Lessons Learned from Public-Private Partnerships in Infrastructure in the Arab World: A Cautionary Tale – Part III

Julia Devlin, 05 Mar 2015

Reality check: Not all public-private partnership (PPP) projects in the Arab world are a success. Less successful projects have been hindered by a number of factors, such as: choosing PPP arrangements and sectors with limited global experience; insufficient government guarantees in the absence of adequate regulatory and legal provisions; high demand risk; a lack of preparedness on the part of government entities; and weak inter-ministerial coordination.


A recent World Bank project in Egypt, West Delta Water Conservation and Irrigation Rehabilitation, offers some useful lessons. The West Delta region is a reclaimed agricultural area with significant agricultural output. Recently, intensification of commercial agriculture significantly depleted its groundwater resources, and land quality is deteriorating.  Consequently, the project aimed to provide surface water resources as a substitute for dwindling groundwater.


A design-build-operate (DBO) PPP model for an water irrigation system was selected; it would also provide institutional support. The PPP model involved a long-term contract (up to 30 years) for water between farmers and the private operator. The exact size of the scheme depended on the farmers’ willingness to pay for connections and for water tariffs, as determined by the piped irrigation system design. The project evaluation suggests that the DBO model was technically appropriate, although there was little experience with this approach either globally or in Egypt. A similar PPP project in Morocco (the Guardane Private Irrigation Project) involved simpler design.


Under the DBO model, the private sector assumed the development risk, and a relatively lower financial commitment was required upfront. The Government of Egypt, in turn, was to raise debt funds and mitigate foreign exchange, financing, and credit risks. Private investors were expected to provide 15 percent of equity—a level well below traditional private project finance schemes—and required to pay a predetermined annual fee for the concession duration. This scheme potentially translated into lower costs and more affordable tariffs for the farmers.


Nevertheless, a number of complementary factors were missing that would have enabled private investors to better assess revenue streams used to pay the concession fee, offset the equity investment, and pay for the water supply system operation and maintenance. There were uncertainties caused by the lack of a PPP law and from project design inadequacies. The project size was not defined in advance, preventing investors from adequately assessing financial costs precisely, based on water demand. This uncertainty, in turn, heightened the risks and deterred potential bidders. In addition, the water tariff in the grower-operator contract could not be assessed in advance. Another issue revolved around inconsistent land titling and registration; not all farmers had title to their land and not all lands were registered. However, both the farmer deposit and water tariffs were to be calculated on the basis of irrigated area, and farmers needed title to the land to enter into the contract. In addition, some farmers had to raise capital to make the security deposit and advance fee payments, but commercial banks required proof of title for loans.


Other issues were insufficient government guarantees to address demand risk, the project's failure to assess government agency capabilities, and weak cross-sectoral coordination, with insufficient involvement of the Ministry of Finance and the Ministry of International Cooperation.


Read Part I, Part II



Julia Devlin is nonresident senior fellow in the Global Economy and Development program at Brookings Institution. She formerly worked as consultant at the World Bank Group and as a lecturer in economics at the University of Virginia. Her focus is economic development, private sector development, energy and trade in the Middle East and North Africa. She holds a Ph.D. in Economics.

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