Public Private Partnerships ready to go
At the beginning of this month, the Minister of Finance submitted the so-called PPP Bill to the National Assembly. This is the bill that will regulate the relationship between the government and its intended private sector partners, for the large infrastructure projects that are financially too heavy for the government to carry through the normal budget.
It is an open debate how much of the current economic malaise was contributed by investment in capital projects, seeing that the budget allocation for capital investment is so tiny. But it can not be argued away that Counter-cyclical budgeting, then TIPEEG, then the fourth National Development Plan, and lately the ambitious Harambee Prosperity Plan, have all contributed to explode government debt to more than two and a half times of what it was in 2010.
How successful this “investment” was remains to be seen. There are two fundamental problems in our economy. The first is the size of government participation and the second is that most of government spending is consumptive. It is only a fraction, less than 20% of the annual budget that goes to capital investment. The rest is listed as Current Expenditures but the lion’s share goes to the wage bill. In the meantime, we were blessed with several more ministries, new Deputy Ministers, new Deputy Permanent Secretaries, and a myriad of new government agencies. All this frontloaded the already heavy wage bill, making it a non-negotiable expenditure that has to be serviced on a monthly basis.
Enter the Public Private Partnership framework. According to the Finance Minister’s reply in the National Assembly this week, the work on this started early in 2010, just as the expansionary budget phase started. To progress from an idea to a workable document, much input has been obtained and processed from a very large group of stakeholders. This eventually culminated in the final version of the PPP Policy which came before the Cabinet early in 2013. From there it followed the drafting route culminating in the PPP Bill.
This week the Finance Minister said, “For the preparation of the PPP Policy and the PPP Bill, it is clear that exhaustive stakeholder consultations have been undertaken while finalising the principles of the PPP framework. Also, numerous international PPP laws and regulations have been thoroughly reviewed and drawn on while drafting the PPP Bill. The PPP Bill has also been previously presented to relevant cabinet committees and to the full cabinet.”
From the outside, the impression one gets is that a lot of work went into the PPP Bill. From this I must assume that it produced a first-class piece of intended legislation. The implication is that an expeditious promulgation will be to everybody’s benefit, especially the government’s who only recently found out what it feels like to be without money.
Public Private Partnerships are in my view the way forward to accomplish our development destiny. One may or may not agree with the government’s excessively large role in the economy, and one may or may not agree with the fact that civil servant wages and benefits consume more than 80% of the budget, but what one can not disagree with, is that PPPs will free up an enormous amount of government resources.
In a sense, a Public Private Partnership is just like a government bond except that equity instead of debt, represents the value of the underlying asset.
If I understood the minister correctly, the Bill makes provision for a wider view of PPPs, not only for infrastructure projects.
It is not so clear whether loss-making state-owned enterprises qualify as future PPPs, but I can see no reason why not. The PPP Bill may just open the door for private equity involvement in these budget-draining parastatals, and may eventually pave the way for full privatisation.
I believe the reluctance on the government’s side to “let go” many of its naughty children, is based on the fear of losing control, and a diminishing contribution to the overall economy. If the PPP Bill opens the door for private equity participation, then it establishes the roadmap for a gradual, managed transition to Public Private participation in some parastatals. This will automatically introduce the element of private sector management, and who knows, maybe even shut down a few of the redundant and obsolete parastatals.
In the absence of legislation, these possibilities have never before been on the table. Now that a law is on the cusp of being promulgated, I believe it will open up many more investment opportunities, especially for institutional investors and for foreign investment.