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Proceedings Paper
Presentations Session
by Mr.
Sugihono Kadarisman Executive
Director International
Chamber of Commerce (I.C.C.) Indonesia
Committee WHY
PPP? Globalization
and economic growth Globalization
calls for free trading of goods and services as well as free investment
flows among all countries. It dictates that all of them make contribution to
the growth of world economy by enhancing their respective
productivity and market performance. It is in this context that
interdependence among countries in their economic endeavours is today so
apparent. One country’s strife for economic progress is thus no longer a
stand alone affair, but it has become also the need and concern of others at
least at regional level. Today in a globalized economy, Foreign Direct
Investment (FDI) has become important as a growth engine, not only to host
(developing) countries but the investing (developed) countries as well. Public
services in developing countries The
level of a country’s economic achievement is directly correlated to the
level of adequacy in the country’s public services. While developed
countries have established good infrastructure and are ready at any time to
further modernize them in response to the rapidly growing public service
demands, it is not the case with developing countries, NAM member countries
in particular. They are lacking far behind developed countries and generally
are still faced with great difficulty to barely suffice their basic
infrastructure. As a result public services in these countries, thus also
their economic performance are poor. Today with globalization, developing
countries are even faced with a more severe challenge where regional and
global demands must also be taken into account. PPP
as a response to the challenge Provision
of public services is traditionally a “natural monopoly” of the state
(public sector). The government takes full responsibility and
accountability, and through its state owned companies develops and runs the
entire public service system in the country. Globalization however, has
escalated demand for public services unbearable to governments alone to cope
with, in terms of their available resources. The private sector having
accrued better resources (capital, knowhow, technology, efficiency and
management skills) must therefore be more deeply involved in providing these
public services, quality and quantity wise, that would satisfy the domestic
and regional needs. The question arises now is what participation scheme and
what cooperation relationship with the public authority that the private
sector can best fit into. PPP has since recent years been gaining wider
acceptance as a response to this challenge. It is a concept which underlines
partnership for its rewarding existence, rather than privatization
which is more oriented to the principle of “laisess faire laisess passe”.
Privatisation is common with state owned industries producing goods and
commodities, not so much with public services. Partnership in the context
discussed here means that the government together with the private sector share
the risks and responsibility in making public services available, as
well as share accountability for the services that they render to the
public. It is a “customized” concept to synergize public service
providers and the public customers, in the sense that the entire endeavour
is to empower the market rather than the producer, thus ensuring
infrastructure growth. HOW
TO IMPLEMENT IT? A
strategic approach: Reform in legislative, institutional and regulatory
frameworks The
implementation of PPP in this respect requires a win-win solution
between two seemingly conflicting premises. On one hand the government has a
mission to keep provision of public services remain as a social function,
while (logically) on the other hand the private sector when given the
opportunity would do it on the basis of normal business terms in order to
secure investment returns and the ability to reinvest.
To implement PPP successfully a great change in perception on how
public services are made available with respect to these two opposing
premises has to prevail. In effect, adopting PPP concept implies a change of
vision, namely a shift from security oriented to prosperity oriented
one; however still in proportional balance between the two. This leads to
the need for reform in legislative, institutional and regulatory
frameworks governing economic sectors related to public service activities.
Indeed, the reform constitutes the strategic element in approaching towards
successful PPP implementation. In today’s globalized economy, the reform
should also be aimed at attracting FDI. General
Principles Since
PPP is designed to satisfy public needs, the strategy in achieving it
shall be guided by a number of general public domain principles,
mainly:
How
far can the reform be a pro-business one, and yet still subscribes
to these principles will really determine the success of PPP REFORM:
WHAT ARE CRUCIAL ISSUES? PPP
in public services will face crucial issues such as:
The
reform is thus all about how to deal with these issues based on the afore
mentioned general principles, with the aim of resulting in a “win-win”
proposition to the government vis a vis the private sector. Ownership
right on assets
By
nature, the state which is represented by the government and the politicians
(legislators in the parliament) is very much concerned about sovereign right
on the public assets. Traditionally, the state would not take a stand to
offer asset ownership to private sector. This is especially so in the case
of basic networks, considered “strategic” to the state security. If
somehow the state through one of its companies does embark into equity
partnership with private/foreign investors to develop a joint venture
project, it would be limited to the non-basic ones. Today however,
opportunities in basic network developments begin to be opened for the
participation of private sector and FDI. Investment
in public infrastructure development, particularly in developing countries,
is a considerably high risk undertaking, therefore ownership is a principle
issue to investors (and their money lenders). Actually their main concern is
that assets need to be placed under their control during operational period
in order to be bank collateralable to safeguard
their investment against major risks. In
PPP concept asset ownership is shared between the government and the
investors. Normally the government owns and control assets which are already
existing (including land), while investors provide capital and technology.
As natural monopoly on public services is still lies with the state, in PPP
it is an absolute necessity that the government plays a role as a strong but
credible regulator, while at the same time a good facilitator
to investors. Such role of the government guarantees that security
considerations are still well checked while it shifts its vision towards a
more prosperity oriented one. This implies that the government must provide
political and legal stability as well as equal protection to both public and
investor’s interests including asset ownership. Project schemes such as
BOT (Build-Operate-Transfer), BTO (Build-Transfer-Operate), BOO
(Build-Operate-Own) etc. are a manifest of PPP implementation with respect
to this issue. They are conceived based on the nature of the project,
depending on different circumstances such as whether the project is a new
undertaking or an insertion of private investor’s capital in the
restructuring/expansion of existing state owned public utility system; and
whether the project is to be jointly operated with licensed state company or
operated directly by the joint venture investment company where the state
company has shareholding, etc. Optimum reform with such schemes including
combination of them are yet to be devised, taking into account the limited
state resources to back up the project, and the prevailing local conditions.
Going public by listing in the stock market is an alternative
choice in PPP, particularly in case of those state companies which are
operating existing public utilities. In whatever business format adopted,
the main aim concerning ownership is eventually how to come up with a legal
framework which will ensure bank collateralability of assets by investors
(or the like, one way or the other), but politically also gain public
acceptance. By exercising more prosperity rather than security mentality in
the reform process, the issue of sovereign right on assets in these variety
of possible business formats should no longer hold relevance and could be
comfortably resolved. Operation
and management of assets
As
the government is natural monopoly holder of the provision of public
services, commonly it will give concessional rights to one or more of
its state companies to operate and manage public assets. Private sector may
then be given a role as sub-contractor to the state company to do the job,
or given delegation authority to manage and operate, on behalf
and under the flag of the state company. With today’s need for massive
investments in public infrastructure development, government’s application
of this principle is no longer attractive to investors. They would be
reluctant to invest if not given right to directly control assets. Without
such right it will be difficult for them to ensure that business plans are
realized with minimum risks. Since
PPP is a concept of sharing risks, responsibility and accountability, based
on the prevailing social and business environment a number of possibilities
can be explored to solve this
dilemma with a win-win proposition to both sides. One possibility might be a
joint-operation scheme. The entire business operation and management
of assets are jointly executed by both the state company and the investors,
but with the state company still bears the main responsibility and
accountability to the public. Enterprises with high reputation in public
infrastructure developments and operations are preferred to be the
investors. To ensure the latter however, reliability of the joint operation
contract must be legally guaranteed, while high level transparency and
professionalism must prevail in the corporate governance of both parties,
especially in the financial aspect. Another possibility might be one where
the operational concession right is delegated
to private investors, but certainly with greater risks,
responsibility and public accountability carried by the investors. Direct
investment by private investors, including FDI, is another possibility. They
can embark into investment partnership with licensed state company by
establishing a joint venture legal entity to develop a new project, then
self operate or jointly operate it with the licensed state company as afore
mentioned, depending on the type of utility network which is developed, i.e.
basic or non- basic one. This is relatively an uncomplicated case to both
sides with respect to ownership, operation and management rights on the
assets. What is crucial in such a case is stability of the joint operation
contract, where the government must provide long term legal and physical
security to the investor’s business. With the case of private direct
investment placement in state owned companies which run existing public
utilities, the matter becomes more complicated, but through a case-by-case
approach a suitable framework satisfying both sides somehow could be found. The
reform should be brought up to accommodate a number of possible business
formats within this range of possibilities satisfying both the public and
the private sector. Application of the PPP general principles must be flexible
enough in lieu with the scale of investment and technology transfer
committed by the private sector vis a vis the scarcity in government
resources itself. Local socio-economic environment must also be
proportionally taken into account in the process. Eventually, prosperity
considerations must emerge in a more forthcoming way in the reform, without
abandoning security considerations. Access
to the market
Conservatively,
natural monopoly by the state is also interpreted as its monopoly to
interface with the public customers. This means that private investors who
produce the service are not given free access to the market, but rather they
must first sell the product to the licensed state company before reaching
the public. Today, such indirect market access is considered to be an
investment impedement and no longer acceptable to investors who have taken
high risks in their investment. What they need is direct access to the
public customers to ensure predictable cashflows. The
reform should provide a regime which gives investors a fair market access
without totally abolishing the natural monopoly principle. Tariff
of service
The
pricing of public services is an issue of public domain. It is a sensitive
political issue to be dealt with by the government and the politicians. On
one hand, legislators in the parliament need to ensure that the public
service prices are kept at reasonable level affordable to the public, based
on social and economical factors. On the other hand, the private investors
need to set their own service tariff based on market economy principles and
cashflow projections. The investors fully believe that through market
mechanism price levels will eventually converge to the public’s purchasing
power. PPP
requires that the reform comes up with a tariff regime which is based on optimization
of global costs, new investments (and their associated multiplier
effects) and economic balance. This would imply that in emergency if
necessary, after a thorough and prudent evaluation, the government will
intervene in the market by granting subsidies so as to make tariffs
affordable to the public. Such wisdom is exactly the real qualification of
government as the natural monopoly holder being responsible and accountable
to the public. It is a concrete proof of its
determination and consistency in adopting the PPP concept. Risk
sharing and mitigation
Since
the investment is highly capital intensive, investors would definitely need
maximum mitigation of non-commercial risks, and to a certain extent also
commercial ones, in form of reliable investment protection regime with
credible judicial and arbitration systems adhering to international standards
and institutions. In addition, investors would need government back-ups as
required by the project financing and insurance schemes. Non-commercial risks
are not only due to natural disasters but also due to riots, political
turmoils, currency devaluation and economic crisis. Commitment of
the government to provide these back-ups or guarantees, or at least its
accommodative attitude to affirm support in solving these private investor’s
concerns, would be another concrete manifest of sharing of
risks-responsibility-accountability on the side of the government. Public
back-up in form of the availability of local financing resources has also
become a key issue in the feasibility of PPP projects and their risk
mitigation. The role of fund resources other than banks such as capital
markets should be promoted. Fixed income portfolios such as pension funds,
government bonds, etc. should
play a more active role in financial markets. Tax
and fiscal incentives
One
major consideration before investors decide on investing in infrastructure
development is whether there are tax and other fiscal incentives provided by
the government, at least during the operational years before reaching
break-even-point. These include income tax holiday, reliefs from VAT,
witholding taxes and other
levies as well as tax discounts. Such incentives will speed up investment
returns, encourage investors to further reinvest in new as well as expanded
infrastructure networks, enhance skill development and transfer technology. The
reform should give room for the granting of
these fiscal incentives without putting a heavy burden to the
government in collecting revenues for the state budget. WHAT
BEST PRACTICES?
Reform
in the public service legal system need to be accompanied by best practices
in the field by various state institutions which are involved (public
authorities), as well as the private investor’s corporations and the public
themselves. State
institutions In
PPP the function of state institutions is to regulate and
facilitate public service developments. Related government
ministries and agencies are the ones responsible for programs and project
developments. They need to be in
synergy to ensure effectiveness and efficiency of the development beginning
from the planning stage, devising of project tender & contracting
procedures down through supervision on their execution stage. It is
very important that state institutions do not interfere with the
operation of state owned companies which are licensed to provide public
services. Meanwhile the Parliament through its Commissions needs to endorse
these program & project, plans after evaluating aspects such tariffs,
financial consequences and social-economic impacts which are potential to
become political issues, and to monitor the progress of their executions later
on. The Parliament can also establish an adhock independent Commission to do
the job to ensure unbiassed evaluation. Synergy is necessary not only among
government ministries and agencies, but also with the parliament and its
commissions. All of them need to have the same vision on PPP. With proper
division of function and authority among them, and guided by public domain
principles, as a whole they should constitute a strong regulator and a
committed facilitator to the achievement of a conducive PPP environment.
A conducive PPP climate is typically characterized by stability of
the legislative framework and consistency of the institutional &
regulatory frameworks, despite the need for periodical adjustments as
required by the changing business environment. It is very important that
public authorities be affirmative and consistent in their
bureaucracy conduct. They need to demonstrate boldness, but prudent
and transparent in regulating/enforcing the state policies based on these
frameworks. At the same time they also need to adopt a pro- business
attitude. To do that, one-stop service in the government
bureucracy is necessary. These are really the salient elements for
implementing best practices. Corporations
In
addition to be efficient and productive, corporations which are involved in
the PPP need also to change their culture and business ethics, from
traditionally closed and accountable only to shareholder to more
open, transparent, environmentally aspired and accountable to
the public. These are in response to today’s demand for sustainable
development (more than just profitability). With such ethics enterprises
will have a greater sense of public responsibility. They will look at the
public not just as an object, but rather as a subject, thus empowering the
public as a market, not just the enterprises themselves as such. Eventually,
this approach will empower the enterprises and benefit them anyway. Such a change
in corporate culture is a prerequisite for the success of PPP where
win-win settlements with the state will be much more likely achieved. As to
state companies which are now given freedom to manage their business without
the intervention of state institutions, there should no longer be a difference
between them and privately owned enterprises in terms of performing
professional corporate government and environmental ethics. The
public
A
successful PPP in public service depends largely on public acceptance and
support to the PPP concept itself. The public consumers need to understand why
the private sector is needed to embark into partnership with the state in
providing the services that they need, and what will be the merits and
consequences in doing that. Also the public need to exactly understand the
phenomena of globalization that nobody can deny, also what are its merits and
challenges. PPP needs to be socialized to the public. WHAT
SPECIFIC PPP-MODEL MAY BE CONSIDERED? ROT
(Build-Operate-Transfer) This
model is normally suitable for PPP in new projects to develop non-moving basic
infrastructure networks such as toll-roads, electric power transmission &
distribution lines, railroads, main airports and seaports etc. Private
investors/FDI, with or without equity partnership in a joint-venture with
state owned company, may develop the infrastructure. The operation however is
to be jointly performed with the licensed state company. After a number of
years as specified in the BOT-contract ownership of assets is transferred to
the state company. The joint-venture company may then continue developing new
projects, so in effect it operates like a developer company. BTO
(Build-Transfer-Operate) This
model is suitable for upgrading or modernization of existing non-moving basic
infrastructure. The investors/FDI, with or without equity partnership in a
joint-venture with state owned company, develop the project but after
completing the construction ownership of new assets is transferred to the
licensed state company and the system may be jointly operated for a
specified/unspecified period of time. BOO
(Build-Own-Operate) This
model is suitable for the development and operation of the rolling stocks
utilizing the non-moving basic infrastructure such as trains (railway trains),
ocean shipping lines, IPP’ s (Independent Power Plants), etc. Investors/FDI,
with or without equity partnership with state owned company, may develop, then
own and operate the system with no obligation to transfer the assets to the
state. With BOO model competition is stimulated and service quality improved. These are just a few known examples of PPP that one may find to date. Of course starting from here other models can be construed through combination of them, or even develop a completely new alternative model. It is to be underlined again that these are PPP-models which are not privatization. Privatization would only be suitable for state owned industries producing goods and commodities. |