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Summary of Public-Private Partnership (PPP) Potential in East Timor

Core Content

This document outlines the potential for Public-Private Partnerships (PPPs) in East Timor (Timor-Leste), focusing on the benefits, risks, and best practices for implementing such partnerships. It was prepared in the context of the International Investment Conference on "Investment and National Building in Timor Leste" held in 2010 and aims to guide the Government in developing its PPP agenda.

Main Benefits of PPP

• Accelerates infrastructure development: PPP can help speed up the delivery of infrastructure services and assets.
• Reduces fiscal pressures: By shifting some risks and costs to the private sector, PPP can ease short-term fiscal burdens.
• Improves value for money: PPP often results in cost savings and efficiency gains, with some studies showing reductions in costs and delays.
• Enhances service quality and coverage: PPP can lead to better quality and broader coverage of services due to private sector efficiency.
• Supports local industry and innovation: PPP can bring in international expertise, improve technical standards, and enhance local capacity.

Risks of PPP

• Fiscal risks: Long-term payments may strain government budgets and limit future spending.
• Contingent liabilities: PPP projects can create obligations that must be managed carefully.
• Perceived country risk: Lack of experience and transparency may increase the risk premium for private investors.
• Need for financial support: Government may need to provide guarantees or financial support to make PPP projects viable.

Good Practice in PPP Development

• Government involvement should be limited to manageable risks: Governments should only take on risks they can control or influence.
• Transparent and competitive procurement: A clear process for identifying, preparing, and procuring PPP projects is essential.
• Financial and non-financial support: Government support can include upfront payments, availability payments, grants, and other mechanisms.
• Legal and regulatory clarity: Clear policies and frameworks are necessary to attract private investment and manage risks.
• Use of international expertise: International consultants are essential for project preparation, especially in countries with limited PPP experience.
• Avoiding "white elephant" projects: PPP should be based on economic and social impact, not just financial profitability.

Typology of Government Support

• Financial support: Includes grants, upfront payments, availability payments, and soft loans.
• Non-financial support: Involves policy frameworks, regulatory clarity, and institutional capacity.
• Guarantee funds: Can be used to cover potential financial obligations and reduce risk for private investors.

Examples of Financial Interventions

• Government payments: To supplement project revenues, especially in the early stages.
• Investment/loan funding: Can be direct or indirect, through state development banks or investment funds.
• Infrastructure Investment Funds: Can be public, private, or a mix, managed by either the public or private sector.

Policy Recommendations for Timor-Leste

• Prioritize high-impact projects: Focus on projects that are critical for the economy and have clear public benefits.
• Develop a policy statement: This should be endorsed by the government and used to guide the PPP process.
• Establish a dedicated team: For project preparation, management, and coordination with consultants.
• Improve transparency and competition: Ensure a transparent process for handling unsolicited proposals and competitive bidding.
• Build institutional and sectoral capacity: Strengthen the public sector's ability to manage PPPs and support local industry development.
• Implement a competitive procurement process: Two-stage bidding with a final award based on a single variable to ensure fairness and efficiency.
• Monitor and evaluate performance: Use service-level indicators for performance evaluation and remuneration, rather than physical or financial metrics.
• Ensure financial sustainability: Compare the long-term costs of PPP with traditional procurement and public financing.

Lessons from International Experience

• Decision making: Clear commitment from the highest levels of government and a dedicated delivery unit are crucial.
• Project selection: Projects should be chosen based on value for money and appropriate implementation modalities.
• Contract design: Careful planning and standardization of contracts, including clear jurisdictions and performance indicators, are essential.
• Government-private sector interaction: User willingness to pay and cost recovery mechanisms should be assessed, and social assistance must be considered where appropriate.
• Framework development: A legal and regulatory framework should be developed in parallel with pilot projects to support long-term PPP growth.
• Conflict resolution: A binding arbitration mechanism is important to resolve disputes effectively.

Conclusion

PPPs have the potential to bring significant value to East Timor, particularly in accelerating infrastructure development and improving service efficiency. However, they come with risks that must be carefully managed. The Government should focus on developing a clear policy statement, building institutional capacity, and ensuring transparency and competition in the procurement process. While a full PPP framework is important, some projects can be initiated before it is fully in place, provided they are well-prepared and justified. Overall, PPP is a viable option for East Timor but requires a strategic, transparent, and sustainable approach.