Azerbaijan and public private partnership

Analysis Materials 16 December 2009 12:29 (UTC +04:00)

The Azerbaijani economy is now at the stage of active development. The main tendencies and the way of this development have been determined, and at the same time, the search is continuing for the new forms and methods for sustainable growth of the country. Currently, we are witnessing the implementation of large-stage state infrastructure projects, and in light of the concept of public private partnership can be relevant for us. 

If to say briefly, the public private partnership is a form of equal relationships between state and private business, where the first offers the second to participate in socially significant state projects, using its financial and intellectual resources. Firstly, it deals with infrastructure projects, which assume public importance: hospitals, schools, prisons, railways, subways, water facilities, ports, highways, etc.

The purpose of the partnership is to balance the strong sides of both sectors of the economy for the common good. The state is interested in promoting socially significant infrastructure projects, business - in making profit. Public private partnership is also the form of relationship, when these tasks can be beneficial to both sides. Such cooperation is an objective process of reducing the state's role in economic activity (but not weakening because the state remains the owner of the strategically important infrastructure facilities). So the state is being unloaded from part of economic, particularly financial burden, transferring it to private business. 

As mentioned above, since it deals with the construction of public facilities, the partnership is usually initiated by the state. Depending on what model of relationships the partners choose - concession, leasing agreement, joint venture, production sharing agreement, contracts for works and services, etc. - the degree of involvement of private business is determined in this project. This may be not only the financing and construction of the facility, but most often the continued operation, maintenance, long-term ownership, or some other form.    

Depending on the degree of involvement between the sides and the risks associated with the project, most of them is transferred to the private sector. The question of receiving profit is also limited and decided proceeding from the concluded agreement, but in any case, the state acts as guarantor for the business return on invested capital, together with dividends, of course, depending on the quality of work performed.

In such a system of relationships there are obvious advantages for each of the partners. State will be able to initiate more projects, saving budget. A private company (or consortium), invested own financial resources and values of its reputation in the project, will try to be effective in achieving the goal, by demonstrating its consistency in the implementation of this project, will continue to rely on its relevance. In addition, it will receive benefits in the form of obtaining a stable income, ensure the creation of additional capital, improve executive skills.

Finally, it ensures the creation of added value for consumers and society as a whole. All these, ultimately, affect the level of quality in the private sector. Current climate of certainty in the relationship enables the partners to plan future activities and (taking into account the long-term partnership) to properly allocate resources.

The system of public private partnership has long and well developed in the United States, Western Europe and in many other countries. In Europe, the annual cost of public projects based on private funds totals about €23 billion. In the United Kingdom, for example, since 2000 the database of Partnerships UK - a company created by the Treasury and the Scottish Parliament specifically to mediate and assist the sides in addressing the economic assessment of projects - contains more than 900 contracts with a capital amounting to 66 billion pounds. Contracts vary from the rental of X-ray equipment to the construction and reconstruction of the London subway.

Total investments in infrastructure projects with private capital (million U.S. dollars) from 1990 to 2008. World Bank data.                                 

Amongst the former Soviet republics, serious attention was paid to the concept of public private partnership in Russia and Kazakhstan. Currently the European Economic Commission of the UNO is working on creating a single point of public private partnership to assist countries, where this partnership is just beginning to develop. Perhaps we should be more active in this regard.

In addition, the trust between government and business, which is an essential factor for the existence of such partnerships, is also a measure of civilized relations between economic players, enhances the international reputation of the country.