A part­ner­ship in risk

Ziad Hayek, sec­re­tary gen­eral of the HCP, ex­plains what’s chang­ing

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Ziad Hayek, sec­re­tary gen­eral of the HCP, ex­plains what’s chang­ing

This sum­mer, Le­banon rat­i­fied a new law en­abling the gov­ern­ment and pri­vate sec­tor to share risk in in­vest­ing, build­ing, and op­er­at­ing in­fra­struc­ture projects. The le­gal frame­work, known as a pub­lic-pri­vate part­ner­ship (PPP), en­cour­ages com­pa­nies to pro­vide ser­vices that the gov­ern­ment can­not af­ford to de­liver at ef­fi­cient costs to end users (see ar­ti­cle, page 26).

To un­der­stand the ap­pli­ca­bil­ity of the new law and its po­ten­tial, Ex­ec­u­tive met with Ziad Hayek, the sec­re­tary gen­eral of the Higher Coun­cil for Privatization (HCP), the pub­lic agency now re­spon­si­ble for co­or­di­nat­ing new PPP projects with the pri­vate sec­tor.

Le­banon has in­fra­struc­ture projects that have had at least ele­ments of PPP. What dif­fer­ence will the new law make?

We do not have PPPs that have worked out well. That was the main prob­lem. PPPs are a very spe­cial type of pro­cure­ment, and they re­ally in­volve a di­a­logue about the shar­ing of risks and the mit­i­ga­tion of risks. And they’re done on the ba­sis of the spec­i­fi­ca­tion of out­puts rather than in­puts for a par­tic­u­lar project. In­stead of say­ing, ‘I want this project to be built by the pri­vate sec­tor,’ you say, ‘I want this ser­vice to be pro­vided by the pri­vate sec­tor,’ so that’s out­put as op­posed to in­put spec­i­fi­ca­tion. It’s not a part­ner­ship in eq­uity or in­vest­ment. It’s not a part­ner­ship in rev­enue. It’s not a part­ner­ship in profits. It’s a part­ner­ship in risk. This is the def­i­ni­tion of PPP.

Un­til now, PPP has been ap­proached in Le­banon like nor­mal pro­cure­ment. It’s al­ways been done wrong be­cause there’s been a ten­der to find out the price—who is go­ing to of­fer the low­est price. This is not what PPP is about. This is what we tried to do in this leg­is­la­tion: in­sist that from now on, PPP projects have to be sub­ject to in­ter­na­tional prac­tices in ten­der­ing. And the main as­pects of that are, first, in­sis­tence on trans­parency be­cause this is para­mount for the suc­cess of PPP; and se­cond, hav­ing an or­gan within the gov­ern­ment that has the ex­per­tise to deal with PPP projects and with the pri­vate sec­tor—the Higher Coun­cil for Privatization.

What role will the HCP play, as per the new law?

The HCP’s role is to as­sist the gov­ern­ment in ten­der­ing projects that are PPP in na­ture. We’re still a small team; we’re in the process of draft­ing the Coun­cil of Min­is­ters’ de­ci­sions that en­able us to in­crease the size of our team, and ad­just our bud­get so that we can cope with new re­sponsi- bil­i­ties. We couldn’t do that un­til now be­cause there was no le­gal ba­sis for us to do this. Now there’s a le­gal ba­sis for us to have these re­spon­si­bil­i­ties. Un­til that is done, we have a very small team, so we can­not man­age more than three projects at this point in time.

I’d like one of the projects to be re­lated to in­fra­struc­ture—most likely in trans­port—and one project to be re­lated to pub­lic build­ings be­cause that, I think, will be one of the ways to in­tro­duce PPP to the na­tion. And the third project could be what we call peo­ple-first PPP, a project hav­ing a so­cial di­men­sion like a hos­pi­tal, or school, or re­ha­bil­i­tat­ing a sports fa­cil­ity, or some­thing like that. But I don’t know what projects they will be. They will have to be pre­sented by the min­istries and agreed [to] by the HCP, which is not just me. The HCP [is gov­erned] by a per­ma­nent min­is­te­rial com­mit­tee. And I head the staff of that com­mit­tee.

You’ve been the HCP sec­re­tary gen­eral for nearly 10 years, and the law was in draft form for nearly as long. In Le­banon, there re­ally never is a clear path to leg­is­lat­ing, but is there any rea­son that Au­gust 2017 was the month the PPP law was fi­nally rat­i­fied by Par­lia­ment?

I think it has to do with the na­ture of PPP. First, it’s not a con­cept that’s eas­ily un­der­stood by peo­ple. I faced a lot of ob­jec­tions. The pub­lic sec­tor was like, ‘What, you want to let the pri­vate sec­tor do such things? This is privatization.’ And the pri­vate sec­tor was like, ‘Part­ner­ship with the gov­ern­ment? You want a gov­ern­ment rep­re­sen­ta­tive to sit on the board with us? We’ll never fin­ish with the bu­reau­cracy. No, we don’t want any­thing to do with gov­ern­ment.’

It took al­most three years to get peo­ple to un­der­stand [that] when we talk about PPP, no, we don’t mean mixed in­vest­ment com­pa­nies. We’re talk­ing [about] the pri­vate sec­tor pro­vid­ing a ser­vice to the gov­ern­ment, which then pro­vides that ser­vice to the cit­i­zens. And then it took us a long time to get the le­gal com­mu­nity to agree that it will not vi­o­late the con­sti­tu­tion—be­cause there’s an ar­ti­cle that states [that] you can­not give con­ces­sions with­out a spe­cific law—and [to agree] that PPP is not a con­ces­sion. Then, it took time to get to the Coun­cil of Min­is­ters, and then [the gov­ern­ment] changes all the time. Ev­ery time it was pre­sented to cabi­net, a com­mit­tee would form to study it, then the gov­ern­ment would change, and then we would wait for an­other gov­ern­ment. Then it took a long time in Par­lia­ment.

As you put it, the HCP is now scal­ing up its in­sti­tu­tional ca­pa­bil­i­ties to ad­vise the gov­ern­ment, and it will take a lot of time to de­velop po­ten­tial PPP projects. In do­ing so, what’s it’s in­ter­ac­tion with the pri­vate sec­tor?

Pre­sent­ing a proper PPP of­fer or bid can cost up­ward of $1 mil­lion, ver­sus the cost of around $10,000 when pre­par­ing a bid on a ten­der un­der nor­mal pro­cure­ment rules. [Un­der pro­cure­ment rules], if the gov­ern­ment is buy­ing a power plant where it will de­ter­mine all the vari­ables and spec­ify ex­actly what it wants, it will then of­fer a ten­der, and who­ever gives the low­est price wins the bid. In this sce­nario, a bid­ding com­pany will take the list of what the gov­ern­ment is ask­ing, make a few phone calls to get the pric­ing, add in a profit mar­gin, and present the bid. It costs like $10,000, and if the process is not trans­par­ent, at the end of the day some­body wins the bid, but no one knows how; $10,000 is an ac­cept­able cost of do­ing busi­ness when fail­ing to win the bid.

In PPP it’s not like that. If I’m bid­ding on a power plant, I don’t know what the power plant is go­ing to be—I just know that the gov­ern­ment wants to buy the cheap­est elec­tric­ity pos­si­ble. How am I go­ing to pro­duce it, and what tech­nol­ogy am I go­ing to use; how many tur­bines am I go­ing to have; how much fuel stor­age will I use? Con­sult­ing firms for de­sign­ing a power plant is not cheap, and then I have to sit and ne­go­ti­ate with banks be­cause even if I have the same de­sign as a com­peti­tor, if that com­peti­tor has fi­nanc­ing at a quar­ter per­cent less than mine, they’re go­ing to win. So I have to ne­go­ti­ate [with] the banks, and to do that, I need fi­nan­cial ex­perts with me to struc­ture the bid, whether this is go­ing to have mez­za­nine fi­nanc­ing or Is­lamic fi­nanc­ing as part of the struc­ture. These cost a lot, and it takes a long time, so when I present my bid, I’m not will­ing, if I’m a se­ri­ous par­tic­i­pant, to par­tic­i­pate in a ten­der where I don’t know at the end of the day how the bid will be awarded.

Is the PPP law a first mea­sure in this path to correction that needs to put in place, and are there other laws that you see could help the pri­vate sec­tor flour­ish again? Reg­u­la­tions?

What makes me ex­cited about PPP is that as you in­vest in in­fra­struc­ture, you cre­ate jobs in large num­bers. A ma­jor in­fra­struc­ture project is go­ing to em­ploy thou­sands of peo­ple, and not all are go­ing to be con­struc­tion work­ers. You’re go­ing to have ac­coun­tants, man­agers, IT, ar­chi­tects, and en­gi­neers. And in­vest­ing in in­fra­struc­ture is, by def­i­ni­tion, the ba­sis on which you then build your econ­omy. When you in­vest in in­fra­struc­ture, you’re in­vest­ing in things that are go­ing to stay. We ran a study: If we in­vest $6 bil­lion in in­fra­struc­ture projects, how many jobs would we cre­ate? Our anal­y­sis showed—and it de­pends on the type of projects that you in­vest in—that we would cre­ate more than 200,000 jobs in five years’ time. That’s huge com­pared to the size of our la­bor force.

Le­banese banks and in­vestors cer­tainly have the cap­i­tal, and maybe the ap­petite, to in­vest in in­fra­struc­ture projects. Will the PPP law en­cour­age their par­tic­i­pa­tion?

We will prob­a­bly not see this in the first gen­er­a­tion of PPP projects, but what I hope for fu­ture projects is list­ing on the Beirut Stock Ex­change be­cause then we’re go­ing to be cre­at­ing a snow­ball ef­fect. Le­banese com­pa­nies have, for decades, been obliged to gen- er­ate cap­i­tal in­ter­nally. Hav­ing ac­cess to an ef­fi­cient stock ex­change to raise money you need means busi­nesses could grow from the level of an SME [a small or medium-sized en­ter­prise] to [the] level of a cor­po­ra­tion. And if you’re a cor­po­ra­tion, you can gen­er­ate more jobs than you would as an SME: this is the snow­ball ef­fect that I’m hop­ing PPP would start.

“When we talk about PPP, no, we don’t mean mixed in­vest­ment com­pa­nies”

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