By Daniel Lubogo
Water, transportation, energy, and telecom infrastructure are essential to the growth and survival of a nation.
When planned, funded, and maintained well, infrastructure plays a vital role in supporting a high standard of living and facilitating commerce and trade, thereby extending a nation’s global reach.
However most of our governments operate on thin budgets, especially in most of our countries experiencing rapid population growth and urbanization.
In response therefore the need tap the private sector for capital, technology, and expertise to finance, develop, and manage public-sector infrastructure projects is inevitable and equally the obligation on the private sector to foster economic growth cannot be avoided by the private sector. PPPs are an enduring solution for strengthening infrastructure and generating economic growth.
According to the World Bank estimates, new investments in the maintenance of infrastructure projects in developing countries costs about US$849 million or more. It is no wonder that public-sector is increasingly finding itself struggling to balance the rising demands on infrastructure with the lack of capital, manpower, and expertise.
Evidence suggests that the more PPP projects launched in a nation, the higher the rate of GDP growth. Notably, countries with 70 or more PPP infrastructure projects demonstrated a 25 percent GDP growth rate between 1990 to 2003 according to the World Bank report.
This is because such projects tend to be large undertakings that bring capital into the market while creating long-term employment. Job growth drives more consumption, generating more wealth and fueling a stronger economy. Private investment of this nature also attracts other private investors to the market, creating a sustainable model for economic growth.
As PPPs introduce additional financial resources into the economy, government expenditures decrease in response. Although sound policies will help attract PPPs to the market, astute negotiating and a sound regulatory framework is necessary to develop agreements that will improve the overall economy. Governments need to minimize economic and political risks. Investing in an infrastructure project or other project that would require injecting large sums of money at any level is risky for the private investor.
The government cannot control fluctuations in the world markets, but it can minimize political and economic risks within its purview to attract more PPPs to its market if the desire for development partners is to survive.
Governments with well-established and enforced policies against corruption, combined with low business transaction costs, a transparent legislative system, and exchange rate and monetary stability are far more attractive to the private sector, particularly for projects that require a sizable investment of capital. Policies that ensure overall economic stability will minimize financial risk for the private investor.
For example, a country with an independent central bank that is free from political influence is understandably more appealing to a private investor than a country with little monetary stability. PPP arrangements with greater private-sector involvement will contribute to GDP growth.
The government, therefore, needs to promote and negotiate contractual agreements that encourage the private sector to invest more money, transfer expertise, and increase accessibility and product choice.
Potential projects should be screened based on a cost/benefit analysis and the ability to deliver a good return on investment, and private partners must be vetted for their experience as well as their financial backing.
At the same time, the contracts should include incentives and penalties that protect consumer welfare by ensuring private partners offer the best services at the best prices. Too many guarantees could encourage monopolies or prompt the private investors to become lax on efficiency and quality.
Thus, to be successful, these guarantees must be based on thorough investigation of project risk, partner strengths, and alignment of project type with partner. Governments should secure a sound regulatory system to maximize resource commitment and transfer of know-how.
Competitive markets yield benefits for consumers and government alike by reducing prices. In short, PPPs can positively influence a nation’s GDP and the private sector must be involved only this can transform our nation. However, they are not magic bullets.
Their influence on economic growth is entirely dependent on the number and value of PPPs in the country, the type of PPP contract, and the policy and institutional environment. Policymakers must thoroughly evaluate how these factors apply to their jurisdiction before launching a PPP project.
The writer is a lawyer
The writer can be reached at email@example.com