|08-2016 - PUBLIC – PRIVATE – PARTNERSHIP (PPP) IN ARUBA (Part II)|
Oranjestad - In a first article about the phenomenon of using Public Private Partnership model in Aruba, we elaborated on the purpose and structure of a PPP project. In this article, we will focus on the experience with PPP projects in the Caribbean region, and in Europe, as a comparison for the experience in Aruba, until this moment.
Experience with PPP in the Caribbean
In the Caribbean, various countries have experience with PPPs, like Jamaica and Trinidad & Tobago. Also, the Dominican Republic, actually distancing itself from PPP, because of less positive experiences with these projects. A report from the Public-Private Infrastructure Advisory Facility (PPIAF) from 2014, made for the World Bank Group about the Caribbean case summarizes these experiences, signaling some very useful conclusions. A comparison was made, including Jamaica, Trinidad & Tobago, the Dominican Republic, Surinam, Haiti and the states of the Eastern Caribbean, on various items, which are: policy on PPP, special legislation aimed at PPP, detailed guidelines, defined roles, dedicated work units for PPP, staff with specific PPP experience, and dedicated project prep funding for PPP.
Among other issues, it became clear that most countries started implementing PPP projects, without having a special framework for PPP in place, and most still do not have this, either. A few countries became aware of the fact that it would be better to create a policy framework, geared toward PPP, and two of these effectuated this: Jamaica and Trinidad & Tobago. These two countries are also the only two that have special teams, with accumulated experience with PPP. Besides this, no country has special legislation, and most do not have any of the mentioned items.
It may be concluded that, in spite of applying the PPP concept for several years, hardly any country has come to the point of developing institutionalized instruments for PPP. For the smaller countries, like the Eastern Caribbean states, the question may be if it would be useful and profitable to invest in infrastructure dedicated to PPP, if the scope and frequency of PPPs are not that great. Another issue that has not been dealt with in this particular study, is the experience with the financial ‘carrying capacity’ of the public partner related to PPP, next to its other financial obligations. This, mostly because of PPP coming along when financing already becomes a struggle through the normal public channels. As for the case of Aruba, we will address this issue later on.
Experience with PPP in Europe; comparison with Aruba
In a report of the European Investment Bank (EIB, 2009), a very complete oversight is given of the European experience with PPP projects, which were financed by the EIB. In each of the following items, as they appeared in the EIB report, we will include an evaluation of the situation in Aruba, as far as data is available. The text in bold refers to the items, as formulated in the EIB report.
1. Project selection is key (selecting projects that best ‘fit’ with the PPP model). In Aruba, most projects are in infrastructure, like in most other countries. This, regardless of the opinion about the necessity/urgency of the project from a priority point of view. Also, the projects referred to are not so big or complex, that they would not fulfill the requirements according to that criterion.
2. Public sector procurement and negotiation capabilities need to be strong. We are not sure that government has all the expertise in house, needed to guide all projects. This implicates contracting external expertise, which will always come at a considerable additional cost. Evaluation is required in order to establish if the size of the projects justifies the implementation as a PPP project, in view of the extra expenses of expertise. Also, extra expertise is required to guide and accompany the entire project, until the moment when government will take over the responsibility for further maintenance of the project. It is deemed important, thus, that the governmental partner would have its own specific know how, in spite of having contracted external expertise. An option would be to contract experts who will transfer the needed knowledge to the local counterpart technicians.
3. PPPs work best when the procurement process is transparent and competitive. Optimal transparency remains a matter of opinion. Actually, some general info was supplied to the public in most projects. Seeking and finding additional information, however, did not turn out to be easy. A website was created for some projects, with general information, but no information was supplied about, for example, financial expenses, financing options, etc.
4. PPPs are most suited to sectors where the pace of change is gradual. In the case of Aruba, most projects are in infrastructure, as is the case in most other countries. The selected sectors in Aruba are all considered of gradual change. There are no projects in IT/ICT, for example, where technology changes are very rapid, making some decisions look obsolete shortly after having been made. The recommendation should be to maintain this policy in the future.
5. Introducing PPP legislation can be an important, but not by itself sufficient, prerequisite for successful PPPs. In Aruba, the option has been not to introduce specific legislation for PPP. The job is done with existing legislation on e.g. civil liability, contract law, and legislation in place for construction, etc. Until this moment, no issues were raised that would imply the necessity of creating such legislation either. The other countries in the Caribbean did not opt for this, either.
6. Successful PPPs involve meaningful, yet realistic, risk transfer. In the projects executed until now, no known problems concerning risk transfer occurred. It is very difficult to evaluate this aspect, however, without access to the technical details of the agreements of the projects.
7. Because of partially-fixed transaction costs, there is a minimum viable size for PPPs of around €25m. It turns out to be difficult to establish a minimum size in the case of Aruba, under which it would not be recommendable to procure PPP projects. In any case, the majority of the known current projects fit into the bracket of the equivalent of € 25 million and higher, established here for the European situation.
8. Some projects may simply be too large and/or complex to be successfully procured as PPPs. In Aruba, there are no known cases of projects being too large, or complex to be procured as PPPs. This refers mostly to cases that are very large, with different phases, with different partners, where liabilities may become very complex, because of dependency on other phases of execution, with possibly other partners involved.
9. The policy focus for PPP promoters should always be on value for money. In the case of Aruba, in various cases the choice was not made for the lowest bidder. This may indicate that the principle of ‘value for money’ was correctly applied, instead of choosing the lowest bidder. However, this may be difficult to evaluate, also because of the fact that extra work (and cost) may be included, after choosing the final private partner (the case of the addition of OR units in the hospital expansion project).
10. Procuring agencies should not lose sight of long-term affordability, both to government and to users, when considering PPP programs. This refers to an evaluation that, as far as our knowledge goes, has not been applied to the PPP projects in Aruba.
11. PPPs do not work in every sector (e.g. in sectors that experience rapid change such as IT/ICT). Until now, PPP projects were procured in sectors that are fit for PPP, such as construction and road projects. In all these cases, it refers to cases that may have well defined goals, in categories in which most projects in other countries are also located. This, however, is no guarantee that in the future no projects may be planned in sectors that are less fit for PPP.
12. Promoters should remain alert to the fact that it is possible for readily bankable PPP projects to become prioritized over perhaps more-needed infrastructure projects. Until now, this does not appear to be the case in the choice of projects in Aruba, as most projects had a relatively long period of planning and preparation, and there were no other projects readily available as PPPs, that would have been given priority. What has been the case, though, were discussions about the sense and use on itself, of certain projects. This was the case for instance with the ‘Green Corridor’ road project, where debate exists whether the expansion into a freeway of only a part of the road between Oranjestad and San Nicolas would have that much of a positive effect on rush hour traffic, also in view of the high cost of the project (‘value for money’).
In this article, we have made an attempt to evaluate the most important aspects related to PPP projects. In the following, and last article, we will present our final conclusions, and recommendations related to PPPs in Aruba. In that release, we will be addressing also the aspect of the financial ‘carrying capacity’ in Aruba, which does not only concern PPP projects, but on a more general level all public investments, directly or indirectly, that represent an extra burden on governmental financial resources.
Aruba, March 22, 2016
Chamber of Commerce & Industry