white paper jeddah economic forum 2016...white paper jeddah economic forum 2016 rishab raturi,...
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WHITE PAPER
JEDDAH ECONOMIC FORUM 2016
Rishab Raturi, Mohamad Fakhreddin, and Stephen J. Mezias,
INSEAD Middle East Campus, Abu Dhabi
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TABLE OF CONTENTS
ABSTRACT ............................................................................................................................................................................. 4
1. INTRODUCTION ....................................................................................................................................................... 5
1.1 What are PPPs? .................................................................................................................................................................. 6
1.1.1 General Characteristics of PPP ....................................................................................................................................... 6
1.2. Why opt for PPPs? .............................................................................................................................................................. 7
1.2.1. Monetary constraints of the Government ................................................................................................................ 8
1.2.2. Private Sector Expertise .......................................................................................................................................... 8
1.3. What are the benefits and risks of PPPs? ............................................................................................................................ 9
1.4. What are Reward and Risk Sharing? ................................................................................................................................ 10
1.4.1. Regulatory risk ............................................................................................................................................................... 11
1.4.2. Planning and design risks ............................................................................................................................................... 12
1.4.3. Act of God ...................................................................................................................................................................... 12
1.5. Impact of PPPs on living standards ................................................................................................................................... 12
2. LEGAL AND REGULATORY FRAMEWORK ................................................................................................... 14
2.1. Strong legal framework ............................................................................................................................................... 14
2.2. Identification of project goals ...................................................................................................................................... 15
2.3. Manageable flexibilities .............................................................................................................................................. 15
2.4. Understanding the private sector needs ....................................................................................................................... 16
2.5. Revenue stream ........................................................................................................................................................... 16
2.6. Unclear contractual agreement .................................................................................................................................... 17
3. PPPS IN MUNICIPALITY ...................................................................................................................................... 18
3.1. Diverging kinds of PPPs in Municipality .......................................................................................................................... 18
3.2. Some of the main issues dealing with PPPs in Municipality............................................................................................. 18
3.3. Discussions at the JEF ...................................................................................................................................................... 19
2 4. PPPS IN SPORTS ......................................................................................................................................................... 21
4.1. Discussions at the Jeddah Economic Forum ..................................................................................................................... 21
5. PPP IN AIRPORTS .......................................................................................................................................................... 22
5.1. Legal Framework .............................................................................................................................................................. 23
5.2. Possible procurement and concessionaire related issues ................................................................................................... 24
5.3. Discussions at JEF ............................................................................................................................................................ 24
6.1. Different PPP models in Ports ....................................................................................................................................... 25
6.2. Identification of important points .................................................................................................................................. 27
6.3. Discussions at JEF ............................................................................................................................................................ 28
7. PPP READINESS .............................................................................................................................................................. 29
8.1. Potential Challenges ......................................................................................................................................................... 34
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3 9. PPPS IN HEALTHCARE ............................................................................................................................................ 35
9.1. PPP Benefits ..................................................................................................................................................................... 35
9.2. Challenges related to PPP ................................................................................................................................................. 35
9.3. Discussions at JEF ............................................................................................................................................................ 37
10. FINANCING PPPS .......................................................................................................................................................... 38
11. PPPS IN HOUSING ......................................................................................................................................................... 39
11.1. Market Potential .............................................................................................................................................................. 39
11.2. Requirements for PPP in Housing................................................................................................................................... 39
11.3. Different phases of Housing PPP projects ...................................................................................................................... 40
11.4. Some of the discussions at the JEF ................................................................................................................................. 40
12. PPPS IN INFRASTRUCTURE ...................................................................................................................................... 42
12.1. Advantages of PPP .......................................................................................................................................................... 42
12.2. Challenges to PPPs ........................................................................................................................................................ 44
12.3. PPPs discussions at JEF ............................................................................................................................................... 45
13. PPP IN ELECTRICITY .................................................................................................................................................. 46
14. PPPS IN WATER DESALINATION AND DISTRIBUTION ..................................................................................... 47
14.1. Aim of the water desalination plant ................................................................................................................................ 48
14.2. Transparent bidding process ........................................................................................................................................... 48
14.3. Financing options and cost-effectiveness ........................................................................................................................ 49
14.4. Discussions at JEF .......................................................................................................................................................... 49
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ABSTRACT
In recent decades, public private partnerships (PPP) for managing services or procurement
responsibilities that have traditionally been the domain of the public sector have been on the
increase. This growth can be attributed to a number of factors, including value for money, a
desire to leverage private sector expertise, and tightening governmental budgets. The shift of
public sector priorities from delivering services to regulating the delivery of services is a
difficult transition, but it is essential to succeed with these partnerships. This white paper
provides an overview of global research about PPP and highlights the potential for PPP
projects in the Kingdom of Saudi Arabia. Key topics include the importance of creating a
strong legal framework within Kingdom of Saudi Arabia, developing specific, relevant goals
for PPP, and best practices to design and maintain partnership, not partisanship.
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1. INTRODUCTION
Public Private Partnerships (PPP) are increasingly being considered for managing services or
procurement responsibilities that have traditionally been public sector deliverables.1 This
growing interest can be attributed to a number of factors including value for money, desire to
leverage private sector expertise and tightening governmental budgets.2 However, the shifting
of public sector priorities from delivering services to regulating the delivery of services is
possibly the most important reason for this turn towards PPPs.3 After all, the nature of modes
of delivery of services is changing, and countries recognize the importance of efficiency and
innovation that the private sector brings with it.
This paper is designed to serve two purposes: to introduce an overview of basic PPP,
and to highlight the potential for PPP projects in the Kingdom of Saudi Arabia. Further, it
will demonstrate the importance of creating a strong legal framework within Kingdom of
Saudi Arabia, evaluate the importance of project goals and assess the ideal relationship
between private and public sector in order to achieve a partnership - not a partisanship. This
will help analyse and identify the delicate balance between the needs of the private and public
sector.
1 Paul H.K. Ho, Practical Guide to Public Private Partnership Projects, Hong Kong Institute of Surveyors Publication, 2009, http://www.psdas.gov.hk/content/doc/2005-1-11/PDP%20-%202005-1-11.pdf (last retrieved on 7 February 2016). 2 Robert Puentes and Patrick Sabol, Private Capital, Public Good, Brookings Institute, 17 December 2014,
http://www.brookings.edu/research/reports2/2014/12/17-infrastructure-public-private-partnerships-sabol-puentes (last retrieved on 5 February 2016). 3 Organization for Economic Cooperation and Development, Recommendations of the Council on Principles for Public Governance of
Public-Private Partnerships, May 2012, http://www.oecd.org/governance/budgeting/PPP-Recommendation.pdf (last retrieved on 12 February 2016).
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1.1 What are PPPs?
Despite the prevalent use of the term 'PPP' since the 1990's, a standard global definition has
eluded both practitioners and academia.4 However, a reductionist definition of PPPs is the
delivering on public projects or services by the private sector.5 Restated, PPP is a legal
contract between a public sector entity and a private company where both partners agree to
share a contractually decided portion of the risks and rewards inherent in a project.6 The IMF
defines a PPP as “the transfer to the private sector of investment projects that traditionally
have been executed or financed by the public sector.”7This contractual relationship could
range from informal strategic partnerships such as short term management contracts8 to
medium-to-long term relationship9 such as design build finance and operate (DBFO) type
obligation with deep commitments for both parties.10
1.1.1 General Characteristics of PPP
Given the amorphous definition of PPPs, the lowest common denominator of similarities
between different PPP projects are as follows:
Private partners aim at designing, completing, implementing and funding the project;
Public sector partner concentrates on defining the objectives of the projects; develops
public policy frameworks; and provides guarantees and incentives.
4 World Bank, What are PPPs?, 2 October 2015 http://ppp.worldbank.org/public-private-partnership/overview/what-are-public-private-
partnerships (last retrieved on 5 February 2016). 5 PriceWaterhouseCoopers,Government Infrastructure Report 2005, http://www.pwc.com/gx/en/government-infrastructure/pdf/promisereport.pdf (last retrieved on 5 February 2016). 6 Restated, Robert Puenetes and Patrick Sabol, n.2. 7 Teresa Ter-Minassian, Public Private Partnerships, International Monetary Fund Report, March, 2012, p. 3, https://www.imf.org/external/np/fad/2004/pifp/eng/031204.pdf (last retrieved on 6 February 2016). 8 John Laing PLC, quoted in PriceWaterhouseCoopers (2005), n. 5 at p. 12. 9 Standard and Poor quoted in PriceWaterhouseCoopers (2005), n.5 at p.12. 10 Puenetes and Sabol, n. 2.
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Further, there is a shared risk and/or reward between the public and private sectors which
is generally defined contractually; and the payment mechanisms for PPPs tend to be based on
production or delivery outputs.11
Interestingly, even these similarities depend on a plethora of factors which are as
diverse as infrastructural assets, legal regimes, political constraints and other such limitations.
For instance, some advanced PPP markets such as United Kingdom having high levels of
legalization provide for deep integration between the public and private partners, whereas
other markets such as United States permit for lower levels of integration such as a simple
"design-build" project.12
Therefore, the onus is upon the public sector entity to identify the
correct form of PPP partnerships.
It is difficult to make a generalization about PPP descriptions given the wide range of
terms and its associated variables. Therefore, this paper will proceed to general questions and
queries related to PPPs, followed by a more detailed discussion on specific PPPs. The
primary motivation is to create awareness and generate interest in diverse and comprehensive
forms of PPPs and to identify which form of PPP is best suited to the diverse opportunity
provided by the Kingdom of Saudi Arabia.
1.2. Why opt for PPPs?
To determine the motivation to enter into a PPP is a complicated process that “requires[s]
robust economic analysis, complex negotiations, intense public scrutiny, long-term
commitments, political leadership, and force public sector employees and policymakers to
11 Puenetes and Sabol, n.2. 12 Id; See also, United States Department of Transportation, Federal Highway Administration, 'Design Build Effectiveness Study', January
2006, https://www.fhwa.dot.gov/reports/designbuild/designbuild5.htm (last retrieved on 13 February 2016). See further, The Louis Berger
Group, Design-Build Environmental Compliance Process and Level of Detail: Eight Case Studies, January 2005, http://onlinepubs.trb.org/onlinepubs/archive/NotesDocs/25-25(12)_FR.pdf (last retrieved on 11 February 2016).
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hone a relatively new skill set”.13
Nonetheless, the use of PPPs has increased exponentially in
the recent past for two main reasons:
1.2.1. Monetary constraints of the Government
PPP structures assist governments by not adding to its long term debt obligations, given that
the finance for a project is secured by the private sector.14
While the economic fundamentals
of the Kingdom are sound and the public debt levels are well under control, yet with the
eminent prospect if economic diversification, it is not unreasonable to account for a small
increase in public debt in the coming years.15
To counter-balance this, PPPs provide the
opportunity to reduce debt constraints.16
However, this does not mean that the public sector will avoid budgetary outlays. It only
means that the costs associated with financing, building and maintaining a project is not the
direct responsibility of the public sector.17
1.2.2. Private Sector Expertise
Private sector brings with it expertise, efficiency, management techniques and cutting edge
technologies that, in most cases, exceed the public sector capacities.18
When combined with
the oversight and experience of the public sector, PPP is the optimal path to harnessing new
ideas and overcome challenges that citizens face on a daily basis. Be it greenfield or
brownfield investment, PPP collaborations lead to innovations, faster project delivery,
13 Puenetes and Sabol, n 2; See also, International Bank for Reconstruction and Development-The World Bank-Asian Development Bank-
Inter-American Development Bank Joint Study, Public Private Partnerships Reference Guide Version 2.0, 2014, https://www2.unece.org/wiki/download/attachments/25265636/236899332-PPP-Reference-Guide.pdf?api=v2 (last retrieved on 15 February
2016). 14 Andre Laboul, Private Financing and Government Support to Promote Long term Investment in Infrastructure, OECD Working Paper, September 2014, http://www.oecd.org/daf/fin/private-pensions/Private-financing-and-government-support-to-promote-LTI-in-
infrastructure.pdf (last retrieved on 14 February 2016). 15 International Monetary Fund, Saudi Arabia, IMF Country Report No. 15/251, https://www.imf.org/external/pubs/ft/scr/2015/cr15251.pdf (last retrieved on 11 February 2016): 16 Puenetes and Sabol, n.2. 17 Puenetes and Sabol, n.2; See also, International Monetary Fund, Public Private Partnerships, 12 March 2004, https://www.imf.org/external/np/fad/2004/pifp/eng/031204.pdf (last retrieved on 1 February 2016). 18 International Finance Corporation, Infrastructure: How Private Sector Helps, 2012,
http://www.ifc.org/wps/wcm/connect/3c4a9e004af21a4bbcaefe888d4159f8/IFC_TOS_Infrastructure.pdf?MOD=AJPERES (last retrieved on 3 February 2016).
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operational efficiencies, etc.19
The ideas that the private sector introduce to the equation are
those that the public sector may never have considered.20
For example, PPPs can revitalize
government’s un-used infrastructural assets as, say, a municipal parking lot.21
This is
conceptually provides stimulus for an increase in economic activities around the parking lot,
and enhance property rates.
1.3. What are the benefits and risks of PPPs?
When considering PPP cooperation, government or public authorities have to assess the
benefits of such arrangements. The World Bank Group has noted that the financial crisis of
2008 brought renewed interest in PPPs in both developed and developing countries.22
This is
because countries recognize the importance of investments, and lacking fiscal space and
public resources, look towards the private sector as a source of funding. According to the
World Bank, these are the main reasons why governments look favourable at PPPs:23
Improved operational efficiency through the introduction of technology;
Incentivizing the private sector to deliver projects on time and within budget;
Imposing budgetary certainty by setting present and the future costs of projects over
time;
Developing local private sector capabilities through technical training, sub-
contracting or joint ventures;
Supplementing limited public sector capacities to meet the growing demand for
development;
Extracting long term monetary value for the PPP in terms of its effectiveness and
project longevity.
19 Puenetes and Sabol, n.2. 20 McKinsey & Company, A risk management approach to a successful infrastructure project, McKinsey Working Papers on Risk, No. 52. 21 Puenetes and Sabol, n.2. 22 World Bank, PPP Overview, http://ppp.worldbank.org/public-private-partnership/overview/ppp-objectives (last retrieved on 5 February
2015). 23 Id.
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Despite the benefits that PPPs offer, it also introduces some risks to the projects. These
risks represent the challenges that most PPPs face, and overcoming them is highly beneficial
to both parties. The primary risks are listed below:24
Re-assessment of its valuation of PPPs from traditional procurement PPPs depending
on the level of depth of the PPPs;
Some projects may be easier to finance than others depending on various factors
including demand for the service;
Some private partners may be dissuaded by the capture of remittance in Saudi Riyal,
where as other PPP projects would see private sector receiving remittances in
international currency;
Despite private sector participation, the burden on delivery and quality of delivery
rests on the public sector;
Recognition that the long-term nature of the project, along with the financial
complexities, could result in difficulty to identify all contingencies during the project
development;
Lack of a clear legal and regulatory framework will keep many competitive private
sector players out of the market.
1.4. What are Reward and Risk Sharing?
The hallmark of successful PPPs is the clear description of risk and reward sharing
mechanisms that are contractually enforced for both public and private party.25
This, of
24 Id. 25 See Generally, KMPG, Financing Australian PPP Projects in the Global Financial Crisis, 2009,
https://www.kpmg.com/NZ/en/IssuesAndInsights/ArticlesPublications/SmarterProcurement/Documents/Financing-Australian-PPPs.pdf (last retrieved on 10 February 2016).
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course, depends on the nature of the project itself. An example of reward sharing would be to
permit the private sector to collect toll tax on a road construction PPP project.26
Risk sharing is a complicated creature. Generally tailored into the contractual
obligations of either or both parties, risk sharing differs from place to place and from project
to project.27
Identified below are some of the possible risks that could be faced when
embarking on a PPP project in the Kingdom:
1.4.1. Regulatory risk
Regulatory risks potentially represent one of the greatest obstacles in PPP projects. This is
because a change in domestic regulation which will directly affect the costs or the time for
completion could set back the project.28
Another major regulatory or legislative risk is
expropriation, and the manner of expropriation of the project.29
While it is highly unlikely for
illegal expropriation of a PPP project in the Kingdom, the earlier example of changes to the
domestic regulation is a very real possibility. A change in the investment policy, or a change
in criteria of investment screening, can negatively affect the project. To remedy such a
situation, a strong contractual obligation is required on the role of the public partner to either
assume such risks or to be more considerate on the deadline of the project.30
Notably, this
could also attract challenges under International Investor-State Arbitration proceedings.
26 Puenetes and Sabol, n.1. 27 Bryan Shapiro, Transferring Risks in Construction Contracts, Shapiro Hankinson & Knutson Publication, 2013,
http://www.shk.ca/wp/wp-content/uploads/2013/02/Transferring-Risks-in-Construction-Contracts-BSS.pdf (last retrieved on 10 February 2016). 28 Alan Straus, Managing Risks in PPP Projects through Legal Documentation, presentation at MENA – OECD Investment Programme and
Executive Privatization Commission of Jordan, 2007, http://www.oecd.org/mena/competitiveness//39303648.pdf (last retrieved on 10 February 2016). 29 Chris Bishop, Legal Issues – Transport PPPs, Allen & Overy, presentation at UNESCAP, 2015,
http://www.unescap.org/sites/default/files/3.2%20Typical%20Legal%20Issues%20in%20PPP%20projects.pdf (last retrieved on 11 February 2016). 30 See Generally, Organization for Economic Cooperation and Development, Fostering Investment in Infrastructure – Lessons learned from
OECD Investment Policy Review, January 2015, http://www.oecd.org/daf/inv/investment-policy/Fostering-Investment-in-Infrastructure.pdf (last retrieved on 12 February 2015).
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1.4.2. Planning and design risks
Generally, the private sector includes all the planning and design risks during the tendering
stage.31
These risks, however, may be expanded when calculating previously overlooked
factors. Construction risks, occupational and workforce risks, risks associated with operating
and maintaining the project, simple day-to-day mechanical problems and financial risks faced
by the private sector are all included within planning and design risk.32
1.4.3. Act of God
Another very specific kind of risk that has been accounted for in contract law is the “act of
god” or “force majeure”. 33
This kind of risk encompasses situations that could not have been
reasonable foreseen at the time of conclusion of contract. These can include everything from
terrorist attacks to unforeseen weather or geological events.34
1.5. Impact of PPPs on living standards
Water, healthcare, transport, energy and education are essential to the growth and, indeed,
survival of a nation. When planned and maintained well, these services play a vital role in
supporting a high standard of living and facilitating commerce and trade. The link between a
strong infrastructure to provide these services and national economic expansion is well
documented. However, governments function on tight budgets, especially in countries
experiencing population growth and urbanization. Governments of these countries may not be
equipped to make the necessary investments and, in turn, look to private partners to finance
and development. When coupled with the right set of policies and investment climate, these
31 Puenetes and Sabol, n.2. 32 Id. 33 See Generally, Allen & Overy, Termination and Force Majeure Provisions in PPP Contracts – Review of current European practice and guidance, Allen & Overy Publications, March 2012, http://www.allenovery.com/SiteCollectionDocuments/Termination_Report.pdf (last
retrieved on 13 February 2016). 34 See Generally, World Bank, Force Majeure Tool Kit, http://ppp.worldbank.org/public-private-partnership/ppp-overview/practical-tools/checklists-and-risk-matrices/force-majeure-checklist/sample-clauses (last retrieved on 12 February 2016).
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PPPs can also become a catalyst for economic growth. The process of PPPs impacting living
standards is best explained below:
Government looks to Private Sector to provide services with no debt on balance
sheets and reducing deficit. This keeps the economy
robust and benefits citizens.
Private sector provides services in a more efficient
manner.
Private sector find new markets to expand. This
investment promotes economic development in the country. Number of jobs also
increase.
Reduces risk of overstaffing, operation mismanagement and corruption. Inefficient
spending curbed, thus increasing government
budget.
Robustness of investment sources and a steady stream
of investments enable private sector to channel resources to consumers/citizens that are not otherwise served.
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2. LEGAL AND REGULATORY FRAMEWORK
Public sector entity should be prudent before considering PPPs. This is because work for the
public sector also increases substantially once a PPP arrangement is enforced. Therefore,
before pursuing a PPP approach, the public sector authority should consider whether the
private sector is equipped with necessary expertise to provide efficient and effective services
and its delivery.35
The public sector must also assess whether it has sufficient capacity and
skills to adopt the PPP approach.36
PPPs are not appropriate in all instances. However, public sector agencies interested in
using this tool need to implement a number of rules, tools, and institutions to ensure that the
process is carried out in a responsible manner.37
Some of the success factors for PPPs are
listed below:
2.1.Strong legal framework
It is well documented that markets grow on certainty. This is also true for PPP projects. A
strong legal framework is a necessary precondition for a successful PPP. After all, this will be
the private sectors safety net in case the PPP project has run aground because of political fiat
or other similar reasons.38
The requirement for a strong legal framework increase
exponentially when the private sector include foreign based firms, or domestically
35 Organization for Economic Cooperation and Development, Hand Out: From Lessons to Principles for the use of Public Private
Partnerships, 7 June, http://www.oecd.org/gov/budgeting/48144872.pdf (last visited on 12 February 2016). 36 Organization for Economic Cooperation and Development, Principles for the Public Governance of Public-Private Partnerships,
http://www.oecd.org/governance/50254119.pdf (last visited on 12 February 2016). 37 Puenetes and Sabol, n.2. 38 Id.
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incorporated firms with strong foreign shareholding. For these firms to be considered, it is a
prerequisite to have a functional and impartial legal framework.
A careful vetting of the laws is also required. This is because it is possible that existing
legal framework may undermine the PPP project implementation and functioning. For
instance – and without any prejudice - environmental review processes could delay PPP
projects.39
Therefore, complete legal due diligence is required before implementing a PPP
project.
2.2.Identification of project goals
Another reason for a successful PPP is clear identification of underlying policy goals – be it
social or economic. It is optimal to identify a project based on its economic rationale, taking
into consideration social equity, environment and other public sector goals. Further, it is
important to assess the goals since many of the failed PPP projects in the past have been
misguided in planning and incorrectly optimistic in projections.40
Also, most successful
projects demonstrate real value between the public and private sector partner.
2.3.Manageable flexibilities
Value creation through a PPP project is generally far greater than a public sector project. But
when entering into a PPP, the public sector will have to be flexible on various issues. Firstly,
as a caveat, it should be understood that PPPs are not the cheapest option in the short term,
but creates greater value for the public through other forms cost saving.41
Keeping this in
mind, it should be noted that occasionally, delivery of the service is delayed for a variety of
39 Id; See also, European Union, Investment protection does not give multinationals unlimited rights to challenge any legislation – Statement
by John Clancy, News Archives, 2013, http://trade.ec.europa.eu/doclib/press/index.cfm?id=1008 (last retrieved on 14 February 2016). 40 Id; See also, World Bank, Success and Failures of PPPs, 2008,
http://webcache.googleusercontent.com/search?q=cache:dn1JCFJLnQgJ:siteresources.worldbank.org/INTECAREGTOPTRANSPORT/Res
ources/Day1_Pres2_SuccessesandFailuresPPPprojects15JUN08.ppt+&cd=3&hl=en&ct=clnk&gl=ch (last retrieved on 14 February 2016). 41 Id.
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reasons. At such times, the public sector partner should exercise flexibility knowing that the
PPP project will reap gains in the long-term.
2.4.Understanding the private sector needs
It is important for the public sector entities to understand the interests that drive the private
sector. The private sector will give priority to projects demonstrating:42
Sufficient demand;
Revenue generating and development potential;
Strong viability of the project;
Strong political commitments
The private sector invests in a thorough analysis of the specific engineering questions and
concerns for a PPP pitch, besides the legal and regulatory framework.43
But the private sector
will be less likely to make their investment in the Kingdom for a few projects, and would
need a defined pipeline of projects for an upfront justification of costs.
2.5.Revenue stream
PPPs succeed or fail based on a number of factors, of which a long term revenue stream is
one. The details of the funding and financing tools for the PPP are determined well in
advance. Nonetheless, the public sector or local governments should have set in place a
successful payment mechanism well before the project hits the floor. Value capture could
help in such a situation. In Denver, Unite States, the Tax Increment Financing model is being
used in conjunction with the Eagle Commuter Rail PPP to back redevelopment along the new
transportation corridor, which will move more housing closer to public transportation,
potentially increase the local tax base, and reduce road congestion in the region.44
Exploring
42 See generally, Asian Development Bank, Public Private Partnership Handbook, Manila,
http://www.apec.org.au/docs/adb%20public%20private%20partnership%20handbook.pdf (last retrieved on 15 February 2016). 43 Puenetes and Sabol, n.2. 44 Id.
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and establishing revenue streams will ensure that a PPP has the fundamental financial
underpinnings that will position the project to succeed.45
2.6.Unclear contractual agreement
Another major obstacle in the successful PPP project is an unclear contractual obligation.
This could lead to confusion for both parties – leading to inevitable conflicts and delays in the
project. Therefore, it is best to have a clear agreement highlighting the requirements from
both parties.
45 World Bank, Public-Private Partnerships Basics and Principles of a PPP framework, May 2012,
http://www.ppiaf.org/sites/ppiaf.org/files/documents/Note-One-PPP-Basics-and-Principles-of-a-PPP-Framework.pdf (last retrieved on 15 February 2016).
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3. PPP IN MUNICIPALITY
Delegating municipality functions and the development of municipality utilities represent
significant investment opportunities for international private firms. The Kingdom of Saudi
Arabia is considering PPPs as a way of delivering these projects.46
Many countries are
adopting this approach, with Canada being a prime example, having introduced over 150
PPPs in municipality (as of November 2011).47
PPPs in municipality are a win-win situation
for both the private and the public sector given that a PPP can effectively handle municipal
projects and infrastructure while improving governance and increasing innovation.
3.1. Diverging kinds of PPPs in Municipality
PPPs in municipalities are like snowflakes – no two projects are alike.48
They depend on the
differing needs of different municipality functions. For instance, maintenance of a zoo or a
public park, or the maintenance of road traffic, or the maintenance of garbage collection and
recycling are all municipality functions. Each kind of PPP project in municipality will require
its own due diligence process.
3.2. Some of the main issues dealing with PPPs in Municipality
Risk Sharing: One of the main advantages of PPPs is risk sharing between both
parties to the PPP. Generally, the private firms risk is limited to its investment in the
consortium whereas the public sector has the broader risk burden of making sure that
the service generated through the PPP project is equitably distributed to citizens of its
municipality/region.
46 PPP Canada, A Guide for Municipalities, November 2011, http://www.p3canada.ca/~/media/english/resources-
library/files/p3%20guide%20for%20municipalities.pdf (last retrieved on 14 February 2016), 47 Id. 48 Black and Veatch, Municipalities Have a Multitude of Options in a Public-Private Partnership,
http://bv.com/Home/news/solutions/water/municipalities-have-a-multitude-of-options-in-a-public-private-partnership (last retrieved on 14 February 2016),
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Contractual Obligation: The importance of a solid contract for PPP in Municipality
cannot be overstated. In fact, this will make onerous on both parties certain
obligations that the parties decided during the negotiation of the contract. There are a
plethora of examples regarding the invocation of legal disputes because of violation of
contractual obligations. One example is from Canada where, in 2006, the newly
elected city council decided to rework its light rail project. The private partner,
Siemens demanded a breach in contract that it had estimated at 175 million Canadian
Dollars.49
While these contractual disputes often de-rail the PPP project, they still
provide the opportunity of a fair and just hearing if the other party in the PPP project
has violated some contractual terms.
Flexibility: One of the greatest arguments in favour of PPPs in Municipalities are the
flexibility options. This largely depends on the relationship between the two parties.
However, it must be noted that even if the public and private entity maintain good
relations with flexibility provided by either party on the contractual obligations due to
reasons the other party find genuine, often a private contractor still has greater interest
in firmly walking along the conditions that are contractual.
3.3. Discussions at the JEF
At the Jeddah Economic Forum, participants will discuss the various issues and potential
opportunities related to PPPs in Municipality. In particular, they will be discussing the
following:
Development, ownership and operational aspects of PPPs in Environmental and
Recreational services
49 Pierre Hamel, Public Private Partnership and Municipaliy, INRS Urbanization, Culture et Societe,
https://www.fcm.ca/Documents/reports/Public_Private_Partnerships_P3s_and_Municipalities_Beyond_Principles_a_Brief_Overview_of_Practices_EN.pdf (last retrieved on 15 February 2016).
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Benefits and challenges of introduction of PPPs in Environmental and Recreational
services
Examining potential PPP models for Environmental and Recreational services
Merging aspirations of the public and private sector to mitigate legal challenges
Importance of clear contractual terms in promoting PPPs for Environmental and
Recreational Services.
Potential avenues for expansion of private sector in delegating municipal functions
Effects of PPPs on local governance
Harnessing consumer oriented service quality and management expertise through PPP
Considerations of potential financial constraints to fund for partnership with the
private player
Importance of risk identification, assessment and controlling for both public and
private entities
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4. PPP IN SPORTS
The Kingdom of Saudi Arabia has the potential to become a world-class sports hub that could
host global sporting events such as the FIFA Football World Cup and the Olympics. Many
countries with similar ambitions are looking to PPPs to deliver these events. Singapore has
recently embarked on a visionary project to create one of the largest sporting infrastructural
projects in the world by way of a 25 year long PPP between Sport Singapore and SportsHub
Pvt. Ltd.50
The Kingdom of Saudi Arabia also espouses similar ambitions and this represents a
great opportunity for the private sector. Besides having solid infrastructure, sports – as
various studies have indicated – are beneficial activities for the public. Increased sporting
activity has resulted in better academic performance and a significant reduction in crime.
4.1. Discussions at the Jeddah Economic Forum
At the Jeddah Economic Forum, panelists and participants will be discussing different aspects
of PPPs in Sports. These discussions include, but are not limited to:
What are the relevant opportunities to maximize profits in privatization of the sports
sector?
What are the risks to be identified?
How can they be assessed and controlled for both public and private entities?
How to ensure that PPPs in sports are delivered in alignment with the societal and
economic objectives of the Kingdom?
50 SportsHub, About Us, http://www.sportshub.com.sg/aboutus/Pages/sports-hub-project.aspx (last retrieved on 14 February 2016),
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5. PPP IN AIRPORTS
Airports link regional, national and international markets. This makes investment in existing
or new airport infrastructure essential to economic development.51
The World Bank reports
that:
“[t]raditionally, airports were owned, managed and operated by governments but there
has been a worldwide trend towards private sector involvement with varying degrees of
private ownership and responsibilities, including the use of public-private partnership
(PPP) models.”
The Kingdom of Saudi Arabia provides a good opportunity for the private sector
directly involve itself in airport PPPs. Annually, millions of religious pilgrims visit
Makkah and Madinah every year. These passengers receive the world class services
provided at the Hajj Terminal at Jeddah’s King Abdulaziz International Airport as a
result of concessions awarded by the General Authority of Civil Aviation (GACA). For
this, a consortium led by Saudi Binladin Group in association with Aeroports de Paros
Management won the 20 year BOT concession.52
TIBAH, a consortium of firms from
Turkey and Saudi Arabia won a 25 year concession to develop and operate an entire
airport in Medina.53
Many opportunities present themselves for the possibility of PPP in
airports in the Kingdom. Notably, many countries are now considering PPP for
airports.54
51 World Bank, Transportation in Airport PPP, http://ppp.worldbank.org/public-private-partnership/sector/transportation/airports (last
retrieved on 14 February 2016), 52 World Bank, Hajj Airport Terminal, http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2015/06/04/090224b082ef8249/1_0/Rendered/PDF/Saudi0Arabia00Hajj
0Airport0Terminal.pdf (last retrieved on 14 February 2016), 53 World Bank, Medinah Airport, http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2015/06/08/090224b082f05926/1_0/Rendered/PDF/Saudi0Arabia0000
Medinah0Airport.pdf (last retrieved on 14 February 2016), 54 India has redeveloped many existing airports in important economic cities such as Mumbai, New Delhi (both brownfield investments) and Hyderabad (greenfield investment).
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5.1. Legal Framework
A successful PPP in airport would require a strong legal framework. The World Bank
has developed a questionnaire that acts as checklist for the important legal questions
that could potentially arise before and during the implementation of the PPP project.
Some of these questions are:
Is the concession a Contract or a Lease?
What is the governing law?
What is the dispute resolution mechanism – is the court system appropriate or is
there a requirement for alternative forms of dispute resolution?
Are there any provisions to waive sovereign immunity of GACA, if applicable?
What is the functional scope and terms of concessions?
Some other pressing concerns that will need to addressed are the architectural
specifications of the airport – and the possible addition of a third party architectural
firm that will also be involved in the project.55
Further, an assessment has to be made
whether PPP structures will also extent to air traffic control, baggage handling, on-
board catering and fuel supply.56
Security is another major concern that both public and
private entities in the PPP need to discuss. Will the government of Saudi Arabia
provide security for the airport, or will that be sub-contracted from a private security
organization? It is best practice to discuss all pertinent and ancillary issues with the
conclusions of the discussion specifically mentioned contractually before entering into
PPPs.
55 World Bank Airport PPP Report, n. 95. 56 Id.
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5.2. Possible procurement and concessionaire related issues
Procurement: A pressing concern that often appears in a PPP related to airports
is the procurement regime. For instance, are their competing municipal, state or
federal procurement regimes? Would such a procurement regime constrain the
re-financing of the project? It is possible that a conflict of interest could arise
given that the State would be party to several PPPs in airports, which could
result delays in the bidding process. These are some of the issues that need to be
discussed by the public and private entity before entering into a PPP. Notably,
the Kingdom of Saudi Arabia has a strong track record of PPPs in airports, as a
result of which it is highly unlikely for such concerns to unfold.
Concessionaire obligations: Another issue that should be discussed in clear
terms is the concessionaire obligations. Identification of the type of PPP, the
kind of investment – greenfield or brownfield, the operating standards and the
revenue sharing mechanism will give confidence to both parties to the PPP.
5.3. Discussions at JEF
PPP in airports bring with it some complex legal, regulatory and operational questions. Given
the importance of an airport to national security, these issues are compounded even further.
The Jeddah Economic Forum will be discussion some of these issues, which include, but are
not limited to:
How can national interests and private interests be reconciled for effective PPPs in
Airports?
What are the most salient PPP opportunities for the GACA?
What are the relevant global best practices of PPPs in airline services and airports?
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6. PPP IN AIRPORTS
Majority of global trade is carried out at sea. Therefore, developing strong and well-
functioning maritime transport infrastructure is a key element of economic growth for many
developing and emerging countries.57
One opportunity that presents itself is the option of
PPPs. PPPs are often used to increase efficiency in managing port operations, which was
traditionally an exclusively government function.58
Presently, different port management
structures are used worldwide, with the most often used model being the delegation of
management responsibilities to the private sector, while the title in the land and assets
remains with the government.59
The Kingdom provides for lucrative opportunities for PPP in ports. In 1997, the Port
Authority of Saudi Arabia started passing the responsibilities of port management, operations
and maintenance to the private sector.60
This was done with the view to remain competitive in
the regional context. Possessing the most diversified economy in the Middle East, and a
strategic geographical location at the centre of shipping routes between East and West,61
private firms can stand to benefit from PPPs in ports. These opportunities have magnified
with the Kingdom demonstrating its intent further expand port systems in the country.
6.1. Different PPP models in Ports
Historically, ports been financed by public funds and municipal bonds. This is also true for
Kingdom of Saudi Arabia. However, with the increasing movement to austerity oriented
governmental spending in the aftermath of the 2008 financial crisis, public financing of
57 World Bank, PPP in Transportation Sector, http://ppp.worldbank.org/public-private-partnership/sector/transportation/ports (last retrieved
on 14 February 2016), 58 Id. 59 World Bank, PPP Tool Kit, http://www.ppiaf.org/sites/ppiaf.org/files/documents/toolkits/Portoolkit/Toolkit/module5/part_a.html (last
retrieved on 14 February 2016), 60 Saudi Arabia Port Authority, About Us, http://www.ports.gov.sa/English/Aboutus/Pages/Introduction.aspx (last retrieved on 14 February
2016), 61Arabian Business, Saudi's top shipping ports, 3 November 2010, http://www.arabianbusiness.com/saudi-s-top-shipping-ports--362304.html#.VsDOUfLhDWI (last retrieved on 14 February 2016),
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capital expenditure has become more limited and the focus shifts to the private sector.62
This
change bring with it views of the private sector which are primarily interested in partnering
on revenue generating port facilities. As a consequence, different models have been
introduced for PPPs in ports, depending on various economic factors. For instance, granting
private operators concessions to build and operate containers and bulk terminals are very
common in the United States.63
Presently, three major types of PPP models exist in port business units:
Management PPP Model: In this model, the private operator manages publicly
owned assets and makes additional investments in them in exchange for being given
the right to use them for a specified time period. Here, the ownership of public assets
is with the public entity, whereas the privately funded mobile assets (eg. Machinery)
remain with the private firm. This type of model is associated with port privatization
programmes that took place in Europe, Africa and South Asia in 1980’s.64
Build-Own-Transfer: In this model, the private investor buys the right to build new
port assets and have exclusive use of them for a fixed period of time. After such time,
which is generally defined in the contract, it is transferred back to the public sector.
One of the primary benefits of Build – Own – Transfer (BOT) is that ports – State-
Owned or private – can compete under conditions established by governments. This
type of PPP model is often used in North West Europe which has a long-established
landlord port tradition.65
62 Availability Payment PPP for Port Projects, Mayer Brown – HSH Nordbank – Rebel Group Joint Report, 2011,
https://www.mayerbrown.com/files/Publication/f83f06cf-20b5-4152-974b-3d561728c0b9/Presentation/PublicationAttachment/735ab7d8-
3c8f-4b0f-92e4-d298819cf896/11266.pdf (last retrieved on 14 February 2016), 63 Id. 64 Sheila Farell, Observation in PPP models in Port sector, 2010. 65 World Bank, Module 3: Alternative Port Management Structures and Ownership Modules, http://siteresources.worldbank.org/INTPRAL/Resources/338897-1117197012403/mod3.pdf (last retrieved on 11 February 2016).
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Public-Private Joint Venture Models: Used often in China and Indonesia, the public
sector has a controlling stake in a Special Project Vehicle which holds management or
development right contracts for new port facilities.
6.2. Identification of important points66
Performance requirement: With greater global discussion on environment related
issues, it is noted that environment targets linked to green-house gas emissions are
often included in PPP contracts.
Labour: Port PPPs has the potential to generate many jobs. However, given the
nature of the business, which is directly affected by various national and international
extraneous factors, could lead to labour related issues. Labour transfer agreements are,
thus, a very important part of present investment models where private sectors take
over the workforce from public sector predecessors.
Tariffs: It is important for both parties to identify which party will set tariffs. If the
tariffs are regulated, then is it through a formula within the PPP agreement or by the
port authority. Regulated tariffs generally take place where geography and traffic
volumes create natural monopolies.
Concession fees: Both parties must also discuss the form of concession fees. For
example, parties must identify if the concession fees in the form of a lump sum
payments, annual rents, royalties or revenues. Generally, the size of the concession
fees will probably be the most important criterion for selecting private sector partners
given the limited scope for innovation. Therefore, it is important to clearly distinguish
the different forms of concession agreements between the public and private entity.
66 Points are a culmination of thoughts derived from World Bank, Module 3: Alternative Port Management Structures and Ownership Modules, http://siteresources.worldbank.org/INTPRAL/Resources/338897-1117197012403/mod3.pdf (last retrieved on 11 February 2016
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6.3. Discussions at JEF
PPP in ports bring with it some complex legal, regulatory and operational questions. Given
the importance of an airport to national security, these issues are compounded even further.
The Jeddah Economic Forum will be discussion some of these issues, which include, but are
not limited to:
Role of PPP in delivery of transportation services
Assessing demands and risks in introducing PPP model in transportation sectors with
less financial viability
Addressing barriers to PPP by strengthening the legal and financial legal systems
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7. PPP READINESS
PPPs combine the technical knowhow and financial reserves of both the public and private
sectors through sharing of risks and responsibilities.67
This enables governments to benefit
from the expertise of the private sector, and allows them to focus instead on policy, planning
and regulation by delegating day-to-day operations.68
In order to achieve a successful PPP, a careful analysis of the long-term development
objectives and risk allocation is essential.69
The legal and institutional framework in the
country also needs to support this new model of service delivery and provide effective
governance and monitoring mechanisms for PPPs.70
A well-drafted PPP agreement for the
project should clearly allocate risks and responsibilities.71
One of the essential requirements for fostering and developing PPP projects in a
country is to have a robust legal and regulatory framework.72
The inherent nature and varied
characteristics of PPPs make it challenging to implement a coherent and uniform PPP
regulatory policy within a country. The needs of a particular sector are distinct from another.
A PPP regime in transport will be markedly different from that in power generation.
However, it is necessary to address the major underlying issues in order to formulate an
effective regulatory framework. In absence of a comprehensive framework, investors and
private parties may be averse to investing in PPPs as can be seen in the case of India. A
World Bank report of 2011 rated India as the largest market for PPPs. However, there have
67 Edward Farquharson et. al. , How to engage with the private sector in public private partnerships in Emerging Markets, World Bank
Publications, 2011, https://www.ppiaf.org/sites/ppiaf.org/files/publication/How-to-engage-with-private-sector-Clemencia-Farquharso-
Yecome-Encinas.pdf (last retrieved on 12 February 2016). 68 Puenetes and Sabol, n.2. 69 PPP Experts, What are PPPs, http://www.pppexperts.com/what-are-ppps/ (last retrieved on 12 February 2016). 70 World Bank, About Public-Private Partnerships, December 2015, http://ppp.worldbank.org/public-private-partnership/overview (last retrieved on 11 February 2016). 71 Id. 72 G-20 Working Group, Principles of PPP Effectiveness in Developing Countries, 2011, http://www.g20dwg.org/documents/pdf/view/15/ (last retrieved on 10 February 2016).
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been only 43 projects proposed, most of which have not been not been implemented because
of procedural and other delays.
Although it is impossible to identify and list all parameters which have to be considered prior
to formulating a legislative and regulatory policy, there are some considerations which have
to be accounted for. They are, as follows:
PPP Specific Legislation: It is imperative to draft a consolidated Act which deals
with all aspects of PPPs, both procedural and substantive. Most developing countries
tend to rely on the existing set of laws to address the challenges for implementation of
PPPs. A consolidated PPP Act will simplify and streamline the process for potential
investors and private parties. Dubai, Kuwait and Bahrain have recently implemented
PPP laws.73
Uniformity: PPPs are generally entrusted with different ministries. It is necessary to
draft a uniform policy for regulating PPPs across all sectors.
Streamlining Processes: There are numerous procedural hurdles for implementing
PPP projects. It is advised that a single mechanism is devised to cut through these
hurdles for effective and efficient implementation.
Dispute Resolution: The various facets of a PPP may give rise to a plethora of
disputes such as labour disputes, environmental challenges, opaque and unfair bidding
of tenders, arbitrary action of governments, financial irregularities by institutions.
Therefore, a dedicated mechanism to handle disputes arising out of PPPs specifically
needs to be devised or the existing dispute resolution framework needs to be adapted
to address such disputes.
73 DLA Piper, Dubai's new PPP law, 6 October 2015, https://www.dlapiper.com/en/bahrain/insights/publications/2015/10/dubais-new-ppp-law/ (last retrieved on 3 February 2016).
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Standard Documentation: A standard form agreement which can be tailored to suit
the specific needs of a particular PPP needs to be drafted.
Concessional Framework: A major incentive for private players to enter into PPPs is
concessions afforded by the government. These concessions may be subject to the
arbitrariness of the government. A regulatory framework needs to establish a uniform
policy for such concessions.
Revenue Sourcing: Revenue generation is arguably the biggest incentive for private
entities to undertake public projects. Generally, the revenue sourcing depends on a
case to case basis largely based on the negotiations between the parties involved. A
uniform method needs to be formulated for revenue generation, sourcing and sharing
Guarantees against Uncertainties: Public Sector is inherently controlled by
uncertainties, namely political and legal. A change in government or amendments in
existing laws can drastically change the way Public Sector functions. PPPs, especially
in infrastructure are long term projects which may range across decades. Private
parties need to be insured against legal and political contingencies.
Transparency and Accountability: Most PPPs are awarded on the basis of closed
biding through tenders. However, bureaucratic corruption is prevalent in developing
countries. PPPs are distinct from privatization and private contracts. It is imperative
that a government makes the bidding process and implementation transparent so as
prevent long drawn legal battles which cause a considerable drain on resources and
also hamper projects.
When designing the Regulatory Framework, the potential costs of monitoring activities
and data collection to all parties involved should not be forgotten.74
Where there are a number
of regulatory bodies responsible for regulating the sector, care should be taken to try and
74 World Bank, Regulation of Sectors and Regulatory Issues and PPPs, 12 June 2015, http://ppp.worldbank.org/public-private-partnership/legislation-regulation/regulatory (last retrieved on 15 February 2016).
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reduce duplication of information to be collected, audits required, etc.75
While it may be
economically viable in the UK market to have separate audited accounts drawn up for
company registration and for regulatory purposes, this may not be sensible in a developing
economy.76
75 Id. 76 Id.
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8. PPP IN EDUCATION
PPPs can create competition in the education market. The private sector can compete for
students with the public sector. In turn, the public sector has an incentive to react to this
competition by increasing the quality of the education that it provides77
Usually PPP contracts can achieve an increased level of risk-sharing between the
private sector and government. This risk sharing is likely to increase efficiency in the
delivery of services and, consequently, to induce the channelling of additional resources to
the provision for education78
. Furthermore, PPP allows government education authorities to
focus on core functions such as policy and planning, curriculum development and quality
assurance79
. It also helps in increasing the level of financial resources which may result in
sharpening competitive pressures in the education sector, resultantly generating efficiency
gains and spurring greater innovation in education delivery80
.
Other benefits of PPP model in education sectors involves- enabling participation
among all stakeholders in decision-making and responsibility for results is crucial for the
success of any innovation or reform; where governments are weak and personnel change,
PPPs provide continuity and stability in a project81
. It enables innovation as the business
sector can play a critical role in the production of new teaching materials as well as the
introduction of new communication technologies, in particular the development of
technologies for education in resource-poor environments.
77 World Bank, Role and Impact of Public-Private Partnerships in Education, 2009,
http://www.ungei.org/resources/files/Role_Impact_PPP_Education.pdf (last retrieved on 5 February 2016). 78 Id. 79 Michael Latham, Public-Private Partnership in Education, International Finance Corporation – CfBT Joint Study, March 2009,
https://www.epnuffic.nl/en/publications/find-a-publication/public-private-partnerships-in-education.pdf (last retrieved on 5 February 2016). 80 Id. 81 Id.
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8.1. Potential Challenges
Firstly, PPPs may lead to the privatization of education and thus will reduce the
government’s control over a public service82
. Secondly, increasing the educational choices
available to students and their families may increase socioeconomic segregation if better
prepared students end up self-selecting into high-quality schools, thus further improving their
outcomes83
. Third, there is a possibility that PPPs may lead to poorer students being left
behind in the deteriorating public schools that lose the support of more educated parents.
Fourth, the corporate or private firms are involved in PPP, whose ulterior motives often
conflict with educational goals in setting up schools and usually for whom there is no
difference between education and, any other business, as long as it ensures attractive profits84
.
Finally, private firms are likely to be less concerned with the hard to reach beneficiaries85
.
These are some of the contours that discussions at the Jeddah Economic Forum will
identify and further discuss. In specific, the discussion will deal with, but is not limited to, the
following topics:
Benefits and challenges of complete outsourcing of educational services to private
sector
Modalities and policy implications for transition to privatization in education – Do's
and Do not's
Case study of the Universal Voucher System from Chile
Balance between profit motivations of private sector and social agendas of the
government
82 World Bank Report (2009), n. 76. 83 Id. 84 The Hindu, Public Private Partnerships in Education, 24 May 2010, http://www.thehindu.com/opinion/lead/publicprivate-partnership-in-
education/article437492.ece (last accessed on 4 February 2016). 85 Michael Latham (2009), n.78.
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9. PPPS IN HEALTHCARE
PPPs in the healthcare sector are an important tool for improving the levels and quality of
healthcare to the citizens of the Kingdom. PPPs in the healthcare sector is seen as a national
asset with health promotion as goal of all health providers, private or public. Further, PPPs
will be very effective in regions where the public sector is generally seen to be less effective -
such as remote and backward areas - reaching out to poor clients.86
PPP in healthcare sector is particularly important because it helps in improving the
quality, accessibility, availability, acceptability and efficiency of the health services in a
region. Second, it facilitates the exchange of skills and expertise between the public and
private sector. Third, it mobilizes additional resources and improves efficiency in allocation
of resources87
. Fourth, the range of services can be widened to include a greater number of
service providers88
. Fifth, it promotes innovation in service delivery.89
9.1. PPP Benefits
PPP in health sector is cost effective.
High productivity- It’s possible by linking payment to performance
Accelerated delivery- since the contracts usually have incentive and penalty clauses
Enhanced social service
9.2. Challenges related to PPP
Equity: Equity is the primary challenge for most private-public partnerships related
to the health sector. This is because the aim of the private sector is profit
86 Sumit Barua, , Public Private Partnerships in Health Sector: Uttrakhand, Asian Development Bank – Government of India Joint Study, http://cell.upppc.org/index.php?option=com_docman&task=doc_download&gid=107&Itemid=6 (last visited on 5 February 2016). 87 Devadasan, N., Bart Criel, Wim Van Damme, S. Manoharan, P. Sankara Sarma and Patrick Vander Stuyft. Community Health Insurance
in Gudalur, India, Increases Access to Hospital Care, Health Policy and Planning 25 (2): 145-54, 2010. 88 Indian Institute of Public Health, A Rapid Evaluation of the Rajiv Aarogyasri Community Health Insurance Scheme–Andhra Pradesh–
Hyderabad, 2009, IIPH, Hyderabad. 89 Confederation of Indian Industry, White Paper on PPP in Healthcare, http://www.cii.in/webcms/Upload/Whitepaper%20on%20Partnership%20in%20Healthcare1.pdf (last visited on 6 February 2016).
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maximization whereas the public sector wants good healthcare facilities in all parts of
the Kingdom. A PPP based in urban regions of the Kingdom will be successful.
However, the same is perhaps not true for the rural regions and a solution for this is
needed.
Cost: Strategic planning is required in advance between the public and private sector
regarding the cost of implementation of the project. Indeed, efficiency improvements
will take place, but both partners – particularly the public sector will have to be
careful about the costs of medical treatments and medical technologies.90
Universal Access: To ensure that all public patients, particularly the poor and
uninsured, have access to adequate hospital care, most contracts for private
management of public hospitals require the provider to continue service to all public
patients91
.
Others
o Conflicts of interest over the role of industry partners;
o Donations in kind, such as drug donations, which often require relatively high
national inputs, including costs associated with guaranteeing distribution
networks, storing drugs at ports and airports, and training health workers;
o The exclusion of poor countries with large populations, unpopular governments or
poor infrastructure from public-private partnership programmes;
o The circumvention of mechanisms designed to ensure that developing countries
have a say in the policies that will affect their populations.92
90 Marc Mitchell, An Overview of Public-Private Partnerships in Health, https://www.hsph.harvard.edu/ihsg/publications/pdf/PPP-final-
MDM.pdf (last visited on 7 February 2016). 91 World Bank, Public Policy for the Private Sector, January 2002, Note Number 241, http://siteresources.worldbank.org/EXTFINANCIALSECTOR/Resources/282884-1303327122200/241Taylo-010802.pdf (last retrieved on 7
February 2016). 92 World Health Organization, Public Private Partnerships for Health, http://www.who.int/trade/glossary/story077/en/ (last retrieved on 5 February 2016).
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9.3. Discussions at JEF
The Kingdom offers great potential for investment in PPPs in Healthcare sector. They are
also a powerful policy tool for improving the viability of public hospitals and the quality of
their services. Some of the discussion that will take place at the Jeddah Economic Forum
include, but are not limited to:
Understanding the challenges and proposing solutions for healthcare PPPs
Assessment and identification of opportunities in Saudi Arabia
Risk mitigation strategies to encourage investors to fund projects in underserved areas
Determining performance standards to establish and monitor clinical quality,
effectiveness and efficiency
Overcoming challenges relating to access, reach and equity
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10. FINANCING PPP
Financing is one of the key motivations for governments to consider PPPs. It also represents a
major challenge since financing projects follow market trends and volatility. The World Bank
categorizes funding into three main verticals:93
Government funding: In this case, the government will fund majority of the capital
as investment for the project while looking at the private sector for bringing expertise
and efficiency. This is often referred to as Design-Build-Operate projects.
Corporate Finance: In this case, the private entity will also fund some of the capital
investments for the project. This is generally the case when the “value of the project is
not significant enough to warrant a project financing mechanism.”94
Project Finance: This is the most common, and often, the most efficient form of
financing. It generally takes form of a limited recourse lending to a specially created
project vehicle which has the right to carry out the construction and operation of the
project.
Some of the sources for potential financing could be:
Islamic Financing
Debt Contribution
Bank Guarantees/Letter of Credit/Performance Guarantees
Capital Market Financing
Intercreditor agreement
93 World Bank, Financing PPPs, http://ppp.worldbank.org/public-private-partnership/financing/mechanisms (last retrieved on 2 March
2016). 94 World Bank, Main Financing Mechnisms for Infrastructure Projects, http://ppp.worldbank.org/public-private-partnership/financing/mechanisms (last visited on 29 February 2014).
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11. PPPS IN HOUSING
Affordable housing in cities is a challenge everywhere in the world, and the Kingdom of
Saudi Arabia is no different. Housing encapsulates two powerful trends that are reshaping
trends in the Kingdom: economic competitiveness and social justice for all citizens.95
Affordable housing, in particular, plays an important role in urban efficiency and social
equity.96
It is well documented that poor urban infrastructure, in particular, housing, has a
direct correlation to rising crime levels and social unrest. Further, traditional housing is often
associated with over-emission of greenhouse gas. PPPs have the potential to solve this
problem, given the economic stagnation in the Kingdom owing to declining global oil prices.
11.1. Market Potential
Saudi Arabia is expected to see the greatest city growth in MENA with its five largest cities
expected to house additional 4.5 million people between 2010 and 2020. Therefore, the need
for low-cost, long term, sustainable and environmentally friendly housing is pressing.97
Encouragingly, PPPs in the MENA region have forayed into the housing sector. An example
is the Bahrain Affordable Housing PPP which seeks to construct 3110 social housing units
and 1000 affordable homes for low-income citizens.98
11.2. Requirements for PPP in Housing
Regulatory Policy: The government of Saudi Arabia must come out with a clear
policy on PPPs in housing with a view to make the housing affordable.
Financing: Financing represents another challenge for the government. With the
introduction of private financing through the PPP structure, this burden will
95 Ernst & Young, Housing the Growing Population, Jeddah Economic Forum 2013 Report,
http://www.ey.com/Publication/vwLUAssets/EY_-_Housing_the_growing_population/$FILE/EY-Housing-the-growing-population.pdf (last retrieved on 14 February 2016), 96 Id. 97Gulf Online, Private sector eyes low cost niche, March 2012, https://thegulfonline.com/Articles.aspx?ArtID=4342 (last retrieved on 14 February 2016), 98 James Morgan, Construction Weekly Online, Is PPP the key to affordable housing in the Gulf?, 7 November 2015,
http://www.constructionweekonline.com/article-36197-is-ppp-the-key-to-affordable-housing-in-the-gulf / (last retrieved on 14 February 2016),
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substantially reduce. However, the public entity will have to ensure that the planning
of the project is sustainable so as to bring monetary profits to the private sector.
On the other hand, the government will also have to reassess its policy of providing
credits and loans to persons from economically weaker segments of society.
Unlocking Land Supply: Equally important is the unlocking of land supply, given
that land is the biggest source of expenditure in real estate. Making available existing
land in strategic locations for development of affordable housing, and helping
increase the facilitation of development of the surrounding land in a sustainable and
environmentally friendly manner will thoroughly boost the participation of the private
sector in housing PPP projects.99
11.3. Different phases of Housing PPP projects
The implementation of PPP projects for housing is divided into several phases. The first
phase involves identification of the appropriate form on PPP structure for the project. Once
that is discussed and finalized, the procurement and tendering phase begins. The
fundamentals of this phase remain the same as all other tendering phases – emphasis on
impartiality and transparency. After this, the project is build and maintained. This simplistic
synopsis of PPPs in Housing, in practice, requires detailed economic, legal and social
analysis.
11.4. Some of the discussions at the JEF
The potential for growth of the private sector in the housing sector is substantial. The
potential to achieve various social goals of the public sector is also substantial. The match is
perfect, and the Jeddah Economic Forum will facilitate further discuss some of this topic. In
particular, the participants will discuss the following topics:
99 Indian Express, PPP Push for Urban Affordable Housing, http://indianexpress.com/article/business/business-others/a-ppp-push-for-urban-affordable-housing/ (last retrieved on 14 February 2016),
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What is the role of government in defining social and economic objective of the PPP
project?
What forms of PPPs are best suited to real estate in the KSA context?
How to ensure transparency in the bidding models and project selection guidelines for
real estate PPP? (Global best practices)
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12. PPP IN INFRASTRUCTURE
Infrastructure is an integral part of development of an economy and provides basic services
that people need in their everyday life and the contribution of infrastructure to economic
growth and development is well recognised both in academic and policy debates.100
Lakshmanan notes that:101
"A developed infrastructure provides key economic services efficiently, improves the
competitiveness, extends vital support to productive sectors, generates high productivity and
supports strong economic growth. Infrastructure covering transportation, power and
telecommunication through its forward and backward linkages facilitates growth; social
infrastructure including water supply, sanitation, sewage disposal, education and health, which are
in the nature of primary services, has a direct impact on the quality of life."
Traditionally, developing the infrastructure of a country was carried out by its
government. However, governments in most developing countries face the challenge to meet
the growing demand for new and better infrastructure services.102
As available funding from
the traditional sources and capacity in the public sector to implement many projects at one
time remain limited, governments have found that partnership with the private sector is an
attractive alternative to increase and improve the supply of infrastructure services.103
12.1. Advantages of PPP
Generally, the advantages of PPP are considered as follows: 104
100 L. Lakshmanan, Public-Private Partnership in Indian Infrastructure Development: Issues and Options, Reserve Bank of India Occasional
Working Paper, Vol. 29 N0.1, 2008, https://rbidocs.rbi.org.in/rdocs/Content/PDFs/ppp1.pdf (last retrieved on 4 February 2'016). 101 Id. 102 UNESCAP, Guidebook on Public-Private Partnerships in Infrastructure, 2011, Bangkok,
http://www.unescap.org/sites/default/files/ppp_guidebook.pdf (last retrieved on 11 February 2016). 103 Id; See also, United Kingdom, Department of Treasury, 2010 to 2015 government policy: Economic Growth in Developing Countries, 8 May 2015, https://www.gov.uk/government/publications/2010-to-2015-government-policy-economic-growth-in-developing-
countries/2010-to-2015-government-policy-economic-growth-in-developing-countries (last retrieved on 4 February 2016). 104 PPP Broad Band, 'What are the advantages in PPPs in General', http://www.ppp4broadband.eu/what-are-advantages-of-ppp-in-general.html, (last retrieved on7 February 2016).
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to remove the responsibility of funding the investment from the government’s balance
sheet;
to introduce competition;
to adopt managerial practices and experience of the private sector;
to provide better technology and scientific knowledge;
to restructure public sector service by embracing private sector capital and practices;
and to achieve greater efficiency than traditional methods of providing public
services.
Efficiency gain is the main source of sustainable public savings and, therefore the main
objective of and justification for PPP105
. In the UK, the Treasury estimates that the use of
PPPs has produced average savings of 17% to 25% over all sectors during the past 10
years.106
Most governments are drawing their decisions for PPP based on greater efficiency the
private promoter delivers in comparison to the traditional public procurement.107
Major
drivers for efficiency gains are transfer of risk to the private sector, long-term nature of
contracts, incentive structures and payment upon performance, output-oriented service
specification, competition between bidders, incorporate feedback and negotiation in the
procurement process, innovation and management skills by the private sector, and
administrative cost reduction.
For example, in Germany, the basis for the decision whether to adopt a PPP approach
or to procure the project conventionally through government resources lies in the evaluation
105 European Commission, Guidelines For Successful Public - Private Partnerships, March 2013, p. 19,
http://ec.europa.eu/regional_policy/sources/docgener/guides/ppp_en.pdf (last retrieved on 6 February 2016). 106 Graham M. Winch, Masamitsu Onishi, Sandra Schmidt, TAKING STOCK OF PPP AND PFI AROUND THE WORLD, Certified Accountants Educational Trust (London), 2012, pg. 42, http://www.accaglobal.com/content/dam/acca/global/PDF-technical/public-sector/rr-126-001.pdf
(last retrieved on 7 February 2016). 107 Michael B. Gerrard , Public-Private Partnerships, Finance and Development, IMF, Vol. 38, No.3, September 2001, Washington, http://www.imf.org/external/pubs/ft/fandd/2001/09/gerrard.htm (last retrieved on 6 February 2016).
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of the Public Sector Comparator (PSC)108
. Each PPP project is, before being tendered,
compared to traditional public sector procurement by a so called “value for money test” (or
efficiency comparison test), which comprises quantitatively a comparison of the net present
value of all cost occurred during the intended contract period, i.e. for design, construction,
finance, maintenance, operation etc. for the traditional (PSC) and the PPP option.109
12.2. Challenges to PPPs
The following are the main challenges of PPPs:
Long- Term Commitment (mainly political and economic);
Requirement for PPP Policy Framework and associated reforms;
Higher transaction cost for smaller projects;
Dominance of foreign players in PPP market;
Increase in construction costs due to limited domestic market capacity;
Introduction of user charges;
Private profit at the public’s expense;
Accountability;
Problem with financier led PPP;
Frequency of contract negotiation
Given the long-term nature of these projects and the complexity associated, it is difficult
to identify all possible contingencies during project development. Many issues may arise that
may not be anticipated in the negotiation documents or by the parties at the time of the
agreement110
. It is more likely than not that the parties will need to renegotiate the contract to
accommodate these contingencies. It is also possible that some of the projects may fail or
108 Efraim Sadka, Public-Private Partnerships: A Public Economics Perspective, International Monetary Fund, WP/06/77, Washington, https://www.imf.org/external/pubs/ft/wp/2006/wp0677.pdf (last retrieved on 7 February 2016). 109 Id. 110European Union – South East Europe –SIVA Joint Study, Common format for organizing a Public-private partnership event, 2013, http://www.burgas.bg/uploads/54d669691550775cd1a9c2570c79e1b9.pdf (last retrieved on 5 February 2016).
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may be terminated prior to the projected term of the project, for a number of reasons
including changes in government policy, failure by the private operator or the government to
perform their obligations or indeed due to external circumstances such as force majeure.111
While some of these issues will be able to be addressed in the PPP agreement, it is likely that
some of them will need to be managed during the course of the project. In assessing the
feasibility of projects, a lot of factors have to be considered, primarily the scale of the project
and the revenue generation source. In the traditional model of infrastructure development, the
end user had greater faith and trust or simply had to be at the mercy of the government. It is
to be noted that PPPs are distinct from privatisation projects. Hence, the government may be
at the liberty to transfer risk and implementation to private entities.112
However, it is still
accountable for any lapses. A thorough analysis needs to be done before any such project is
undertaken.
12.3. PPPs discussions at JEF
The main advantage of public private partnerships is the creation of value for money, which
is a collection of several factors. The most important value for money-drivers are the transfer
of risk, the output based specification, the long-term nature of contracts, the performance
measures, the increased competition and the private sector management. Other important
advantages of public private partnerships are the quicker delivery of projects, the improved
incentives to market forces, the cost efficiencies, the broad support for PPP and the improved
cost calculations by the public sectors. These are some of the broad topics that the Jeddah
Economic Forum seeks to discuss in detail.
111 Road Projects In Transition Europe, Transportation Equipment and Infrastructure Review, Euromoney Publications, 1998. 112 Arne Kaijser, Per Högselius, Erik van der Vleuten, Europe’s Infrastructure Transition: Economy, War, Nature, Palgrave Macmillan,
2005, pg. 50, https://books.google.co.in/books?id=k2mkCgAAQBAJ&dq=Road+Projects+in+Transition+Europe&source=gbs_navlinks_s, (last retrieved on 6 February 2016).
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13. PPP IN ELECTRICITY
Improvements in the electricity infrastructure will lead to energy efficiency. This will benefit
interest of the government, the private sector and the citizens. There is a constant requirement
for expansion of capacity generation and electricity sector reforms. These reforms could take
shape in the form of stronger regulatory framework. Short term solutions such as introduction
of rental power plants based PPP structures. Also, support mechanism such as feed-in tariffs
are considered important for attracting investors for renewable energy generation. This will
be particularly important considering Saudi Arabia produces 65% of its electricity from oil –
which is not a sustainable option.113
Further, the incentive systems will have to be reworked
so as to reduce strains on the national budget. Therefore, there exists a great opportunity for
the private sector to invest in PPPs in Electricity.
Some of the discussions that are set to take place at the Jeddah Economic Forum
include:
• Energy licensing procedures
• Types of energy agreements best suited for Saudi Arabia
• Market potential
• Rural Electrification
• Clean technology and energy efficiency requirements
• Who sets the tariffs?
• What are the challenges to private sector entities?
113 United States Energy Information Association, http://www.eia.gov/beta/international/?fips=SA (last visited on 29 February
2016).
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14. PPP IN WATER DESALINATION AND DISTRIBUTION
Despite being blessed with one of the most important liquid natural resource – oil, the
Kingdom of Saudi Arabia lacks abundance in another liquid natural resource – water. Indeed,
many regions in the Kingdom face severe water shortages. However, this challenge brings
with it opportunity for the private sector firms that are keen on entering into a PPP with the
government. Water production through desalination and its dissemination through
distribution systems provide international private firms specializing in water desalination
with a profitable opportunity to grow in the Kingdom.
The Kingdom already has some sterling examples of PPPs in Water Desalination. The
Shoaiba complex produces 880 million litres of water per day.114
The Al Jubail complex
produces 800 million litres per day.115
Even smaller scale water desalination projects in the
Kingdom have been achieved through PPPs. For example, the King Abdulaziz International
Airport Desalination project was a direct result of lack of water around the airport region.
Examples from other parts of the world that have successfully implemented desalination
projects include Australia and Singapore.116
Singapore: Singapore has imported water from Malaysia, with an accord signed in
1961 and 1962 to guarantee supply. In order to reduce dependency on Malaysia for
water – which supplies for half of Singapore's daily water needs, desalination is a
natural solution for Singapore. The Tuas desalination project is a successful PPP that
operates on a Build, Own and Operate (BOO) structure. It is the country's first water
desalination project and provides for 10% of Singapore's portable water demand.117
114 Government of Victoria, Desalination History, http://www.depi.vic.gov.au/water/urban-water/desalination-project/desalination-
background/desalination-history (last retrieved on 14 February 2016), 115 Id. 116 World Bank, King Adullahaziz International Airport Desalination Project. 117Abu Naseer Chowdhury Robert LK Tiong, Financing and Case Study of Singapore PPP Desalination Project, April 2011, http://www.ceci.org.tw/book/90/web/114-125.pdf (last retrieved on 14 February 2016),
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Australia: Based on a designing, building, financing, operating and maintaining
structure, the Victorian Desalination Project is a service based PPP. The agreement
between the public and private partner is 30 years and the project costed 3.5 billion
AUD.
Further, Australia also has a major seawater desalination plant that was commissioned
in Perth in 2006 and produces 130 million litres per day. A similar plant has been
developed in Adelaide and Sydney.118
14.1. Aim of the water desalination plant
Conducting due diligence for the new desalination project is important. It is possible that
refurbishing existing plants could provide for the water needed by the Kingdom. If not, then
the most cost efficient construction of a new plant should be considered. A risk assessment of
the technology should also be made. For example, it is often considered that seawater reverse
osmosis desalination is the most cost effective method of water desalination. However, a
scientific risk assessment must be introduced to evaluate if, indeed, such a method is the most
efficient method. Further, the new desalination plant must include improved reliability,
reduction in energy consumption and emissions, no thermal pollution of the sea water and
flexibility to increase capacity through modular construction.119
14.2. Transparent bidding process
Like all other PPPs, it is important to have a highly transparent bidding process. Such a
bidding process should give fair treatment to all bidders. The transparency of the process will
also increase the legitimacy and credibility of the project. The bidding process must also
118 Government of Victoria, Urban Water Desalination Project, http://www.depi.vic.gov.au/water/urban-water/desalination-project/desalination-background/desalination-history (last retrieved on 14 February 2016), 119 International Finance Corporation, PPP Impact Stories: Saudi Arabia Desalination Project, 2013,
http://www.ifc.org/wps/wcm/connect/e63d6500498390f48364d3336b93d75f/PPPImpactStories_SaudiArabia_Desalination.pdf?MOD=AJPERES (last retrieved on 14 February 2016),
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include clear and defined expectations of the post-tender result for both public and private
entities.
14.3. Financing options and cost-effectiveness
While considering desalination technology, it is important to look at the costs: costs of
building the plant, costs associated with running the plant, costs of the water produced.120
PPPs provide a good opportunity to effectively and efficiently reduce costs owing to the
private sector expertise and competitiveness. The sharing of skill and financing of the private
sector, combined with the assets of the public sector, can achieve reduced costs. However, it
is not unlikely that desalination may not be the cheapest option. This is the case in for the El
Paso Water Utilities Plant in the United States. Nonetheless, such plants provide for
supplemental water needs of the citizens.
14.4. Discussions at JEF
Water is a necessity, and any discussions related to water bring with it some pressing
questions that are being addressed at the Jeddah Economic. These include, but are not limited
to:
Possible legal, regulatory and other challenges facing PPP projects in saline water
conversion
Communication strategy and public awareness of domestic tariffs increase and cost
recovery – Role of public and private sector
Setting realistic economic and social performance indicators to increase sustainability
of operation management
120 Water Resource Research Centre, University of Arizona, https://wrrc.arizona.edu/awr/s11/financing (last retrieved on 14 February 2016),