ABOUT THE PUBLIC-PRIVATE-PARTNERSHIP MODEL TO INFRASTRUCTURE DEVELOPMENT: THE GOOD, THE BAD AND THE UGLY
By Sean Tembo – PeP President
1. The New Dawn administration has decided to embrace the Public-Private-Partnership model for infrastructure development, which is often just referred to as PPP or triple P. But what really is the PPP model? Where has it worked? Where has it failed? What are it’s advantages? What are it’s disadvantages? And perhaps more importantly; can it work for Zambia as envisaged by President Hakainde Hichilema and his Government?
2. The PPP model to infrastructure development is where, as the name suggests, Government enters into a partnership with the private sector for the private sector to finance the construction of particular public infrastructure, and in return the private partner or partners charge Government some kind of rent for the entire life of that particular infrastructure. The most common type of PPP is where the private partner charges the public for the use of the particular infrastructure asset. Recently, Government shortlisted two private companies for the PPP construction of the Lusaka-Ndola dual carriage way road. If awarded, what this will mean is that the private companies will try to recoup their investments through collection of road tolls at various toll-gates.
3. The advantage of the PPP model is that Government usually does not need to spend a single Ngwee and yet is able to develop various public infrastructure. To most Governments, such an approach to infrastructure development brings less headaches as they do not have to worry about sourcing funds to develop infrastructure. They just need to let private companies undertake infrastructure development. But if the PPP model was that simple and beneficial, then why is it that most African Governments shy away from it and instead prefer to just go and borrow from China to undertake infrastructure development? Where is the catch? Well, like they say; the devil is in the details.
4. The starting point to truly understanding the PPP model is to appreciate that when the private companies invest to undertake public infrastructure development, they first need to recover the cost of financing the project at commercial lending rates, and then they also need to make a sound profit and return on investment for their shareholders. On the other hand, when Government gets a bilateral loan from say China to develop public infrastructure, it is not at commercial lending rates but at discounted rates because it is a state to state loan, and there is no profit component. Therefore, in as much as the PPP model might appear to be attractive at the beginning, it is usually three to four times more expensive in the long run. And that is the primary reason most African Governments have decided to shy away from it.
5. However, it is worth noting that the PPP model has worked well in western countries largely because commercial lending rates out there are extremely low; as low as 3 percent in the United States. Also, most construction companies in western countries are not exploitative and will not seek to make supernormal profits in a PPP project. The end result is that in western countries, the cost of public infrastructure development using the PPP model is not significantly different from the cost when a Government makes a direct procurement. The same cannot be said for most African countries including Zambia, where commercial lending rates are as high as 35 percent per annum, and that financing cost has to be incorporated into the project. Also, most of the private companies in Africa in general and Zambia in particular tend to be glutinous when dealing with a Government, and will often seek to make supernormal profits. Therefore, the incorporation of high lending rates and supernormal profits makes the PPP model unsustainable in most African countries including Zambia.
6. With regard to the proposed Lusaka-Ndola dual carriage way PPP model project, what will happen is that for the private companies to recover their initial capital investment, recover the financing cost at existing commercial rates and also be able to make a sound return on their investment, they will need to set up at least give toll-gates between Lusaka and Ndola, and will have to charge at least K300 for a small car which currently pays a toll fee of K20, for each of the toll-gates. That means for a small car to travel from Lusaka to Ndola, it needs to pay a total of K300 x 5 toll-gates = K1,500 and that is only one-way. This scenario actually happened in South Africa in one of the last PPP model projects that the Government undertook for roads, before they realized that it was not a sustainable model. Those who have driven through the Bakwena Toll Plaza in the North-West Province of South Africa will agree that it is the most expensive toll-gate in Southern Africa where a small car pays about ZAR230.
7. However, in the Zambian scenario it is unlikely that the New Dawn administration will allow the private company that will develop the Lusaka – Ndola dual carriage way using the PPP model to charge motorists as high as K300 per toll gate, and to establish as many as five tollgates on this route. Otherwise it would make them extremely unpopular and could even lead to public protests and a potential uprising. So what the New Dawn administration would do is to subsidize the private company so that instead of the private company charging motorists K300 per toll gate, they will only charge say 10 percent which is K30 and the Government would then pay the remaining 90 percent or K270 to the private company. This would have to happen for the entire life of the road which is 40 to 50 years. Meaning that for the next 50 years or so, the private company would bill Government billions of Kwacha per month to subsidize the toll fees for motorists. If Government fails to pay, then the private company will just make the motorists pay the full 100 percent of the toll fees, which would be about K300 per small car.
8. Evidently, the route of PPP model might appear to be attractive on the onset, but we would essentially be digging a grave for ourselves. The nation would be enriching a few privileged individuals at the expense of the masses. President Hakainde Hichilema should reconsider his newly acquired appetite for the PPP model because it is not in the national interest. In as much as the PPP model works in western countries, it cannot for Zambia for the reasons affore-mentioned. Also this habit of copying and pasting economic models from western countries and thinking they will work here in Zambia should come to an end. Government should develop home-grown economic solutions, otherwise we shall take several steps backwards during President Hakainde Hichilema’s five year tenure in office. If the New Dawn administration would like evidence of the failure of the PPP model in Africa, the examples are abundant including South Africa and their experience with the Bakwena Toll Plaza. We are better off getting a bilateral loan at 5 percent to undertake the Lusaka-Ndola dual carriage way project than the current PPP model route in which we shall definitely pay 4 to 5 times more in the next 50 years. What kind of a country are we going to become, where Government is renting public infrastructure from a private company and paying billions of Kwacha per month in rent? Zambians, let us wake up and stop this attrocity before it happens.