more than 200,000 jobs in five years’ time. That’s huge compared to the size of our labor force.

E   Lebanese banks and investors certainly have the capital, and maybe the appetite, to invest in infrastructure projects. Will the PPP law encourage their participation?

We will probably not see this in the first generation of PPP projects, but what I hope for future projects is listing on the Beirut Stock Exchange because then we’re going to be creating a snowball effect. Lebanese companies have, for decades, been obliged to generate capital internally. Having access to an efficient stock exchange to raise money you need means businesses could grow from the level of an SME [a small or medium-sized enterprise] to [the] level of a corporation. And if you’re a corporation, you can generate more jobs than you would as an SME: this is the snowball effect that I’m hoping PPP would start.

Jeremy Arbid

Jeremy is Executive's in house energy and public policy analyst.