Public private partnerships can boost Lebanon

President Sleiman is right that the private sector is the best way forward

The energy ministry’s partnership with Turkey’s Karadeniz has partially helped fill a gap in energy supply

As part of Executive’s ‘10 Ways to Save Lebanon’ issue, we asked leading figures from a range of fields to put the case for one major changes for the country. In this article, privatization expert Ziad Hayek calls for inviting more private companies into public sector.

 

It is clear to any Lebanese citizen that the country is in desperate need of new public infrastructure. Its current electricity, education, health, transport and other basic networks are decaying due to the chronic inability of successive governments to manage and plan them.

Investment in new infrastructure would not just help the end users; it has also been shown to play a key role in raising national growth rates, developing the economy and ensuring sustainable growth. Such projects also help to lay the groundwork for job creation and attracting major new investments.

Right now, however, to ask the government to pay for such projects is unrealistic. The new cabinet has little to spend — the country’s national debt is climbing again and growth is minimal. As such, investments in new infrastructure would be at the cost of additional taxes or increasing the public debt — both potentially damaging for growth.

One way to develop new infrastructure without crippling the country’s economy would be through public-private partnerships (PPP) — inviting private firms to work alongside the government in developing the necessary infrastructure. Indeed just this weekend, President Michel Sleiman spoke about the importance of PPP deals for Lebanon’s growth. These deals have had a major impact in countries across the globe that, like Lebanon, were desperate for change but couldn’t afford to pay in the short-term.

But PPP deals are not just about delaying debt; they are long-term agreements between the public and private sectors focused on providing public services and building infrastructure by relying on the private sector’s financial capabilities and expertise. Such partnerships are not at the level of capital or profits, but rather a partnership of risks, whereby the public sector transfers some of the project’s risks to the private sector and retains others.  For example, the private sector could assume the risks of development, design, construction, operation, exploration, financing and inflation, while the public sector bears the environmental, regulatory, political and pricing risks.

As such, in PPP deals, the government does not buy (or bear the cost of building) the assets required to offer the public service. In the case of electricity, for example, Lebanon is desperate for new power plants but the government cannot afford to pay for them directly. Instead, it should agree a deal with private firms to set up the plants and then buy electricity from them, thereby satisfying the needs of its consumers and potentially ending the power shortages that all Lebanese endure.

The potential benefits are huge. Foremost among these is guaranteed rapid execution. In a country where public sector projects often come in years late and millions over budget, bringing in the private sector mentality  (both by transferring the design and construction obligation to the private sector and linking payments to service provision) could be a game changer.

Similarly, the government could execute numerous projects simultaneously, rather than having to wait for the funding for capital expenditures. Lebanon is clearly crying out for infrastructure investment and PPP would make a genuinely radical series of reforms possible.

Even better, in a wider sense PPP promotes decentralization as local authorities can sometimes go it alone without the central government. Redistributing power away from our central political classes can only be positive.

This is not to say there are no potential issues with PPP. While it is clear that there is local and foreign readiness to invest in PPP deals, success must be built on certain important pillars.

First among these is a modern legal and regulatory framework ensuring clarity in tender procedures, and in the relationship between the parties from the public and private sectors. In Lebanon, this is currently stalled as the public-private partnership draft law has yet to be passed by Parliament.

Secondly, it is important to represent all stakeholders in the process of awarding PPP deals. This helps avoid surprises or obstacles that result at later stages from the lack of coordination among all parties concerned. It also helps prevent the corruption that occurs when one minister may award tenders unilaterally. This should obviously go alongside a high level of transparency — something that foreign investors in particular will push for. In Lebanon this is a particular concern, as public deals are often incredibly murky.

Finally, it is important to establish an independent centralized unit composed of experts who are specialized in partnership with the private sector. This would enable them to design PPP agreements that guarantee the public interest, and respect the investors’ rights.

Lebanon’s new Cabinet should push through the PPP draft law and open up to private sector funding for state infrastructure projects. In a time of economic shortages, PPP could help boost growth and create the kind of society we want to see.

Ziad Hayek is the secretary general of the Higher Council for Privatization

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