|07-2016 - PUBLIC – PRIVATE – PARTNERSHIP (PPP) IN ARUBA (Part I) English Version|
Oranjestad - The Aruba Chamber of Commerce & Industry has been monitoring the development of local projects designated as ‘Public Private Partnership’ (PPP) Projects, over the past years. This model of cooperation between the public and the private sector was introduced some years ago, with the institution of the “Aruba Foundation for Immovable Goods” (Stichting Onroerend Goed Aruba, SOGA). Projects like the “Ministry of Justice building” located in Santa Cruz and the “Tax Department building” located in Camacuri, are the early results of this new form of cooperative project realization, introduced to the Island. After the new government came into office in 2009, the idea came up to expand considerably the application of this model with, for example, the expansion and renovation of the hospital, the construction of the container port at Barcadera, and the ‘Green Corridor’ freeway between the airport and Pos Chikito.
In view of the debate going on, about the use of this model in planning, financing, building, and maintaining a public project, the Chamber of Commerce decided to have an evaluation made of PPP projects, in Aruba. As comparison, projects in other parts of the world and based on similar mechanisms, such as in the Caribbean region and Europe, were taken into account. In a series of three press releases, the results will be brought forward, and additionally, recommendations will be made in view of a possible adverse financial impact on a ‘Small Island Economy’, as Aruba still is. In today’s edition the first part.
What is a ‘PPP’ project?
Introduced as an alternative for financing, but also for seeking and contracting specialized expertise for certain projects. Formerly, governments in any country would finance and implement major projects entirely by themselves. This for various reasons. One of them being that governments were geared toward taking responsibility themselves for the entire route of planning, financing in-house or finding financing under government responsibility, implementing and maintaining the project, with all costs being the sole responsibility of the government.
Besides financing, managing and exploiting, a government also has to deal with liabilities. These liabilities sometimes are so huge that a government is almost obligated to insure the project in-house, in the sense of paying for damages ‘as they come along’. This, because the cost of insurance premiums with private companies may be so high for certain projects, that the government will simply take responsibility and pay damages as they present.
Within the structure of a ‘PPP’ the following actors appear: government, either one or more ministries and/or departments; a contractor, the private partner that is going to design, arrange financing, execute, and maintain the project; a body that will perform the role of the ‘proprietor’ of the project. In certain cases, a foundation was chosen as ‘proprietor’ in the Aruban cases. In other cases, it may be the private partner creating a ‘special project vehicle’ (a local company) that would be responsible for executing and maintaining the project. Furthermore an international financial institution or a consortium of financers, who would supply the financial means for the ‘proprietor’ of the project.
Why the ‘PPP’ alternative?
In case of a PPP project, the external partner from the private sector will enter into an agreement with the public partner to take care of designing, planning, financing, execution and maintenance of a project. What makes it different compared to a project, based on a public tender, where a private partner is contracted to build a project? More than anything, the integrated nature of a PPP project. Based on a publicly held tendering process, government attempts to find a private partner who will take responsibility of the entire route of implementation of the project, as described above, during the entire period of repayment. The responsibility of government is essentially accompanying and supervising the implementation process, making sure it will have the product or service agreed upon, and taking care of the periodic payments to take place.
In a PPP project, a government does not need to take care of the project financing. The private partner will be taking care of finding the financier, or consortium of financiers, willing to finance the project. Of course, the credit rating of the government in question will play a role in this, as it is from government funds that the periodic payments will be made, if no other source of revenue is available, as for instance in the case of toll charged to the user for usage, in the case of a road, or it may be included in some way in a price the consumer will be paying, for instance in the case of a windmill park, where the investment is included in the price paid for electricity. The entity that will take responsibility for the loan directly, is the foundation, or other legal person as the ‘proprietor’ of the project. Government’s involvement will consist of the regular payments, as agreed. This is an amount of money that the government will have to add to its budget each year, if the project has no other direct revenue.
An advantage may be the transfer of risks and liabilities to the private partner who executes. On its turn, this partner may need to insure itself against possible risks, and will include these in the cost of the project. This is one of the crucial aspects in preparing a PPP project, where specialized legal expertise may be a necessity for both parties.
A project may turn out to be more expensive than in the case of the government executing the entire project on its own. That is because the private partner has to include its own return on investment, which will include bringing in the necessary capital. The government may be able to borrow money cheaper on basis of bond loans, but that must still be an option, depending on the financial situation of government.
In the case of the government executing a project on its own, it may also turn out to be necessary to contract external expertise, in order to be able to execute the project. Also, in a project executed by the government, legal problems concerning the distribution of liabilities and risks may arise, which may require government having this kind of expertise on its side. In the guidance and supervision of the project during the entire process, it may be also necessary to have specific expertise on the government’s side. The expenses related to this specific expertise should be included, in order to have a clear picture of the entire cost, either in the case of a PPP project, or in the case of a project financed and executed by government itself.
In this first part we have been focusing on goals and structure of a PPP project. In the editions to follow, focus will be more on the experiences, both positive and negative, in the Caribbean region and in Europe, and the situation in Aruba, in particular. This, also taking into account the capacity of Aruba to absorb PPP projects, in view of its size and its capacity to repay, in the long run.
Aruba, March 14, 2016
Chamber of Commerce & Industry