Focus | Public-private partnerships and our future fiscal fate
The government is strapped for cash, but demand for public goods and services is unyielding.
Despite the empty treasury, schools still need building, hospitals still need beds, the police force still needs bulletproof vests and roads still need to be paved and repaved, just to name a few of the demands.
Yes, the government can tax more, but this tool has its limitations and drawbacks. If the government goes to that well too much, the natives will eventually revolt, either by reducing their economic activity and thereby reducing the economic base from which the government draws revenue, or by outright protest and refusal to pay. There is only so much a people can be taxed.
The government can reduce expenditure and hope to free up some revenue. However, this, too, has limitations, especially since more than 75 percent of government expenditure is on salaries and subsidies to government corporations. Dare the government consider laying off hundreds or thousands of workers? No way, and nor should it, for, in an anemic economy, government downsizing might cause further harm. So what does the government do to meet unlimited demands on its limited funds? It does what many countries the world over have done. It turns to the potential of public-private partnerships (PPPs).
What are PPPs? According the World Bank’s PPP Knowledge Lab, a PPP is “a long-term contract between a private party and a government entity, for providing a public asset or service, in which the private party bears significant risk and management responsibility, and remuneration is linked to performance”.
In these arrangements the private sector provides the money for a public project and receives payback through some revenue source linked to the government. In this way the government meets a public demand without additional outlay of capital immediately, and, arguably, avoids taking a hit on its public debt.
One example of this is a project proposed by the PPP Investments and Construction Company Limited, in which a complex will be constructed on some 2.83 acres of land in Eight Mile Rock, on the island of Grand Bahama. The complex will consist of two buildings, both of which will house a number of government agencies in that area. One building will be 33,000 square feet, with three floors and the National Insurance Board’s Eight Mile Rock offices, and local government-related offices. The other building will be 13,000 square feet, with have two floors, a court house and police and fire station. PPP Investments and Construction Company Limited is a private entity and the tenant in its building will be the government of The Bahamas.
It appears that, under the PPP agreement between the government and the company, the government will lease to own the building for a period of 10 years; and at the end of the period, pay the private company $100 to receive the building freehold. The government will not have to provide any funds up-front for the building of the complex, which is estimated to cost $25 million. How will the building then be funded? The company is undertaking a private placement in which it is floating $25 million worth of fixed rate redeemable corporate bonds. The bonds will pay an annual rate of eight percent over 10 years, after which the full amount bond on maturity. The offer, according to private placement documents, has a minimum subscription of $50,000. The bonds will be issued this year and mature in 2028. There will be a bond sinking fund established as a restricted asset where funds will be deposited for the retirement of the bonds.
This PPP offering is interesting for a number of reasons. First, it was initiated under the former administration but endured under the new administration. This might speak to the robustness of the arrangement entered into between the government and the private entity.
Second, it may represent a model for how the government might, on this scale, and on a grander scale, fulfil some of the enormous public infrastructure needs in the country. One could well conceive of such arrangements for the construction of a number of schools, clinics, roadwork and the like.
Third, it may represent alternative savings and investment options for Bahamian residents, starved of such. A eight percent APR on a bond is not a shabby offering; and so long as the underlying arrangements providing the revenue for the funding of those returns and the retirement of the bonds are in place, Bahamian savers might have new options to deposit their money. It might also be a way to soak up some of that excess liquidity in our banking systems and provide an impetus for better rates on savings deposits in our banks.
Fourth and finally, it represents, it seems, a wholly Bahamian enterprise, with Bahamian entities engaged in the partnership and the Bahamian public providing the funding for the project’s construction. A kind of ‘win-win’, one might say.
Potential investors will, of course, need to do the necessary due diligence to satisfy themselves about the integrity of PPP arrangements such as the one being put forward by PPP Company and Investment Company Limited. The companies themselves must meet the regulatory standards of the Bahamas Securities Commission in putting forward their offerings.
What I take note of here is the model that this arrangement presents for the future of the country’s fiscal circumstances. It points the way to how a fiscally constrained administration might find the means to collaborate and partner with the private sector to meet important public sector needs, while at the same time managing its indebtedness so as not to further encumber itself. Of course, it will also have to ensure that its obligations under the PPPs are managed in such a way that cash flow is properly managed as well. PPPs: The way of the future for governments in fiscal peril. Something to think about.
- Zhivargo Laing is a Bahamian economic consultant and former Cabinet minister who represented the Marco City constituency in the House of Assembly.