Why Development of Afghanistan Depends on Public-Private Partnerships (PPPs)?

Contributed By Talhat Hidayat, A Public-Private Partnership Specialist at Ministry of Finance (Afghanistan)

Afghanistan’s infrastructure and service delivery is grossly inadequate in comparison with global and even regional standards and is one of the critical reasons holding back economic growth. The existing infrastructure and service delivery are largely inadequate to satisfy the needs of economic development as well as the demand arising from population growth. However, the large fiscal deficit and paucity of resources limit the Government’s capacity to meet growing infrastructure and service delivery needs and has emerged as a major constraint to the country’s efforts to improve its investment climate.

Given the increasing demand for adequate infrastructure and services and the need for a significant level of investment, capacity, and resources, the Government of Afghanistan recognizes the need to augment its efforts and scarce resources through increased private sector participation. In this case, the Public-Private Partnership (PPP) is considered as an option to provide infrastructure and services to the public. PPPs are contractual arrangements between the public and private sector parties for the private delivery of public infrastructure services or other basic services. The private sector undertakes to deliver the desired service and assumes the associated risks to earn a fair return.

PPP is a contract for service and outputs, rather than merely a physical asset. This policy does not cover government assets listed for divestiture or privatization and the outsourcing of public services where no significant private investment and risk transfer is involved.

PPPs may be undertaken for:

The design, construction, development, maintenance, and/or operation of new infrastructure, assets, and/or facilities.
The rehabilitation, modernization, expansion, operation, maintenance, and/ or management of existing infrastructure, assets, and/or facilities.
The provision of services previously undertaken by a public sector or government entity, where these services are financed wholly or partly by a private party.

The private partner is remunerated through tariffs, transits, rents, charges, or fees to be collected by the private party from users or customers of the assets or services, or a payment made by the public sector partner or some combination of these.

As per the approved PPP National Policy, the main objectives of PPPs in Afghanistan are to:

Mobilize private sector investment to expand access to infrastructure and services to support sustainable and inclusive economic growth.
Reduce the investment burden of the government through the transition of financing responsibilities from donor support to private investors.
Promote better and more efficient operation of public assets, properties, and quality service delivery.
Utilize the investment and business skills of the private sector for the establishment and reconstruction of infrastructure for the supply of public services.
Ensure consumers of public services are provided with high-quality services at a reasonable price.
Support and develop Afghanistan’s capital markets as a means of financing infrastructure and services.
Provide financial support and incentives (such as political risks insurance, tariff exemptions, and tax holidays) to private partners in PPP contracts.

Benefits of PPPs to the Government:

PPPs are not only used for the purpose of financing projects, but also to utilize the private sectors’ capacities such as specialized knowledge and experience, management skills, and incentives to optimize resource utilization. These can be achieved through the transfer of risk and greater responsibility to the private sector.
PPP contracts are currently considered as the best option for reducing government spending. The experiences of different countries show that quality PPP contracts guarantee economic and infrastructure development.
The PPP improves economic performance and consequently improves the country’s economic indicators because the private sector intends to put the outsourced construction project into operation as soon as possible.
PPPs significantly reduce government spending and budget deficits.
PPP contracts also have the potential to direct liquidity in the country, helping generate and reduce inflation due to the use of public funds.
PPPs extend the life of the project, which will benefit both the government and the country after the transfer.
Completing the country’s development and economic projects with PPP will allow the government’s budget to shift to social and cultural sectors which has its own advantages.

Benefits of PPP to the Private Sector:

Based on other countries’ experiences and existing research, the return on investment in the private sector is much higher than in the public sector.
Public-Private Partnerships offer more business opportunities to the private sector. The private sector will be engaged to deliver a full suite of services (e.g. design, construction, operations, and maintenance) which were traditionally performed in-house by public agencies or performed by multiple private companies.
The private sector has more room to innovate and offer efficient solutions for public services. Moreover, the private party can also use its experience and network to maximize asset utilization and the commercial potential of the project. Thus, PPP allows the private sector to move from just constructing assets to designing and delivering innovative solutions.
The private sector’s involvement in projects gives other companies valuable experience to spur their development in the PPP arena and position them to win other contracts.
PPPs increase the level of private sector participation in government services.
The taxpayers benefit by avoiding paying higher taxes to finance infrastructure investments.
Moreover, it is advantageous for the taxpayers that PPP is structured so that the public sector body makes a capital investment which usually does not need any borrowing.
By specifying what it wants rather than how it wants it, the public partner maximizes opportunities for the private sector to bring innovation to the table; an ingredient often lacking in large public works projects.
The private developer takes full responsibility for both design and construction in accordance with the standards provided by the public owner. Since the private developer is often charged with operations and maintenance, it will tailor the design to minimize maintenance and operational costs.

Projects under Implementation:

After the establishment of the Central Partnership Authority (CPA) under the direct supervision of the Minister of Finance, the CPA has prepared the PPP National Policy, PPP Law, PPP Regulation, and other standard documents and templates.

Besides the development of Legal and Institutional Frameworks, CPA has achieved good progress in the implementation and attraction of investment in the country as well.

Currently, CPA has awarded six energy projects (Kajaki Phase II Hydro Power Plant, Kandahar Solar Power Plants, Shibarghan and Mazar Gas-to-Power, and Electrification of Badakhshan) with a total investment of around one billion USD. Other Projects in different sectors i.e. Agriculture, Energy, Health, Urban Development, Civil Aviation and IT are under process.

Projects Under Preparation and Transaction

Baghdara Hydro Power Plant

Baghdara 226 MW hydro project is one of the prioritized projects of MEW with a total investment of $570 m for 25 yrs. The feasibility study of this project is conducted by a German company (Fitchner). The construction of the project is expected to start in 2021 and is going to be completed in three phases (Pre-Construction, Construction, and Operation) by the end of 2026.

Sarobi 2 Hydro Power Plant

Sarobi 2 hydropower plant will be constructed on the Panjshir River in two phases. In the first phase, three turbines are being installed with a capacity of 105 MW each, and the second phase will have a capacity of 128 – 140 MW capacity. The project has the capacity to provide electricity to eight provinces. The total investment of the project is estimated at $315m.

3. Fiber to the Home

FTTH is to be implemented by the Build-Operate-Transfer (BOT) model of PPP. The project aims to reach fiber to every home, where the private sector is supposed to build the last mile connectivity to every home using the basic infrastructure of Afghan Telecom (AFTEL). Based on the feasibility study, the estimated investment required is $50-100 million.

Ali Jinnah Hospital

Ali Jinnah hospital is a 200-bed hospital built by the Government of the Islamic Republic of Pakistan. The hospital requires detailed renovation with some extension after which the hospital will be operated by the private sector through the Renovate Operate Transfer (ROT) model of PPP. The feasibility study of the project needs to be revised based on which the required investment by the private sector is around $7m.

Diagnostic Center in Ibni Sina Hospital

The purpose of the project is to provide an effective diagnostic center of the diseases suffered by patients and identifying medical sensitivities of the patients to avoid wrong/under/over medication resulting in adverse effects and to extend the research and development capabilities of the medical process. The required investment by the private sector is estimated to be $3.77m.

Herat 25 MW Wind

This project is in the contract negotiation stage with 77 Construction Company

Operation of Slaughterhouses

The operation and maintenance of 5 slaughterhouses constructed by Asian Development Bank (ADB) for $30m in Kabul, Herat, Mazar-e-Sharif, Kunduz, and Kandahar provinces. The operation and maintenance of these slaughterhouses will be carried out by the private sector through the Lease model of PPP.