Home Economics & Policy A marriage of convenience

A marriage of convenience

by Jeremy Arbid

After a nearly decade-long wait, Lebanon’s legislature finally ratified a law encouraging private-sector investment in public infrastructure. The new framework for public-private partnerships (PPP) could allow the private sector to deliver some public services at lower prices than those currently available, says Peter Mousley, the program leader for trade and competitiveness, finance and markets, and PPP at the World Bank’s Beirut office. Lebanon’s commercial banks, Mousley says, have signaled their readiness to diversify away from mostly purchasing treasury bills, and an appetite for investing in public infrastructure.

E   What’s the difference between privatizing public services and public-private partnerships?

One way of looking at it is [that] privatization is a divorce and PPP is a marriage. They’re two very different things. One is where a government sells assets to the private sector; the other is where, under certain terms, a government makes assets available to the private sector to deliver public services, but the assets remain owned [by the state]. What they’re primarily trying to do with a public-private partnerships is distribute risk to get a more cost-effective service delivered. So, if the private sector [is more] willing to take the risk under a PPP model, you try to incentivize them to take that risk.

E   Should countries new to PPP exercise caution, or begin with a trial project?

Yes, you take time. This is a skill that is not immediately created, and the [Lebanese] Higher Council for Privatization and the line ministries that want to do PPPs are going to have to develop the right expertise to manage the process. It’s very different from public procurement, so if they build up a pipeline of PPPs, it will be done over a long timeframe.

E   What can go wrong?

Well, you can do bad analysis about what the allocation of risks are. You can underestimate or overestimate the revenue base. There are so many elements to it. Usually, in preparing a PPP, you do an initial prefeasibility [analysis], which sort of says: Okay, this is a sector that has revenue flow. And if it doesn’t have revenue flow, [the private sector can be] confident that the government entities that would be making revenue, if it’s not the end user, are creditworthy and are able to make the payments to the private sector. And if it isn’t going to be based on end user [revenue], then does the government have the fiscal capacity to honor what is called “availability payments,” which is often how these are financed? Bearing in mind, what you’re essentially doing is asking the private sector to [take on] front-end risk in the investment in capital development against a long-term flow of revenue. So they need to have confidence that long-term revenue is coming from a creditworthy source.

E   Lebanon has witnessed almost seven years of sluggish economic growth, for many factors, but elected and public officials arguably did little in that period to facilitate or ease the challenges of the private sector. Is the PPP law an example of legislation that can help Lebanon’s economy, and does the World Bank advise other legislation or regulatory fixes?

Look at the World Bank’s Ease of Doing Business rankings for Lebanon and you [will] know there are areas that, if you deal with these things, you’ll generate more investment. [Foreign direct investment] flows have been declining, [and] there are lots of reasons for that: political security as overriding. We did a survey a couple of years ago, [and] the significance of political insecurity as a disincentive for investment had gone right up relative to previous surveys. Then there is a host of investment-climate items, from starting up a business to creating a more inclusive financial system, through legislation Parliament has in draft form. So there is a whole range of things the country could do to move forward, and in terms of generating more private sector investment. In the back of the Spring 2017 edition of LEM [Lebanon Economic Monitor—a World Bank publication], we list a lot of the policy priorities that we recommend. Frankly, I don’t think any of these ideas are unknown to the government—the reason they haven’t gone forward is they haven’t got very clear awareness of the importance of these. PPP is a great one and is a good start, but there are many others that arguably have been pending parliamentary approval or implementation for a few years. Cumulatively, they would all make a huge difference.

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Jeremy Arbid

Jeremy is Executive's former economics and policy editor.

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