Offset and PPP – How one complement the other

Below is a report published at page 5 of Countertrade and Outlook, Vol XXV No. 8, dated April 23, 2007 of a presentation delivered in International Offsets 2007 on 21st March 2007 in London. 

David Hew, Leader of Team APCA (the Asia Pacific Countertrade Association Pte Ltd.) and one-time Head Legal Counsel for the project sponsors of the $5bn Bakun Hydroelectric Dam project in Malaysia, spoke of the links between offset and public private partnerships (PPP).

Hew presented an analysis of how a PPP Structure with offset embedded can satisfy the objectives of all parties in a PPP program. Citing Israel’s Tel Aviv Light Railway project as an example he said the government there had put up 80-90 percent of the project cost by way of grants, and successful bidders had to engage domestic industry for up to 30 percent of the value of the grant. The project was carried out over a five year period.

He illustrated the involvement of various parties: the public party (government); the lenders; shareholders; turnkey contractor; operation & maintenance contractor; and the private party (joint venture partner) with a Special Purpose Vehicle (SPV).

Hew said that when deciding on the offset projects that are wanted by the government to be embedded in the PPP, local private parties may be “persuaded or directed” to engage, but this is best determined through transparent, fair and open competition . “I believe that market forces are the best in picking winners”.

From the public partner’s perspective offset or PPP contracts must be structured to ensure that the benefits do not just accrue, but are also enhanced and are achieved at the right costs.  The private partner must not only make a profit for itself but increase the quality and service of what it offers and discharge corporate social responsibilities.

The offset objectives though must come second.  “The procuring party’s needs and objectives must be served first and should never be compromised by the offset objectives. The private partner’s objective is to differentiate its offerings and to offer value beyond price, quality and service,” replied Hew.

The PPP and offset structure cannot be done in isolation because the private partner’s objective is to demonstrate that it is their efforts that brought about the offset contract – hence causality – and that it is a new contract and not a continuation of an existing contract – thereby achieving additionality.

On the other hand, the public partner’s objective is to ensure that public accountability is satisfied and that the additional costs, if any, of the partnership’s utility, efficiency and benefit are acceptable.

These three factors are not the same, however. Hew questioned whether a project that is not commercially viable but is of utility, and also effective “from the perspective of the larger good”, delivers value for money from the perspective of the national interests.  His answer was that value for money is relevant for both offset and PPP.

Good project due diligence and documentation are therefore critical and best practices must be adopted and delivered.

A delegate commented that the PPP process is very important for those countries like the Balkan allies in NATO that have severe constraints on their budget and wish lists that are much greater than their resources. One way to achieve their needs is to offer a PPP solution in which the finance of projects comes, usually partially, from the private sector rather than the public sector so that the PPP is paid for basically with payments over the life of the project rather than with significant capital expenditure at the beginning.