It was recently reported in sections of the media that the Ministry of Public Infrastructure is moving ahead with construction of the [much needed and long overdue] new Demerara Harbour Bridge this year, with actual work slated to commence next year. According to the report, the cost for the new bridge is estimated at some US$250 million (Gy$51.6 billion).
It was also noted that, through the Ministry of Finance, the project will be financed by way of a public/private partnership model. Further, the report highlighted that there will be capping of tolls, so that there will be no hikes in charges to cross the bridge. In response to that debacle with the Berbice Bridge Company Incorporated, the Government has assured that it would not make the mistakes which were made in the Berbice Bridge financial model, and has noted that the Berbice Bridge was also financed by way of a public-private partnership arrangement.
The problem with this model — as was cited by Dr. Anand Goolsarran in his Accountability Watch column featured on July 16, 2018 — is that it constituted too much debt financing. This analyst is in full concurrence with Dr. Goolsarran’s analysis, based upon the information he revealed therein with respect to the financing structure, wherein the debt-to-equity ratio was 84:16. That is, 84 per cent debt financing and 16 per cent equity financing. The total financing of the Berbice Bridge was close to some $10 billion Guyanese dollars. Therefore, definitely, the excessive debt financing is primarily the causation for the current financial difficulties of that entity.
Public-Private Partnerships
Turning now to the Public-Private Partnership (PPP) model in advancing economic development, this ever-increasing, sought-after economic development model, like anything else, has its fair amount of advantages and disadvantages. Governments worldwide have increasingly turned to the private sector to provide infrastructure services in energy and power, communication, transport and water sectors that were once delivered by the public sector. This seemingly growing collaboration with the private sector in these respects is being driven by several factors, such as:
* Increased efficiency in project delivery and operation management
* Availability of additional resources to meet the growing needs of investment in the sector
* Access to advanced technologies (both hardware and software).
Often times, lack of Government funding has been the main reason for considering a PPP option for the implementation of a project. PPP models are viewed attractive to governments as an off-budget mechanism for infrastructure development, as:
* They can enhance the supply of much-needed infrastructure services
* They may not require any immediate cash spending
* They provide relief from the burden of the costs of design and construction
* They allow transfer of money project risks to the private sector
* They promise better project design, choice of technology, construction, operation, and service delivery.
Models of PPPs
There are five broad categories of the PPP models in order of generally (but not always) increased involvement and assumption of risks by the private sector, namely (UNESCAP, 2011):
* Supply and management contracts
* Turnkey contracts
* Affermage/lease
* Concessions
* Private finance initiatives (PFI) and private ownership.
Limitations of PPPs
Before the approval of PPPs by governments, there are many crucial aspects that need to be carefully assessed, such as: economic, social, political, legal and administrative aspects. There are various limitations in PPPs as well, of which some of the major limitations include (UNESCAP, 2011):
* Not all projects are feasible (for various reasons: political, legal, commercial viability etc.)
* The private sector may not take interest in a project due to perceived high risks or lack of technical, financial or managerial capacity to implement the project
* A PPP project may be more costly, unless the higher costs can be offset through efficiency gains
* Change in operation and management control of an infrastructure asset through a PPP may not be sufficient to improve its economic performance, unless other necessary conditions are met.
These conditions may include appropriate sector and market reform, and change in operational and management practices of infrastructure operation.
Recommendations/Conclusion
In hindsight, the lessons that are currently unfolding with the Berbice Bridge imply that Guyana is perhaps not ready to maximise the full benefits from PPPs. While the model in itself is good to advance infrastructure development in particular, within a developing economy’s context, it is the inherent political risk(s) of the PPP model that are the probable cause that makes it problematic.
Notwithstanding that, some time ago, the Minister of Finance had signed onto an agreement with the Islamic Development Bank, wherein a US$900 million line of credit facility was approved for Guyana; which is accessible for utilisation between now and 2020/2021. As such, because of the unique nature of Islamic financing in general, it would be by far much economically wiser and more prudent to finance the new Demerara Harbour Bridge through the Islamic Development Bank’s financing which is available to Guyana, with the Government of Guyana injecting some amount of equity as well.
(In next week’s article, the author shall present an in-depth discussion on how Islamic financing works, and some other projects for which this type of financing can be used.)
