Public–private partnerships (PPPs) have helped many countries in the Middle East modernize their highways, upgrade their communications infrastructure and build new power plants. But such partnership models have proven less effective for governments seeking to outsource certain services, such as health care.
Handing over such services to the private sector requires a greater level of collaboration and trust between governments and their partners than straightforward infrastructural works. Creating an electronic payments system, for instance, goes to the heart of what government does and affects its everyday transactions in a way that the construction of a sewage plant does not.
To better manage such services, the Egyptian government is developing a new approach to partnership called ‘joint ownership’, which could be broadly applicable throughout the region. This approach transforms the way in which public services projects are structured and offers opportunities for private sector entities around the world to capitalize on the region’s rapid growth.
In the joint ownership model, both the government and the private entity get a stake in a newly formed private company. The government awards a contract to the jointly owned company, giving it the right to be the sole provider of the service in question. It also contributes regulatory support, clearing a path for the company to operate without interference. The private sector contributes the technical and management know-how, as well as a portion of the financing for the project.
The Egyptian government conducted its first experiment with the joint ownership model to launch a nationwide e-payment system in 2007. The newly formed company, e-finance, was created with an initial investment of 60 percent from the government and 40 percent from its private-sector partner, and was granted concession rights that made it the sole entity allowed to operate an electronic payments platform for the Ministry of Finance.
The Egyptian government was also able to ensure the buy-in of the banks, pension fund managers and others that needed to be part of the system. The private partners, meanwhile, provided know-how in the areas of software development, banking, automation, and e-services, as well as designing, installing, managing and maintaining the e-payment system. The new system allows civil servants, who used to line up at cashiers’ windows every week for cash payments, to receive their salaries automatically via an ATM card.
Hundreds of thousands of pensioners now receive their income from the government in the same way. The company is expected to become profitable over the next several years, once the infrastructure is in place and the system reaches its projected number of processed transactions.
The experiment proved so successful that the Egyptian government is now considering other areas in which joint ownership might be effective. For instance, there are opportunities to replicate this model for services as diverse as carrying out customer handling and data processing at customs, providing state-of-the-art training to Egyptian and regional civil servants, and even for conducting government-wide procurement services.
There is a caveat to these partnerships: They are short-term commitments. Governments, after all, should not be the owners of companies. Their economic role should be to set and enforce the regulations that enable competitive markets. But as long as both parties understand this condition, they can reap several immediate benefits from joint ownership.
Most importantly, the partnership offers access to resources that neither side would independently have access to. The public partner gets the technical, financial and management resources of its private-sector partners: the private sector’s often higher salaries mean it enjoys better-trained workers and deeper expertise than exists in government.
In turn, the public partner can offer concession rights and support regulatory changes that may be vital for the new company’s success.
Second, the venture’s risks are shared in a way that can increase the initiative’s prospects of success. For instance, political, legal and environmental risks are borne by the public partner; after all, the public partner can directly influence outcomes in those areas. Risks relating to the design of the service or financing fall to the private partner, which presumably has more expertise in those areas.
Finally, jointly owned companies offer straightforward exit strategies in the form of initial public offerings or strategic sales that are not available in most other types of PPPs. In particular, if the company is prospering, the public partner can push for an initial public offering, giving it a way to cash out of its position. Or the public partner can sell all or part of its stake to a strategic investor.
The same structure that bestows benefits also creates some risks. If the government has granted concession rights, the new company may be a monopoly player in the market. To address this issue, contracts need to clarify what services must be provided and what is reasonable for consumers to pay.
The joint ownership model also creates a conflict of interest for the public partner. The government would normally push to maintain low prices for its services, but as a stakeholder in the company, it should be maximizing profits. This risk can be diminished by creating a separate entity within the government to monitor the performance of the company.
In the long term, the real priority for any Middle Eastern government must be to figure out what fixes are required in its legal, regulatory and institutional frameworks, so that its private sector can launch public-services projects without such intensive government involvement.
This is the true sign of success — when the government doesn’t need to offer itself up as an owner in order to spur private sector participation. Until that happens, joint ownership will remain a potential short-term strategy.