Given the large number of new projects being planned for Saudi Arabia in the different economic cities and mega infrastructures, the time is perhaps ripe to explore the concept of public-private partnership or PPP. This concept can also be applied to existing government projects and is a halfway house before full privatization of government assets, especially where there is still some hesitation in applying full-scale privatization.
PPP is now an increasingly relevant and globally popular public policy option and the methodology is evolving. Basically PPP takes over the more traditional methods of providing public sector services and infrastructure, by establishing clear guidelines on operations methods and pricing criteria. For the private sector, organizational and fundamental risk management analysis is key to their successful partnership and operation of the public project.
For governments that have used PPP, the scheme has been at the heart of attempts to revive ailing public services, especially in the health and education sectors. This could be of particular importance to Saudi Arabia, where the largest budgetary expenditures in recent years has been precisely in these two areas. The overall aim of any government utilizing PPP is to secure improvement in public services, based on the premise that private companies are often more efficient and better run than bureaucratic public bodies. Their aim is that by bringing together the public and private sectors, the government hopes that the sharper management skills and cost conscious acumen of the private sector will create better value for society at large, and release funding to other projects. PPP can work in different ways.
The government can have contractors pay for the construction costs of projects and then rent the finished project back to the public sector. This allows governments to build new schools, universities and hospitals without raising domestic debt or drawing down on reserves. If privatization represents a takeover of a publicly owned company, PPP is more like a merger, with both sides — public and private — sharing the risks and hopefully seeing the benefits.
The beauty of PPP projects of this type for Saudi Arabia is that financing and leasing back can be constructed on Islamically acceptable methods, making it more attractive to investors and the government.
PPP is evolving to find the best possible solution for different type of public sector projects. Building of roads or airports is probably less controversial than PPP partnerships in the health and education sectors, as some people hold strong views that such sectors should remain in the domain of the public sector. Critics of PPP argue that private companies might cut corners in order to maximize profits, and that PPP sometimes hurts employees through layoffs, wage reductions and benefits. Some argue that PPP do not save governments money, but in fact may end up costing them more, and that PPP’s do not improve care or providers of service as planned.
The issue is one of establishing the correct set of rules and regulations under which both parties can operate so that standards are known in advance without ambiguity. This will call for regulatory bodies being established for countries like Saudi Arabia with little PPP experience, drawing on best practice models from successful PPP operations worldwide. Advocates of PPP argue that without it, many hospitals and educational establishments would not have been built if it were not for private finance, especially if public money was not available.
The recent spate of new Saudi government projects over the past two years have only been made possible by the sharp rise in oil prices and government revenues which allowed capital investment projects to take place. PPP should be considered as an option when governments are running both revenue surpluses as well as deficits.
To safeguard the public interest, performance related penalties are now built into most PPP contracts that ensure continuing improvement in standards, sometimes far in advance of anything that could be achieved in the public sector. In the final analysis, what performance benchmark does a public sector entity judge itself by?
For Saudi Arabia, PPP is strategic option that should be debated from now to provide the government with an added flexible option to expand its services to the wider community, especially in key areas such as education and health. It might not be the most optimum solution, but at least one can debate the merits and risks involved for this halfway, pre-privatization opportunity. At the same time, PPP can provide financing and investment opportunities to channel Saudi private sector liquidity into projects and away from speculative stock trading investments. Projects operated under PPP will add substance to listed companies and create stability to the market based on company project performance.
— Dr. Mohamed Ramady is visiting associate professor of finance and economics at King Fahd University of Petroleum and Minerals.