From Mines to Mortgages, PPPs Can Be Antidotes of Progress, Not Touch-and-Go Pitfall

May 11 , 2024.

The ruling Prosperity Party - the Prosperitians - has its leaders turned to the Public-Private Partnerships (PPPs) model, a strategic tool for economic development. The focus of these partnerships has recently shifted from traditional sectors like mining and energy to more immediate needs such as housing and hospital management. While prudent, the shift in focus to finance public projects through PPP warrants cautious optimism.

It should be no surprise that nearly 30 emerging economies—home to over 3.6 billion people—are embracing public-private partnerships worldwide. A recent study by McKinsey & Company, one of the largest global consulting firms, suggested that adherence to this financing model could match productivity with that of developed economies within 25 years.

According to this study, productivity, the linchpin of economic vitality, has witnessed a six-fold increase in median global output over the past quarter-century. Yet, as the world faces ageing populations, energy transitions, and supply chain upheavals, productivity growth is the only viable route to improving living standards. A refocused productivity strategy for developed countries is projected to add between 1,500 dollars and 8,000 dollars to GDP per capita by 2030. The U.S. alone might have seen a 5,000-dollar expansion in its GDP in 2022 if not for a manufacturing slowdown, and a more effective capital deployment could have contributed an additional 4,500 dollars.

Investment is critical in maintaining high productivity in fast-developing economies and propelling growth in slower ones. Countries like China and India, alongside regions such as Central and Eastern Europe and Emerging Asia, demonstrated this hypothesis through investments amounting to 20pc-40pc of GDP. These funds have been intentionally allocated towards urbanisation, infrastructure enhancement, and globally integrated manufacturing, serving as models for less developed countries like Ethiopia.

However, the pathway to sustained and inclusive growth requires meticulous investment in human and physical capital. Sadly, Ethiopia invested only 4.1pc of its GDP in capital expenditures last year, from 939 billion Br in public spending. No less depressing should be the declining ratio of national savings to the GDP, plummeting from an average of 28.8pc for the decade beginning in 2013 to 23.3pc last year. An economy that is not saving could only have as much resources to invest in productive sectors.

Here, greater private sector participation in public-private partnerships, particularly in foreign direct investment, is expected to boost efficiency in service delivery. Nevertheless, the absence of a robust regulatory framework could lead to unchecked risks, including transparency issues, policy unpredictability, and corruption — factors that exacerbate the challenges of delayed projects and mistrust between stakeholders.

In April 2018, Ethiopia began a profound shift in its leaders' economic policy orientation, driven by the demand to modernise through public-private partnerships. Political unrest and violent but popular convulsions spurred the public disposition to transition from the hegemonic developmental state to a liberal growth model. The Revolutionary Democrats' fidelity to a model prioritising state-led growth brought unprecedented economic growth in the country's economic history. But, it also ignited widespread protests due to perceived exclusions from its benefits, particularly among youths in the Oromia and Amhara regional states.

These protests, fuelled by a youth bulge, were met with violent repression and promises of reform, setting the stage for Abiy Ahmed’s (PhD) ensuing rise to power.

Prime Minister Abiy began his tenure with pledges of economic liberalisation and a move away from autocratic governance. Central to his agenda was deploying public projects financed by private-public partnerships, particularly in infrastructure. His administration's earlier articulations envisaged a blend of private sector efficiency and capital with public projects. The approach sought to rejuvenate the economy, privatising state-owned enterprises that controlled its commanding heights and opening previously restricted economic sectors to private investments.

Yet, the rush to open up was not beyond reproach. The policy was subject to criticisms that it risks widening income disparities and reducing public accountability. Concerns linger about the transparency of projects under public-private partnership processes and their public benefit, with fears that the new administration’s strategy might favour international capital and private profits over social welfare.

The initial carte blanche support the administration won from international financial institutions like the World Bank and the International Monetary Fund (IMF), bastions of unabashed market liberalisation and private sector engagement as catalysts for growth, did little to comfort these anxieties. The jury is still out on the success of public-private partnership projects in delivering sustainable development and inclusive growth—or their failure, potentially deepening inequities and perpetuating external dependencies.

However, Ethiopia's leaders' ambitions in these partnerships face unique impediments. It has been five years since the Ministry of Finance (MoF) established a policy framework and regulatory unit for projects launched through public-private partnerships. Despite high hopes of attracting foreign capital for large-scale public infrastructure projects, particularly in energy and mining, no single project has progressed to implementation.

Meanwhile, the few projects that have commenced — bar projects under the Prime Minister's Office — suffer from opaque financial backing.

In September, the National Bank of Ethiopia (NBE) attempted to spur foreign investment by allowing offshore accounts for projects under public-private partnerships, increasing the debt-to-equity ratio to 80pc, and guaranteeing fast-tracked foreign currency repatriation after such companies made profits. Yet, this move appears to have attracted inadequate interest, with domestic companies frustrated by the bureaucratic web of doing business.

The proposed public-private partnership models have either been financially daunting — like a housing scheme requiring 45 million dollars in assets — or presented lacklustre returns, as seen with the medical outsourcing envisioned for hospitals in the capital.

The federal government’s latest urban redevelopment initiatives under a public-private partnership arrangement suggest a promising but potentially risky venture. The overwhelming aesthetic renaissance in the capital also looks to include elements of the public-private partnership arrangement.

A deal promising developers 30pc of homes in exchange for building on newly repurposed land is gaining popularity. Yet, if these projects falter, the repercussions extend beyond economic stagnation; they could undermine the political standing of Prosperitians, especially when their monopoly on the use of legitimate force is challenged in several regional states. Tens of thousands have resettled from their homes while the development they paid for appear to remain a castle in the sky.

Bankable projects, particularly those that mitigate risk for private partners while enhancing transparency and ensuring contractual obligations are met, should be prioritised to rebuild trust and legitimacy in public-led initiatives. Failure to do so could threaten economic progress and risk political instability and, eventually, social turmoil.

Looking back, the shift from prioritising public-private partnerships in large-scale national projects like energy or mining to more immediate concerns such as housing should reflect a cautious recalibration of economic strategy, potentially spurred by macroeconomic concerns. Several half-finished projects scattered across the country should provide adequate lessons in how poorly public funds have been previously managed. The inadequacies of project management that assail the public ones should not be transferred into the public-private partnership domain.

For instance, the Aysha II energy project in the Somali Regional State, backed by the Chinese Exim Bank, should warn of the perils of prolonged project timelines and complex risk-sharing arrangements. Despite the government only needing to contribute 15pc, the project has languished for seven years.

To cushion such risks, Ethiopia's leaders need a comprehensive public-private partnership framework that guides the entire project lifecycle, from concept to financial closure, with stringent fiscal accounting and reporting standards.

The broader macroeconomic reality cannot be overlooked either. Inflation and interest rate variations could theoretically encourage more efficient capital allocation, potentially curbing recent decades' rampant debt and asset price surges. Artificial intelligence is a transformative force that could reshape economies by opening new investment avenues. Yet, as observed in regions like the United States, Japan, and major European economies, substantial investments in digital technologies have yet to boost productivity outside the ICT sector.

While public-private partnerships offer a viable strategy for addressing Ethiopia’s infrastructure needs, their success depends on implementing robust regulatory frameworks, enhancing transparency, and maintaining diligent oversight. Through rigorous governance, projects financed in such models can fulfil their potential as catalysts for sustainable economic growth.

PUBLISHED ON May 11,2024 [ VOL 25 , NO 1254]

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