For years now, Western countries, through their institutional framework, have criticised South Asian countries for keeping governments in the driving seats of economies; their idea was that businesses are for the private sector. Today, both systems have failed and everyone is looking hither and thither for a solution.
New economic realities have dawned, thus, the next obvious step is to try a combination - the viable common ground between these two - ie Public-Private-Partnership (PPP). It has been tried before, but never before has the need for it been more pressing as the base for our South Asian economies. There is an urgent need to find an effective formula to make this a reality.
Pakistan has experimented successfully with the PPP, on the advice of the World Bank and other international agencies, to drive economic growth and bring about development and improved welfare for its people. The evidence is seen in the many infrastructure projects in ports, road, and power projects, South Asian countries have been dabbling in the mechanics of both the government and private run enterprises, so what better place and time to boldly embrace this economic blueprint.
The main idea should be that they find the fundamental elements that make both the private sector and the government work and make PPP out of it; the bad parts of it must be jettisoned. What is the win-win answer for both? As the world becomes more competitive, there is a need for governments to improve the welfare of its people, using its limited resources, to build infrastructure. Resources are limited while demand is ever increasing.
To bridge the gap, the trend would be to utilise resources and skills of the private sector to achieve public objectives. Public Private Partnerships (PPP), a contractual arrangement between governments and the private sector, involves the sharing of risk between public and private sectors. Infrastructure projects are characterised by high initial investments, and revenue flows occurring many years after the initial investment.
Traditionally, it is believed that investment in infrastructure for public services, such as transport, telecommunications, due to the need for large sums of money, must be carried by the public sector. However, experience has shown that when implemented correctly, PPP is capable of providing services to the public at lower cost and spurs economic growth. It results in faster implementation of public works, better risk allocation and improves service quality.
Implemented correctly, this means a proper balance of private investors' and public interest. Grand and visionary development plans could be wreaked by overzealous officials, in the name of protection of national and public interest, by imposing unrealistic and exacting commercial terms, due to callow faculty experience and lack of comprehension of port facility management science.
In the area of container terminals, increase in global trade, increasing levels of containerisation, combined with an increase in container ship size, has resulted in more demanding investment in state-of-the-art cranes, systems, and civil works. The scale of investment in container terminals has increased exponentially, to a point where it is not meaningful to expect such infrastructure to be financed by solely public sources.
Similar to other infrastructure projects, there is need for a delicate balance of the interest of the public and private sector. Most PPP projects for container terminals are granted on a model of Build-Operate-Transfer, which involves the investor transferring all its assets, as no cost, to the port authority. For a government and port authority or trust as the case may be, PPP is used to achieve the objectives of economic growth and job creation, ultimately transferring skills and technology.
The use of a Build-Operate-Transfer (BOT) ensures that the operation of the facility reverts to the nation. For the investor, his objective is to build a business and make a profit. The period of any BOT is important and involves a delicate balance. The investors' asset will be transferred to the port authority at no costs, allowing the port authority to gain control. Overzealous port officials, keen to gain control of such assets, could set a short concession period destroying any hopes of attracting investors.
Thus, professionalism and understanding of port management science has become imperative. Private sector companies exist to make a profit and are accountable to their shareholders. Private investors are unlikely to participate in PPP where they are asked to take a leap of faith. The quantum of investment is heavy and the time to recover the initial investment, usually referred to as the payback period, for container terminals is long.
Weigmans, esq. (BW Weigmans, Investment in Container Terminals, 2002) estimates that it takes an average of 10-15 years to recover such investments. There are three main terms of critical importance to investors in container terminals. First, whether the period of the investment is adequate to allow them to recover their investment and make a reasonable return on their investment.
Secondly, whether there is any protection against the indiscriminate issue of licences for new facilities by government and port officials, who may have their own personal interests. Thirdly, whether it has any control over the setting of tariffs in the event of changes in its cost of operation. It is interesting to compare the recent PPP projects in South Asia. Starting from the west, Pakistan has successfully used PPP to develop its container terminals.
The efficient terminals at Karachi and Port Qasim were awarded on a Build-Operate Transfer (BOT) basis, except one on a build-operate-own basis, which may be transformed to a BOT basis as per new agreement. The port of Karachi, administered by the Karachi Port Trust (KPT), handled over 1.3 million teus (twenty-foot equivalent boxes) in 2008, with two privatised terminals. KPT had, in 2007, granted concession for the deepwater container terminal, for 25 years, for a terminal, which will handle 3.1 million teus.
The project cost to be incurred by the private investors totalled US $500 million. The other major port in Pakistan, Port Qasim handled approximately 800,000 teus in 2008. Together, these two ports handled Pakistan's 2.2 million teus. An examination of concession agreements, which are public available documents, shows that they contain a mechanism, which allows the investors to recover his investment and make a reasonable return.
At, or close to, the expiry of such a period or upon the agreed percentage of capacity being reached, the port authority has the right to grant new concessions, such a mechanism catering to the interests of the public. India has its share of success in attracting investment to privatise its ports. The Mumbai Port Trust granted a concession for the Offshore Container Terminal (OCT) in 2006, to build a container terminal with a capacity of 1.4 million teus.
With a project cost of approximately US $350 million (INR1200 crore), the investor is granted a concession period of 30 years. The investor is given the assurance that a new terminal will be built only when his terminal reaches a capacity of 800,000 teus. In 2006, Chennai Port Trust was able to attract investors to build the second terminal to add 1.1 million teus to the port.
The investor is required to spend US $150 million (INR492 crores) and operate the terminal for 29 years. In consideration of incurring such infrastructure costs, the investor has the assurance from the Chennai Port Trust that it will not grant licences for new facilities within 5 years, or when the investors' facility reaches 400,000 teus.
Moving eastwards, there is the Colombo Port Expansion Project (CPEP), first tendered in 2007 and recently re-tendered in 2009. The concession has provided for an operation period of 35 years, a good period of time for the investor to recover their investment. There is a provision of guarantee by the port authority that no new concessions would be granted for 5 years, allowing the investor time to recover his investment. Bidders are requested to bid for the royalty per teu (twenty-foot equivalent boxes) and the minimum volume guaranteed.
For a terminal designed to handle 2.4 million teus and an area of 58 hectares, bidders are required to pay rental of US $5 per annum from the first year of operation, escalating at 3% per annum. Most important, the operator has the flexibility in setting the tariffs. Overall, it is a reasonable proposition to potential investors.
In 2007, the tender attracted a good number of internationally reputable bidders, although it is unfortunate that this has fizzled out in 2009, due to the untimely arrival of the global economic crisis.The most recent example is the tender issued in July 2009 for the New Mooring Container Terminal in Chittagong, Bangladesh. It is premature and would not be right to speculate on the level of investors' interest.
It is noteworthy that the concession period is 15 years. The major commercial terms require the investor to install equipment estimated at over US $100 million, and pay annual fixed fees totalling US $110 million over 15 years, making the total investment of close to US250 million.
It is also reported, by those who attended the pre-Application (pre-Request For Qualification (RFQ) meeting in October 2008, and enquired about the matter that there is no assurance that new facilities would not be built in the immediate future, thereby opening the possibility of uncontrolled supply and jeopardising their investors' money.
Indeed, plans are already afoot to convert publicly-owned general cargo berths to container terminals. The response from the officials provides little assurance, as investors were requested to trust that their government will be reasonable in taking care of their interest. The tender specified that tariffs are to be regulated and subject to approval of the port authority.
Additionally, the tender contains a unique term, requiring the investor to relinquish all financial control, as monies received by the terminal operator are required to be deposited in an escrow account and any disbursements controlled by the port authority. In this PPP project, the proposition appears to invite investors to take a leap of faith into the dark.
There are common traits of the successful PPP projects as described above. The concession period of 25 to 30 years allows the investor adequate time to recover his high capital costs and make a reasonable return. There is a mechanism, which balances the interest of the investors and public interests, where the government or port authority undertake not to indiscriminately issue new concessions, exploding supply, and destroying any opportunity for the investor to recover his capital.
A PPP is a business relationship, albeit a very structured one. It is necessary to have a structure to ensure that the interest of the parties (port authority and investor) and public interests are protected respectively. Written contractual terms, rather than verbal guarantees of reasonable behaviour from ministers or port officials are needed to assure investors.
PPP projects with imbalance weighing against investor's interest will not attract the participation of the private sector for any funds needed to build the infrastructure for the country. South Asia needs to work out a viable formula for its economies, it has to be done soon before the crippled West rises again, this time they should be in a better position to be partners in global commerce, rather than be at the back end of it.
The cash strapped countries of South Asia need considerable foreign direct investment in the next five years, of which it is estimated that 65% will be needed for new investments, whilst the balance will be needed to maintain existing assets to extend their useful lives.
We certainly need regulations but regulatory regimes must have the enforcement power who takes care of national interest while having the flexibility to be fair to private investors to earn a reasonable return (IRR). The PPP systems can only flourish when each country devises its own to suit local conditions. No single blueprint can be imposed.
Both public and private sectors must be allowed to exercise creativity within a broader framework. There are five phase of PPP implementation, namely policy development, capacity building, development of enabling environment, identification of partners and evaluation/selection of credible partners.
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