The first PPP projects need foreign experts

By Gulnara Kalikova
Founding partner

THE FIRST PPP PROJECTS NEED FOREIGN EXPERTS 

Today, Public-Private Partnership (PPP) is not new in Kyrgyzstan. But just 2 or 3 years ago, PPP was confused with privatization, joint ventures, public procurements, and even GKChP (Soviet coup). But gradually, this form of cooperation between government and business has become part of our lives and despite the lack of practice, there are high hopes put on it. Many ask why we need such partnership.

Many consider it as an opportunity to improve the public and municipal infrastructure. Everyone knows that government infrastructure investments are not keeping up with demand. Probably, every person living in Kyrgyzstan has more than once scolded authorities over broken roads, half-ruined utilities, schools and hospitals in need of major repairs. However, not everyone knows that nowadays government can partner with business to rehabilitate, build and operate infrastructure facilities. The quality of infrastructure greatly influences our lives. If there is any chance to improve infrastructure through public-private partnership, such chance needs to be taken. Today, many countries use PPP to build roads, airports, schools, kindergartens, hospitals, cultural institutions, government facilities and even prisons. But the final beneficiaries of infrastructure projects are the people living in those countries.

We are not reinventing the wheel here. Public-private partnership is widely used both in the West and in the East. Our CIS neighbors are also actively introducing PPP in their countries. For example, Russia and Kazakhstan have launched extensive national programmes to bolster the development of such projects.

Despite the growing popularity of PPP projects around the world, they do present a severe organizational and institutional challenge for the public sector. To work well they require appropriate policy and legal environment for PPPs, as well as careful evaluation of such projects in terms of their economic, financial and social impacts on the public. There is no need to rush when it comes to this kind of projects.

CRITICAL PREREQUISITES FOR PPPS

First and foremost, government must have the political will. Such policy is in place in Kyrgyzstan. This is confirmed by the enactment of the PPP Act that is regarded as one of the strategic documents of the State, as well as by the establishment of the PPP enabling institutions (offices and units within the Ministry of Economy and the Ministry of Finance). Public authorities are already working on selecting and preparing potential PPP projects.

Government should plan in detail how the different stages of the procedure will be conducted. Such plan must be realistic and deliverable and set out details on timelines and responsible parties involved in the projects. It is desirable that potential projects be medium-scale and have minimum negative effects on the public.

One successfully completed medium-scale project may bring more benefits to the State than several large-scale projects. This kind of project will involve less effort and less risk to implement, but will make a greater impact by serving as a model for future projects.

Another important task is to establish and maintain national best practices in PPP procurement. For this purpose, it is necessary to launch one or two real PPP projects. Many countries are committed to the principle of learning-by-doing. The enactment of new legislation is only a first step in building the framework for effective PPPs, but legislation and policies alone are not enough to learn how to build partnership between government and business. Procuring a PPP contract is a complex matter involving essential elements of lease, trust management, contract, agency, and many other contractual relationships. How to make PPP an effective tool in the hands of the government can be learnt through experience only.

In the first projects, it is very important to involve highly qualified specialists with valuable PPP experience and expertise. It is unlikely that such specialists can be found among the local experts. By the way, there are no PPP experts in our law firm as well. Although we have actively participated, over the last five years, in various local and international workshops and conferences, including the training courses in Russia, and have read a lot of literature on PPP, we cannot claim ourselves as PPP experts. Like many other experts in Kyrgyzstan, we have little practical experience in this area.

In the first projects, it is necessary to solicit advice from international experts on best practices in PPPs and spare no expense on this since everyone knows that cheapskates always pay twice. The price, when it comes to infrastructure projects, is too high assuming that such projects directly affect people’s lives.

CRITICAL SUCCESS FACTORS FOR PPPS

Firstly, a good PPP tender process requires careful and extensive preparation by the procuring authority. In most countries, the process of preparing such projects continues over 1.5-2 years on average, and sometimes even longer. The preparation stage is of vital importance for a successful tender procedure.

At this stage, public authorities or municipalities should decide which target infrastructure project to support in partnership with business. A decision to support the implementation of a project is based on an assessment of the economic and social value of the project and whether it justifies particular government support. Certain projects can be financed by the public sector alone at an acceptable cost. But this is an exception in most cases.

If government decides that certain target requires input from the private sector, it will, in the first place, carry out a thorough due diligence analysis to assess the current and expected technical condition of the target and to identify the steps needed to achieve such expectations.

In the second place, after completing the due diligence process, it will proceed with the evaluation of the scope, sources and stages of funding required. Financial advisers play a critical role in this process. It is also important to understand which social effects (both positive and negative) may arise from infrastructural changes and which legal environment and regulatory procedures to choose to undertake a PPP project. All these matters require deep knowledge and experience. This is specifically why Kyrgyzstan, in its first projects, needs to involve highly qualified international experts. They should in their turn share knowledge and experience with local specialists.

The tendering process represents a critical stage of the PPP procurement. This stage can be designated as one of the most vulnerable and prone to dispute. To avoid the negative effects, the tendering procedures should be as transparent as possible. Selection and award criteria must be neutral and nondiscriminatory and should eliminate any scope for discretion. Better rules and procedures can help reduce the risk of disputes over tender results.

Public-private partnership agreement is used as a legal basis for cooperation between government and business. The effectiveness and efficiency of the project directly depends on the quality of this document. The partnership agreement must be well-drafted and detailed and must define responsible parties, their areas of responsibility, targets and timelines anticipated by the public partner, consequences of the private partner’s failure to perform and many other issues. Unlike ordinary agreements which give rise to legal consequences for only two parties, PPP agreements have effects on the general public. Therefore, such agreements must meet the highest standard possible.

BARRIERS TO PPPS IN KYRGYZSTAN

It is not rare in our country that officials press for getting immediate results. This approach is totally unacceptable when it comes to PPP. I would say that with such expectations in mind, it is better not to undertake PPP at all, since haste in such matters can result in grave and sometimes irremediable mistakes.

PPP is not a short-term task, but a long-term undertaking lasting 5 to 50 years. Therefore, such approach needs to change. It is necessary to establish and finance national PPP training programmes to build the expertise of government officials. Business needs such expertise as well.

In general, it should be noted that today government and business have effective communication tools. Once I talked to a government official who had visited South Korea lately. He spoke admiringly of its fantastic infrastructure: roads, bridges, hospitals and many others. But what surprised him most was that such great results were achieved through the partnership between government and business, including PPP projects.

We both agreed that Korea is certainly a beautiful country, but we also can achieve much in Kyrgyzstan. Everything depends on its ability to succeed from the perspective of human potential, good governance and capacity-building. We concluded from this discussion that people in Kyrgyzstan also can achieve benefits from high-quality roads, convenient parking zones, modern hospitals and as a result, afford a decent standard of living. To realize this goal, we need to put PPP on the right track.

The article was published
on Vecherniy Bishkek website
June 16, 2015