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Discerning Public-Private Partnership

Sun, Feb. 9, 2020
CAIRO - 9 February 2020: Over the past years, there has been a focus on upgrading Egypt’s infrastructure in order to attract investments, while the large size of the population has given rise to a need for human development projects. Since the lack of financing and modern know-how can constitute an obstacle in the face of the government to introduce such projects, the Public-Private Partnership (PPP) can be an optimum solution.

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What to know about PPP

The PPP concept dates back to the 1960s when the United States implemented such solution for urban renewal projects. At present, more than 85 countries have resorted to PPP to accomplish infrastructure. PPP projects are categorized into nine types: 1- BOO (Build, Own, Operate), where the contractor constructs, owns for a specific duration, operates, and maintains a facility. 2- BOOT (Build, Own, Operate, Transfer), where the contractor carries out the same missions but the facility’s ownership goes to the government after a specified operating duration. 3- BOT (Build, Operate, Transfer), where the contractor never owns the facility. 4- BBO (Buy, Build, Operate) where the government sells the facility to a contractor who improves and operates it for profit. 5- BTO (Build, Transfer, Operate), where the government acquires the ownership of the facility once it is built by the contractor who later assumes operations. 6- BLT (Build, Lease, Transfer), where the contractor builds a facility and leases it for a while from the government before the latter gets it back. 7- ROT (Rehabilitate, Own, Transfer), where the contractor renovates an existing facility, owns it for specific time, and later transfers it to the government. 8- Operations, Maintenance, and Management (OMM) agreement where the contractor operates, maintains and manages an existing facility owned by the government. 9- Concession, where the contractor just constructs the facility and collects the expenses by directly charging the user and/or receiving a grant from the government. The operating duration is usually 10 to 30 years.

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Proper Basis for PPP

Professor of Economics, Investment and International Finance Rashad Abdo, Chairman of the Egyptian Forum for Economic Studies, tells Business Today Egypt that PPP can be applied in all sectors. “For instance, if we want to build 300 schools that cost $300 million, we can invite tenders on the local and global scales for the private sector to construct and equip the buildings, and get financing from funding institutions. The loan and interests can be paid back over 30 years, which would be $10 million a year. Pension funds would be interested as they would get a fixed annual income. The World Bank can conduct the studies needed for PPP projects, designating the specifications and amount needed. The studies can be conducted by the World Bank and submitted to funding institutions. This can be a way to develop hospitals, education, and transportation,” Abdo explains.

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The professor underlines that the success factors for such partnership are comprehensive studies, rational demands from the government, the ability to pay, and guarantees to pay off. Whether to hold PPPs in the manufacturing or agricultural sectors or not, Abdo says “everything is subject to studies. For instance, the New Suez Canal was funded by investment certificates with 12 percent interest rate. It was a success because the revenues covered the amount repaid. It is about the ability to pay back. An agricultural project would yield a nine-percent profit. Would it be possible to fund it through investment certificates with a 12-percent interest rate? It is about feasibility and evaluation of the investment project.”

Gains of PPP

Economic Expert Hany Tawfik tells Business Today Egypt “I am against that the public sector pumps investments as its role is to build infrastructure, and not to crowd out the private sector.” Speaking of PPP benefits, Tawfik explains that “the role of the state should not be confined to participation, but to also include the elimination of obstacles embodied in corruption and crippling administrative procedures. An advantage of PPP [to investors] is that such impediments would be absent. As an investor, you examine opportunities offered by the government and you pick projects that are properly valued, have corporate governance, transparency, and good representation.”

The economic experts suggests that infrastructure projects, public schools and hospitals are established in the BOT system. In case of the last two, the private sector can rent the buildings to the government. Tawfik views that prospective IPOs of state-owned companies are also a kind of PPP that would push forward the role of private investors in the economy. “For the large public companies we inherited, we should evaluate and restructure them and open up for the private sector to invest in them either by bidding or stock market,” the expert asserts.

“The positive effects of public-sector companies’ IPOs are generating income to the state, reviving the stock market, and pointing out to the state the many flaws that should be remedied in the stock market. Examples [of flaws] are the tax on transactions and tax on dividends,” Tawfik highlights, suggesting incentives to the companies listed on the stock market.

Hurdles Facing Public Enterprise IPOs

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Board Member of the Egyptian Exchange Ihab Said stated in a conference on rehabilitating public-sector companies that the value of exchange dropped from more than LE2 billion to LE400 million. One of the reasons is the lack of liquidity because of high interest rates and real estate purchases. The outcome of the drop is that companies willing to list themselves have refrained from doing so as they are worried about the drop in share value. “Only the government is brave enough to take that step,” Said pointed out, adding that a delay in IPOs occurred due to the bad performance of the market, which has room for IPOs, if the evaluation is right.

CEO of Acumen Holding Rana Adawy suggests that the best solution for corruption in public sector companies is joining the stock market. “If you look at non-listed public companies, you will find a huge amount of corruption embodied in high expenditure on compensations and wages,” Adawy highlighted.

Managing Director of Azimut Egypt Asset Management Ahmed Abou El-Saad said some of the public companies did well in the stock market while others did not because of a backlash in the free market conditions as the administrations of such companies they did not make information available. “Some pulled out from the stock market for the board to not sit with small investors and explain the situation,” Saad stated.

Saad pointed out that the percentage of foreigners in the Egyptian Exchange is low because they do not know enough about the listed companies, and whether they are successful. The stock market expert suggests to start IPOs with big names like Banque du Cairo, the Arab African International Bank, and the National Bank of Egypt (NBE). Later on, others can be marketed to foreign investors, Saad proposes, saying “it is easier to offer listed companies when it comes to administrative procedures but that should not be the priority.”

Public-Private Partnership Bill in Egypt

The Cabinet drafted amendments to the “Regulation of Private Sector Participation in Infrastructure Projects, Public Services and Utilities Bill” promulgated in 2010. The draft was submitted to the parliament in December 2019, and states that administrative entities are allowed to enter into contracts with “the project’s company” to carry out specific tasks. Those include financing, designing, constructing, operating/leasing, and maintaining the project; financing, developing, operating/leasing, and maintaining the project; financing, rehabilitating, operating/leasing, and maintaining the project; and any of the aforementioned tasks whether independently or together as long as such tasks include financing and maintenance.

The duration of the partnership contract shall not be less than five years and no more than 30 years starting the issuance date of the “approval certificate” by the administrative entity endorsing the quality level of work, products, or services provided. The value of the contract shall not be less than LE100 million, and a license is required if the duration of the contract is more than 15 years.

Projects to be accomplished in the PPP system must be offered in auctions or tenders. Exceptions can be made after the approval of the Supreme Committee for Partnership Affairs and the endorsement of the Central Unit for Partnership upon the request of the administrative entity.

Limited auctions and tenders are allowed if the project requires financial and technical capacities available with only a small number of investors. Direct contracting is also possible, if some conditions apply. Those include the necessity to accomplish a certain project immediately as mandated by national interest, the outstanding performance of a contractor in former PPP projects, and if the private investor puts forward a proposal that is creative and fulfilling of the national interest, coupled with all technical and financial studies needed.

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If an investor puts in a bid having a low value compared to the specifications that must be met, they have to present guarantees and explanations to the committee, which still preserves the right to discard the bid. A petition committee shall be formed presided by the Ministry of Finance to receive investors’ complaints with regard to any pre-contracting procedures. The committee will be headed by the minister of finance and have as members deputies of the State’s Council chairman, head of the Central Unit for Partnership, and an expert working for the state to be selected by the minister.
 
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