Public-Private Partnerships (PPPs) are increasingly common for delivering infrastructure projects across the world. In Ethiopia, the experimentation with PPPs was introduced in 2018 and has progressed through policy, legal, and institutional frameworks. Implementation of PPPs has been tested with projects in energy and health, while several others are in the pipeline. However, knowledge and awareness about PPPs is limited. The misconception that PPPs are akin to traditional procurement or outsourcing persists.
Building on our previous insight on PPP procurement modalities (available here), our #PPPSeries aims to foster an understanding of PPPs and their application in Ethiopia. Key enabling documents referenced are the PPP Policy, the PPP Proclamation No. 1078/2018 (“Proclamation”), the PPP Amendment Proclamation No.1283/2023, the PPP Directive No. 55/2018 and the PPP Guidelines.
Definition: What is a PPP?
A PPP is a long-term agreement between a public entity (also referred to as the contracting authority) and a private party. The private party provides a public service and receives compensation from the contracting authority collects fees directly from consumers, or both. The public entity to be involved in the PPP must be one with the legal mandate to exercise the right which will be transferred to the private party. Depending on the project, the contracting authority may differ from one project to another. For example, if the project involves a PPP contract with a public hospital for the establishment of a certain diagnostic centre, the private party would be providing the diagnostic service that would otherwise be offered by the hospital.
PPPs are fundamentally different from traditional procurement or outsourcing. In traditional procurements, the public sector is responsible for the ownership and financing of the infrastructure project and assumes the risks for the design, financing and operation. Whereas PPPs involve a partnership between the public and the private sector in which risk is shared and financing is covered by the private party. In PPPs, the private party secures the financing for the project, and the government makes payment to the private party over the project’s lifespan.
Why PPPs?
PPPs are a crucial financing source for developing countries, addressing limitations in finance, technology, and technical capacity. In addition, PPPs are preferred by governments to free up public finance that could be invested in areas where PPPs are not favourable.
In Ethiopia, the rationale for adopting PPPs is articulated in the PPP Policy. PPPs in Ethiopia aim to access private finance to expand public service delivery. The policy document highlights key reasons for PPP’s importance in Ethiopia:
- Using the investments and organizational skills of the private sector to enhance the financial resources that are allocated to building infrastructural projects.
- Risk sharing between the public sector and the private sector
- Facilitating transfer of knowledge in terms of innovation in terms of designing and building infrastructures
- Avoid delays, and cost overruns, and ensure efficiency and quality
What are the Forms of PPPs?
Under the PPP Proclamation, the following activities may be performed by way of PPPs.
- The design, construction, financing, maintenance or operation of new Infrastructure facilities.
- The rehabilitation, modernization, financing, expansion, maintenance or operation of existing Infrastructure facilities; and/or
- The administration, management, operation or maintenance of new or existing Infrastructure facilities.
The private party that undertakes the PPP project will be compensated through one of the following modalities:
- Direct compensation by the contracting authority to compensate the private entity for the services provided; this means the private party would not charge service users and it would settle with the contracting authority on all due payments.
- Tariffs or fees collected by the private party from the users or consumers of the public service. Here, the contracting authority would not have a financial obligation towards the private party.
- Thirdly, a combination of compensation by the contracting authority and service fees from consumers could be adopted.
Scope of PPPs: Who may implement PPPs?
PPPs may be implemented by public entities or public bodies, including:
- any organ of the Federal Government, which is wholly financed by the Federal Government budget. (public entities)
- an enterprise fully owned by the Federal Government (public enterprises).
While the current legislative framework only applies to the federal government and federal projects, regional governments may establish their own PPP regime based on the national PPP Policy.
What Projects are Eligible for PPP Procurement?
Under the PPP Proclamation, “Public Service Activities”, ie., any activity that the government deems to be in the interest of the general public, may be implemented on a PPP basis. PPPs are mostly procured for infrastructure projects such as power and energy, roads, railways, expressways, airports, and social infrastructure projects such as housing, health and education.
However, some sectors are not eligible for procurement under PPPs. These are:
- oil, mines, minerals, rights of air space; and
- Privatization or divestiture of public infrastructure or public enterprises
Privatization of state-owned enterprises is subject to a separate legal framework (Proclamation No. 1206/2020).
How long are PPPs for?
As the definition of PPPs indicates, PPPs are “long-term” arrangements which will terminate upon the expiry of the project period. At termination, the infrastructure will be handed over to the contracting authority. The duration of the PPP is subject to the type and nature of the project which will be determined under the project agreements. However, the PPP Directive provides that a typical PPP project will last 20-30 years, and in exceptional circumstances, PPP projects could be entered for a lesser period. The considerations that determine the duration of the PPP project include the useful life of the assets of the project, the availability of financing and standard market practice for similar projects.
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