A tale of two cities and three Ps
Published December 1st, 2016
I have been in Riyadh and Beijing this week. I was surprised to discover that the governments of both countries are talking the same language: a language with just three letters in the alphabet: P, P, and P.
I am sure the coincidence of this enthusiasm for Public-Private Partnerships says something profound about the state of the global economy, especially as P3 also appears to be in the vocabulary of Donald Trump.
From a narrower water perspective, however, it is interesting to see how both countries are confronting similar problems. Unlike the United Arab Emirates or Oman, which evolved highly sophisticated and successful frameworks for PPPs, China and Saudi Arabia both face the challenge of rolling out projects as fast as possible, while simultaneously creating the institutional structures which are required to make the proposition attractive to private investors. It means that while private developers are undoubtedly pleased by the fact that the PPP market is returning to strength, the risks look very large.
In China, the central government is driving the adoption of PPP models for all areas of environmental remediation. Arrangements which might work for financing a build-operate-transfer (BOT) wastewater treatment plant require a leap of faith if they are to be applied successfully to cleaning up a river basin. It means that most of the bidders on PPP projects are off-shoots of state-owned enterprises. They have a low cost of capital and they have the political means to manage project risk. At the same time, selling state-owned assets to state-owned enterprises does not in fact end the state’s responsibility for financing the water sector.
In Saudi Arabia, everything - past, present and future - is potentially available for private sector participation. It puts staff at the major public water agencies in a difficult position. Publicly, they need to communicate absolute enthusiasm for moving as fast as possible towards privatisation. In private, the message is more cautious: there is still work to be done to ensure that project risks are minimised for private developers, while at the same time ensuring that the long-term benefits to the Saudi state are maximised.
That said, there was a genuine sense of excitement at the Water Investment Forum in Riyadh, which I have not seen at an event in the Kingdom for over a decade. There was standing room only at most sessions, and fervid deal-making going on in the exhibition space. There is a lot to report in December’s GWI.
At its best, PPP can inspire brilliance: it forces the entire supply chain into a state of competitive innovation, driving costs down across the board. It does, however, rely on robust risk management structures to deliver the benefits it promises. There is probably not time in either China or Saudi Arabia to set everything right before moving ahead with tenders. The key to success will therefore be building the dialogue between the first two Ps in the alphabet in the spirit of the third.