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Digital Economy – Framework for Public-Private-Partnerships

Thilan Wijesinghe

Chairman

National Agency for Public Private Partnership

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PPP: Definition

A PPP is a special contractual arrangement between a public sector Ministry, corporation or authority and a private company for providing a public infrastructure asset or service, in which there is an appropriate transfer of risk to the private party and where the private party bears investment and management responsibility on a long-term basis

In a PPP, the private partner is typically tasked with the design, construction, financing, operation and management of a capital asset to deliver a service to the government or directly to private end users. The private partner will receive either a stream of payments from the government or through charges levied directly on the private end users, or both, for its efforts in undertaking the investment and risks associated with such investment.

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What is not a PPP

Any project where the GOSL provides a direct sovereign guarantee to the lending institution of the private partner’s debt.

The GOSL or any of its institutions finances by itself (either through public funds, loans, grants, gifts, donations, contributions or similar receipts) the procurement of a good or service

Outright sale of the freehold title or long-term lease of any GOSL asset on CV’s valuation

Projects where the GOSL retains whole-of-life asset risk. In a PPP, whole-of-life asset risk is retained with the private partner

Projects where there are no ongoing post construction performance standards to be met by the private partner;

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Role of Finance Ministry and National Agency for Public Private Partnership (NAPPP)

Project risk assessment and the equitable allocation ofrisk between the public entity and the private entity is aresponsibility of the NAPPP

Oversight of the Ministry of Finance is essential to ensurefiscal cost and fiscal risk and recourse to the to thenational capital budget if any is optimized.

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Why is a central agency for PPPs Necessary?

▪ The third source of financial resources to stimulate capital formation

▪ PPPs are complex transactions and requires specialized skills that can be consolidated within one organization

▪ Standardization of approach

▪ Line Ministries and Private sector requires single facilitation point

▪ Tapping into Technical Assistance funds for feasibility studies etc

How would these tasks be carried out by the NAPPP ?

▪ Updated guidelines for PPPs

▪ Effective board

▪ Eventually new NAPPP legal structure

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Viability Gap Funding and Blended Finance

Blended Finance is a viable and cost effective way to scale sustainable infrastructure investments in developing countries

Blended Finance

Leverage: Use of development finance and philanthropic funds to attract private capital and enhance affordability

Impact: Investments that drive social, environmental and economic progress

Returns: Financial returns for private investors in line with market expectations

Blended Finance Participants: AFD, Bill & Melinda Gates Foundation, Guggenheim Foundation, Governments of UK, Canada, Norway, Denmark, AIIB, World Bank, FMO, JICA, European Investment Bank, selected Pension Funds

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Critical Skill-set for Successful Implementation of PPPs

• Pre-feasibility to ensure BANKABILITY

• Risk allocation and assessment

• Financial structuring and evaluation

• Research and public policy articulation

• Effective Working Groups, PC’s and CANCs (Inter-Ministry/agency coordination)

• Communication, PR & stakeholder engagement

• Effective documentation

• NEGOTIATION

• Legal structuring and documentation

• Legal coordination (when to bring in AG and External Lawyers)

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PPPs vs Public Investment – Myths and Realities

• Preservation of fiscal space for public investment

• Purchasing a service and not an asset (e.g. power)

• Capital cost benefits (highway, port, power)

• Sector efficiencies (port)

• Public investment or donor funding is cheaper (e.g. SAGT)

• Takes a longer time to implement and much harder

• Deprives the state of revenue (telecom, port)

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Institutional History

1994: Secretariat for Infrastructure Development & Investment (SIDI)

1996: Bureau of Infrastructure Investment of the Board of Investment

2017 January: Establishment of Public Private Partnership Division/Unit

2017 July: Winding up of the PPP Unit and set up of National Agency for Public Private Partnership:

• A Division of the Finance Ministry is inadequate

• Need for Agency with adequate legal, administrative and financial authority

• Lack of consistency and necessity to establish standards

• Prepare guidelines in association with NPC

• Collaborate and facilitate relevant line ministries

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Net FDI as percentage of GDP as

computed by Prof. Ricardo

Haussman

Sri Lanka has seen suboptimal

levels of FDI over the last 20 years.

No sustained increase in net FDI as

percentage of GDP after the conflict.

1998-99 period peak is due to

implementation of PPPs and

divestiture

1999 GDP growth – 6.9% (highest

during conflict years)

.51

22

.53

% o

f G

DP

1.5

1995 2000 2010 20152005

YearSource: WDI

FDI Net Inflows, Sri Lanka

05

15

20

% o

f G

DP

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Source: WDI

FDI Net Inflows, 1995-2015 Avg.

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Projects that contributed to FDI in 1998 -1999

• South Asia Gateway Terminal (SAGT): $200 mn

• Lanka Bell: ($80 mn)

• Suntel ($70 mn)

• Power sector PPPs ($200 mn)

• Shell Terminal ($ 65 mn)

• Manufacturing & services(YKK, Textured Jersey, 10 projects by MAST, Aman Resorts etc $150mn)

Bureau of Infrastructure Investments (15 persons) produced around 40% of FDI

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Sri Lanka has a successful track record implementing PPPs – no failed transactions

Over US$ 5 billion in PPP transactions financially closed in last 20 years and operating successfully (around 70% after conflict)

Only 3 PPP transactions over $500 mn

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Brief History of PPPs and SOE Divestiture in Sri Lanka

Telecom…commencing 1990s

Five mobile operators…Axiata, Etisalat, Airtel, Hutchinson and Sri Lanka Telecom

Divestiture of Sri Lanka Telecom and introduction of competition in fixed telephony with PPP investments (Lanka Bell and Suntel)

Result: Most competitive and efficient telecommunications services in South Asia

Mobile penetration 127%

Fixed line penetration 21.3%

Data among the cheapest in the world

A catalyst in growth in ICT exports by around 20% compound annual per year over last 20 years to reach around $1 billion per annum

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Brief History of PPPs

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Ports…commencing late 1990s

First country in South Asia to structure BOT in Port Sector, resulting in significant efficiency gains and growth in transshipment volumes.

Competition to Sri Lanka Ports Authority terminals in Colombo:• SAGT (1998): P&O, John Keells Holdings, Maersk• CICT (2013): China Merchant Holdings• East Terminal: PPP proposed in 2018• SLPA minority shareholder on every terminal operated by private sector

Largest ever PPP in Sri Lanka: Hambantota Port 2017$1.1 billion initial investment with $600 mn additional investments proposed

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Brief History of PPPs

Power Sector

→IPP program commenced in 1997

→Currently thermal, hydro, waste to energy, wind and solar IPP plants

→Today 30% of total thermal power installed are IPPs

→Today 20% of hydro power installed are IPPs including 100% of small scale hydro

Renewables and LNG to make up 50% of capacity additions.

IPPs will lead the way on migration to LNG and renewables.

Sources: CEB Long Term Generation Expansion Plan 2018 – 37

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Brief History of PPPs

PPPs in real estate

1990s• Affordable housing (Millennium City, Nivasie Pura)•Hospitals • IT Park

2000s• Colombo Port City• Industrial zones (planned)

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Types of PPP Projects and their Role in Generating Economic Efficiency

Divestiture vs PPP – what’s the difference

New business model vs New capital formation

Dead assets of the State (e.g. land)

PPPs as tool of SOE reform

PPPs as a SOLUTION to GOSL’s fiscal constraints

PPP is the ART of mobilizing private capital and viability gap funding to generate economic activity

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PPP Project Pipeline – Parties Short-listed or selected

Infrastructure

Elevated Highway NKB to Rajagiriya

Marine drive extension

LNG FSRU

LNG Power Plant 2 x 500 MW Kerawalapitiya

300 MW Multi-Fuel Combined Cycle Power Plant - Kerawalapitiya LEGAL

Guhagoda Waste to Energy

Weliwita Water Project IFC

LRTs

Education

Biyagama University with Berkeley University

Minerals

Mineral Sands

Manthai Salt

Services

Domestic Airline service

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PPP Project Pipeline – Pending soliciting investors via EOI/RFP

Digital Infrastructure

Transit Smart Card

Power

Renewable Energy Park (Wind 350 MW and 250 MW Solar) – Pooneryn

Barge-mounted Power Plant HFO (Heavy Fuel Oil) (100 MW)

4 x 24 MW HFO - Monaragala, Kappalthurai, Pallekele, Horana

Tourism

Dedduwa integrated Tourism development

Colombo Port Cruise Terminal

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PPP Project Pipeline – Social Infrastructure and Services

Real Estate

Kandy Mahaiyawe Urban Housing Project

Pettah Multimodal Hub

Recreational Beach - Colpetty / Dehiwala

Ekala Aero City Project

Convention Centre Port City

Medical Complex Port City

School at Port City

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Divestiture of Non-Strategic SOEs and SOE RestructuringCurrent Project Pipeline

Divestiture

• Sri Lankan Airlines

• Hyatt

• Hilton

SOE Restructuring

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We are at the beginning of a revolution that is fundamentally changing the way we live, work and relate to one another

How can we build a sustainable, inclusive and trustworthy digital future?

On three pillars

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The Fourth Industrial Revolution

First Revolution: Mechanical innovations such as steam engine and railroads

Second Revolution: Mass production and assembly line through electrification

Third Revolution: Mainframe computing, Personal Computer and the Internet (GOSL policy action taken in late 1990s

Fourth Revolution: The interplay between fields like nanotechnology, brain research, 3D printing, mobile networks and computing

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Governments should be essential partners in shaping the transition to new scientific, technological, economic and social frameworks

Therefore the catalytic role of the NAPPP in facilitating PPPs in Digital Infrastructure

A tool for generating economic productivity

Government must not over-estimate what it can do….create the enabling environment and stay out of the way so that entrepreneurship can thrive

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Potential PPPs in Digital Infrastructure – Transport

Transit smart card

• Multimodal connectivity and multiple use

• The aggregation of national transport data into one electronic platform and database

• Accurate revenue recording and collection

• How present IT systems of the SLTB and Railways can handle the data generated by their respective commuter volumes.

• Provisions in place for data security and privacy, where traveller identity and transport data to be clearly separated

• Discount be given for transport purposes

• Viability gap funding

• Need for a financial feasibility study

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Potential PPPs in Digital Infrastructure – Agribusiness (Future Possibilities)

• Need to get youth involved in agriculture

• Infrastructure needs: Data access for last mile

• Build trust networks through block chain for traceability, platform economics, big data and machine learning

• Digital diary for farmers to keep track of crop. Data driven farming with analysis in order to optimise growth cycles and eliminate seasonal demand/price fluctuation

• E-wallet solutions to pay farmers direct avoiding revenue leakages

• Logistics of collection – PickMe for farmers

• Digital credit scoring to enhance bankability

• Crop insurance through “trust networks”

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Potential PPPs in Digital Infrastructure – Health (Future Possibilities)

• Genomics: To unlock the true potential of human DNA analysis –enabling truly personalized testing and treatment that could vastly improve patient outcomes for a huge range of diseases.

• Wearables: Smart health monitors that can collect personalized, real-time data, encouraging healthier lifestyles. Some companies have already introduced wearables into the workplace to boost performance. By monitoring the stress levels and health of their staff, companies can recommend healthier habits, often leading to higher productivity.

• Big data: Comparing the responses of patients with similar DNA and medical histories can permit understanding health risks and the impact of different treatments. Mobile data is being used to identify malaria infection patterns and identify hotspots that guide government eradication efforts

• Telemedicine: Mobile technology being used to reduce pressure on healthcare systems by removing need to travel to see doctors.

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Why Digital Health?

• Using a PPP programme to build a proper, strategic partnership with the private sector, can help government health authorities use the private sector ́s skills and capabilities but in service to national or regional health strategy

• Hospitals are overloaded with minor ailments, leading to long waiting times

• Primary care is weak, so utilization and awareness of it are low

• Doctors are in short supply, which limits the scalability of traditional care models

• Patients’ expectations are rising faster than the ability of the system to keep up

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Potential PPPs in Digital Infrastructure – Sectors Priorities

• Transport

• Agriculture

• Health

• Education

• Finance

• Tourism

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The World Economic Forum (WEF)’s Travel and Tourism Competitiveness Report 2017 ranks Sri Lanka 64th out of 136 economies –

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…..CONCLUDING REMARKS

PPP implementation focus is to create a virtuous circle of investor confidence, private capital inflows, SOE reform and capital market deepening to reduce fiscal dependency on Treasury

PPP process is not working efficiently due to poor institutional capacity

We have limited policy options for fiscal consolidation. Other required measures:

• Higher FDI

• Divestiture of dead assets

• SOE reform through PPPs

• SOE efficiency through process improvements

• Acceleration of domestic investment and FDI through phasing out of Para Tariffs and domestic protection

• Encourage inward skills transfer

NO MORE LOW HANGING FRUIT TO GENERATE ECONOMIC GROWTH

• Drivers of growth: tourism, ports and shipping, aviation, logistics based manufacturing, knowledge based services, financial services, agribusiness

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Thank you