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Are PPPs the answer to Myanmar’s financial constraints?

Public-private partnerships, or PPPs, are the latest buzzword in government circles as the National League for Democracy looks for new ways to develop infrastructure projects without straining public finances.

Officials want to resuscitate the long-stalled Hanthawaddy airport project as a PPP scheme, for example, while Daw Aung San Suu Kyi told an investment forum back in January that she hoped to see progress similar to Thilawa SEZ made in Dawei, Tanintharyi, “in short order”, again based on a PPP initiative. The New Yangon City urban planning project is also structured as a PPP.

But the embrace of PPPs, a term largely undefined in Myanmar law, is not without its critics. In particular, the lack of transparency in some projects and absence of an open and fair tender process have undermined investor confidence.

The business community is watching how the authorities will regulate and improve the PPP framework following the launch last January of a publicly accessible online “project bank” that will also include large-scale infrastructure proposals financed through PPPs.

The Myanmar Times interviewed Siddhartha Basu, an economist with the think tank International Growth Centre in Myanmar. This year he authored a policy brief “Contracts in international business” which provides an overview of the contract types and outlines the PPP process for both public and private sectors.

1. What is the state of public procurement reform in Myanmar, such as a public-private partnership law and the “project bank”?

No single public-private partnership (PPP) law exists as yet in Myanmar, though a number of existing laws are relevant to PPP projects, such as the Arbitration Law 2016. Having said that, there was a 2018 bill proposing a Law on Public Procurement and Asset Disposal. If passed, the resulting law would mandate open tenders under certain circumstances. Moreover, the bill prescribes a “request for proposal” method for tendering large-scale PPP projects.

Another important development is the Project Bank Notification, in November 2018. The Project Bank, an official database of prioritised PPP projects in Myanmar, has been established on the basis of this notification. The database prioritises PPP projects in accordance with the Myanmar Sustainable Development Plan. The notification also mandates the creation of a centralised government unit for supervising PPP projects. Other key provisions relate to the procedure for obtaining government support, including financing, for PPP projects.

2. What are the differences between public procurement and public-private partnerships?

Public procurement typically refers to supply by the private sector of works, goods or services according to the requirements of a public authority. These are essentially business transactions, such as a purchase of computers for a government office or a contract to build a road.

In contrast, PPPs can refer to long-term contracts between a private party and a government entity for providing a public asset or service. This is different from public procurement in that the private party occupies the asset over a longer term. Furthermore, the private party in a PPP bears significant risk and management responsibility, which is usually not the case with public procurement. An example of a PPP in Myanmar is Thilawa Special Economic Zone (SEZ).

3. What is the importance of transparency and fair competition in Myanmar’s public procurement?

Firstly, I would just like to stress that transparency should be seen as a condition for fair competition. This is because transparency is needed for the government to be held accountable for its actions, including the extent to which its business transactions are fair and competitive.

With respect to fair competition, I would say it is important for two broad reasons. The first is that competitive procurement allows for public funds to be used efficiently. This is of vital importance in a country like Myanmar, with its limited ability to raise tax revenues. The second reason is that the manner in which a government conducts its business transactions affects public opinion and the public’s trust in the government. I think this is also very relevant in Myanmar’s case, including from the government’s perspective.

4. Are public-private partnerships an effective way to reduce the government’s financial burden and hence the tax burden?

In many PPPs, the private party contributes financially to the project. This is an attractive feature from the perspective of the Myanmar government, as is clear from the Project Bank Notification, which explicitly states that PPPs represent “an effort to reduce the [g]overnment’s capital and operating expenditures.”

However, evidence from other countries doesn’t support the view that PPPs consistently reduce the government’s financial burden and make public investments more efficient. In fact, studies show that these outcomes vary from project to project. The decision of which projects to pursue is thus a critical one, although projects may still evolve in unexpected ways.

One way to improve the method for selecting between competing projects is to estimate a reliable social discount rate – sometimes referred to as a hurdle rate of return – to quantify the benefits that a project should bring over time, and then assess potential projects against this benchmark. There are several approaches to estimating this figure, and the IGC has done some work in this area to support the Myanmar government with its calculations.

5. What are the most prominent PPP projects in Myanmar? What are their challenges or risks?

There are a number of PPP projects in Myanmar that have been prominent for one reason or another. Two very notable PPP projects, with very different stories to tell, are Hanthawaddy International Airport and Thilawa SEZ.

Hanthawaddy has suffered significant setbacks since it was first proposed in the early 1990s. A framework agreement for the project lapsed last year, before the project could enter its construction phase. Complications have included the competing interests of Yangon International Airport – another PPP – given the risk posed by Hanthawaddy of reduced business for Yangon’s. These entanglements can sometimes have significant implications for the public purse, such as with the private party in a PPP claiming compensation from the government for losses.

Thilawa SEZ, in comparison, is both operational and expanding. However, the risk with SEZs in general is that they can impose significant costs on society – through forgone revenues from tax incentives, duty drawbacks and zone-specific infrastructure investment – without generating sufficient societal benefits to compensate for these costs. The distribution of costs and benefits is also of critical importance. The Thilawa SEZ Management Committee is conscious of these risks, and are collaborating with the IGC to look at ways the zone can benefit the wider domestic economy.

Source: Myanmar Times

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