A long time in the making

It took 10 years to pass the PPP law—how long will it take to implement?

The PPP law, formally known as Law 48 Regulating Public Private Partnerships, was first proposed as a draft by Cabinet in 2007. It was not until September 2017 that it was passed by Parliament and published in the Official Gazette. In other words, it took lawmakers ten years to pass the PPP law.

Back in 2007, Lebanon’s public debt was circa $42 billion. Today, it has reached approximately $83 billion. While this massive jump in public debt was not caused by the absence of the PPP law, it is certainly arguable that a significant portion could had been saved, had the law been passed in 2007 and implemented in the intervening years.

There are numerous benefits to public-private partnerships. As well allocating the risks between the public and private partner, the benefits of PPP that are most relevant in the Lebanese context are the following:

It minimizes the financial risk to the government, given that PPPs are regarded as an alternative to public funds for financing new development or upgrading of infrastructure, both of which are capital intensive. With PPP, the costs will be covered by the private partner rather than eating into the government’s budget.

It increases the efficiency of the project—if applied to the right project under the correct procurement process—and increases effectiveness, by achieving the desired outcome in a time- and cost-effective way.

It helps foster transparency and limits corruption, which is a major current impediment to economic growth and sustainable development in Lebanon.

Several factors at play

These benefits, however, are dependent on several factors: whether the proposed PPP project addresses a public need and is suitable for a PPP, well prepared, commercially feasible, properly structured and tendered, and proactively managed through the life of the partnership agreement.

The importance of the PPP law lies in the fact that it ensures that different projects are consistently structured, tendered, and managed. This consistency lowers costs for the private sector and builds confidence in the market—in the absence of such a robust framework, different ministries may act with frustrating inconsistencies and, in doing so, put off potential bidders.

Meanwhile, the principal benefit of the PPP law is that it codifies the pre-procurement and procurement processes, meaning that any actors—the state, public institutions, municipalities or federation of municipalities—must follow the required steps in order to procure a PPP project. According to article 4 of the PPP law, PPP projects can be proposed by the president of the High Council for Privatisation and PPP (HCP), the “concerned” minister, the president of a municipal council, or the president of a federation of municipalities, with respect to projects under their purview.

In this regard, it is important to stress the need to create a pipeline of projects that increase the attractiveness to sponsors while, at the same time, focusing on the sectors contributing the most to the growth of our public debt. By doing so, the same types of sponsors will be more willing to incur bid costs in the knowledge that, if they are unsuccessful, they can simply roll-over their resources into the next project in the pipeline.

Now that there finally is a PPP law, the challenge is not only to attract private partners, but to attract the right ones. When investing in a foreign country, private firms assess certain risks, such as foreign exchange, economic viability (including GDP and inflation), regulatory risks, and political risks, such as government instability.

Unfortunately, Lebanon is known for its frequent political instability and deadlock. At the time of writing, the country was still waiting for Prime Minister-designate Saad Hariri to form the next cabinet, after over five months of political wrangling and stalemate. The Council of Ministers, in accordance with the PPP law, plays a major role in the procurement process of any PPP project undertaken by the state, public institutions, or any moral person of public law. In our opinion, this constitutes a major problem: Without a cabinet, PPP projects cannot move forward.

The Council of Ministers is a key decision maker at several points in the process: It must approve the project and the final tender document; on the suggestion of the concerned minister, it has the authority to appoint a member onto the board of the project company if a public entity has contributed to the share capital of the project company; the concerned minister must sign the partnership agreement on behalf of the state; and if the PPP project requires the expropriation of private properties, then there must be a decree declaring public benefit, which would need to be issued by cabinet.

No cabinet, no PPP

The approvals, appointments, and issuance of decrees mentioned above, cannot be carried out by a caretaker government, nor can a caretaker minister sign a partnership agreement. This means, in the likely scenario that Lebanon continues to have long-standing caretaker governments, the procurement process of PPP projects will become another casualty of the lack of functioning institutions.

There could be cases in which the HCP has prepared and approved a PPP project but there is no cabinet to give final approval, and so the project committee would be unable to launch the process to select the private partner. Or worse, the tender document may be approved by the HCP but not the government, or the private partner could be selected—after a long and thorough tender process—but the partnership agreement would go unsigned, because a caretaker minister has no authority to give it their signature.

If this happens, will the private partner wait? What message will we be sending to international investors in this scenario? Was this reputational risk taken into consideration when the PPP law was drafted?

It would have been preferable to keep the Council of Ministers out of the procurement process as much as possible, and, at the very least, to bestow the aforementioned responsibilities (with the exception of expropriation) on the HCP, for PPP projects of a certain size (for example, up to $50 million).

For PPP projects of a municipal nature, the process and implementation are much easier. Municipalities are more stable and the powers mentioned above are granted to the municipal council president or the president of a federation of municipalities, as the case may be. Given this, municipalities and federations of municipalities are urged to undertake as many PPP projects as possible.

Aside for the setback with the Council of Ministers, the PPP law is also silent on conflicts of interest that the public side (the HCP’s employees, project committee members, work team members, concerned ministers, ministers in general, the president of a municipal council, municipal council members, the president of a federation of municipalities, and/or their relatives) may have with the project company, the sponsors, or the contractors. This is a very crucial issue in order to fight corruption, and should be addressed in the implementing decrees of the PPP law.

Ultimately, it has been one year since the PPP law was passed and no PPP project has seen light yet. One can only hope that, despite all the challenges mentioned above, there will be a PPP project in Lebanon in less time than it took the authorities to pass the PPP law.

Ahmad El-Khatib is the managing partner of Khatib & Partners Law Firm.