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The new capital initiative

Oct 29,2017 - Last updated at Oct 29,2017

According to Prime Minister Hani Mulki, the government is seriously considering a proposal to develop a new capital city in partnership with the private sector.

In order to demonstrate the government’s determination to proceed with the initiative, the premier pointed out that the preliminary master plan of the new city has already been designed.

Advocates of the initiative touched on the positive economic spillovers of the project and underlined the need for a new capital to mitigate growing pressures on Amman’s infrastructure.

Other analysts highlighted the project’s positive repercussions on the quality of public services offered to citizens, through abundant parking place, modern public facilities and lighter traffic.

Urban planners and public transportation experts commended the initiative, which, they say, will pave the way for modern public transportation solutions and help unlocking bottlenecks constraining residential and commercial expansion in Amman.

Sceptics, on the other hand, question the government’s financial and operational capability to implement such mega project, and cite excessive public debt burden and prolonged delays in lower-scale government initiatives, including the notorious rapid bus project, to support their argument.

Some commentators went even further and accused the government of fabricating this initiative to relieve part of the mounting pressure on it to think outside the box and propose creative solutions to spur economic growth, instead of exclusively focusing on fiscal reforms.

The government responded to key concerns by asserting that the mage project will not be funded by public resources. Instead, private partners will be responsible for funding and executing the project through the public-private partnership (PPP) model of “build, operate and transfer”.

From an operational point of view, the government response sounds convincing, as the PPP model entails sizeable penalties on private partners if they fail to meet funding requirements, quality standards and delivery deadlines as articulated in the partnership agreement.

However, the same government response failed to address the financial concerns regarding the project.

Given that the government is the ultimate owner of the government buildings and the public facilities in the new capital, the PPP model “build, operate/lease and transfer” would only resemble an accounting workaround through which the government can borrow funds indirectly without adding to the official record of public debt.

It is true that under the PPP model the government will not borrow new funds or incur any expenses until the private partner completes the project.

However, upon delivery, the government shall meet the pledge it undertakes in the PPP contract to make regular payments to the private partner that should ultimately cover all project costs, including profit margins and funding costs.

According to most studies, meeting future obligations and contingent liabilities of PPP contracts proves costlier than servicing the public debt needed to finance public projects conventionally without a private partner.

In addition, without an abnormal increase in future government revenues, the government will end up in a debt trap where it needs to issue new debt to fund future payments triggered by delivered PPP projects. 

Given the already high public debt level in Jordan, such scenario will have dangerous ramifications on future economic stability.

Leading economic institutions continue to warn governments against the contingent liabilities of PPP projects, while stressing that PPP models should be mostly considered as an efficiency enhancing tool, rather than a new pool of funding.

Despite all aforementioned financial obstacles, the government initiative to build a new capital should be praised, as it exemplifies a progressive attempt to think outside the box and propose creative solutions to break the static equilibrium of the Jordanian economy.

The initiative may even become financially viable if the government drops the idea of constructing new government buildings and public facilities for now, and leaves the first phase of the new city to private developers and stakeholders struggling to overcome expansion constraints in Amman (housing companies, hospitals, medical complexes, etc.).

Under this scenario, the government will be responsible for providing the land, drawing the master plan, offering convenient transportation solutions, and granting concessions to private developers responsible for landscape development and attracting potential investors.

Providing transportation solutions through PPP projects in this scenario will prove financially feasible for the government, as passengers will eventually bear the cost through road tolls or bus and train tickets.

The writer, an economist and columnist, contributed this article to The Jordan Times.

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