PSD Blog - The World Bank Group

Weekend Reading: Unemployment Edition

Can development workers win wars?

Is transport infrastructure the most important aspect of urban evolution?

The Treasury's courtship of the blogosphere.

Is China's changing worldview bad for business?

America's largest retailer: it's not Wal-Mart.

Why are some marathons more volatile than others?

The EU's role in reducing state fragility in Sub-Saharan Africa.

Thoughts on migration: Kosovo edition.

Unemployment

What America can learn from Europe about unemployment.

Other difficulties that arise from high unemployment.

Plus, unemployment charts galore from Calculated Risk.

A less pessimistic take on today's numbers (it's still ugly).

Why employment is down and GDP up? It's all about productivity.

The Obstacle to Renewable Energy (hint: it isn't about costs)

Columbia University's Geoffrey Heal asks, "can renewable energy save the world?". The answer is dependent on infrastructure and technology, rather than cost:

Where does this leave us with renewables as a solution to the problem of climate change? We can replace some fossil fuel power with renewable power without a major cost increase, but we cannot hope to replace a major fraction of our fossil power with intermittent power sources such as wind and solar – unless we can develop storage technologies. Being able to store power and smooth the output of intermittent power sources would greatly enhance the attractions of renewable power.

The bottom line is that neither costs nor capital requirement will prevent us from decarbonising the electricity supply. The real obstacle to doing this largely with renewables is our current inability to store power, and as long as we cannot store power we will need to use non-renewable sources like nuclear and coal with carbon capture and storage.

Probably a good place to invest some stimulus money.

The day you’ll be able to stumble upon development funds

Quite literally…

Imagine walking around the streets of DC with your mobile phone in hand. You "point" to, say, a building or a bridge and an application on the phone allows you to detect whether the project is a beneficiary of some of the $787 billion allocated by the US Government American Recovery and Reinvestment Act. The amount of money spent for the building and the name of the beneficiary are also displayed. Public spending could not get more transparent – and tangible – than this. Science fiction? Not anymore, thanks to the augmented reality mash-up just released by the ever inspiring folks at Sunlightlabs (hat tip: David Osimo).

 

Should the public sector guarantee private sector financing for PPPs?

The financial crisis and subsequent credit crunch has greatly reduced the options available to governments regarding PPPs. The reason is very simple: There is no longer enough money available for long-term private infrastructure investment. However, I see this as a temporary situation, as the rationale for PPPs remains as strong as ever. 

In the meantime, governments in many countries are in the middle of procuring large PPPs and therefore in need of solutions to the temporary dislocation in credit markets. More and more governments have been turning to public sector guarantees of private sector loans for PPP projects as a way to overcome shortfalls in available financing.

The question is: Is this solving the problem? There are voices that say this doesn’t make sense, why should the public sector guarantee a loan by the private sector? Isn’t the rationale behind PPPs to get the private sector to put its own capital at risk?

Examples of Chile’s innovative approach to PPPs

As I discussed in my previous post, Patricio Mansilla of Chemonics International has explained to me that Chile has been at the forefront of innovation in the design of PPPs. The government has experimented with a bidding mechanism for PPPs based on the Least Present Value of Revenues (LPVR). The innovative feature of  the LPVR approach is that contracts always have a variable term date, in contrast to normal PPPs, which have an end date set in advance. Considering the number of comments generated by the previous post, I thought I would provide a bit more detail on the benefits of this approach, plus a few examples of how LPVR PPPs work in practice.

First, the advantages of this approach over fixed term bidding concessions, as I see them:

• The LPVR is concessionaire friendly, which allows for many bidders on each deal. Lack of bidders is a problem on some PPP deals in Latin America.
• Another advantage of the LPVR approach is that it is easy to enforce compared to normal fixed-term contracts, which are exposed to renegotiation risks that sometimes can threaten the solvency of the consortium and thus the project as a whole.
• The government’s only burden to enforce the concession is to closely monitor the concessionaire’s operational cash-flow revenue. There is still a need to verify solvency and overall performance and maintenance of the project itself, but those can be achieved under much less pressure. After all, these burdens are mitigated by the concessionaire’s interest in recovering its investment. There is no chance for extra profit, and delays only postpone revenue recognition.

Despite crisis, positive outlook for PPPs in Russia

Editor's Note: The following is a joint submission by Filip Drapak and Natalia Reznichenko.

Many countries are experiencing a big infrastructure gap, and Russia is no exception. The Russian government is well aware of the problem, and it has announced that it will invest about US$1 trillion over the next 10 years in improving infrastructure. But how can the government raise that kind of capital? The expectation is that the private sector will contribute most of the financing though a Public Private Partnership (PPP).

While Russia does have some experience with PPPs, the track record so far has been spotty. We might mention in this regard one project that is sometimes considered to be the first PPP in Russia—the South-West Wastewater Treatment plant of St. Petersburg. The project was agreed upon by the Russian, Finnish and Swedish governments all the way back in 1986, but due to a lack of public financing the project was stopped. It was resurrected as a PPP in 2002 and formally procured as a 12-year BLT (Build-Lease-Transfer) contract.

Latin America: From disappointment with privatization to innovation in PPP’s

Editor's Note: Bernardo Weaver is a Wharton MBA in Finance Candidate and a consultant at the World Bank working on Public Private Partnerships.

Privatizations in the 80’s and 90’s in Latin America proved to be disastrous by many accounts. The success of the Thatcher administration in the United Kingdom did not transfer well to the other side of the Atlantic, at least south of the US. Many Latin American politicians found an easy target in privatizations: The sale of state-owned assets at sub-par value.

Politicians also conveyed the idea that the state and the citizens are identical. As a result, the population thought that their assets were sold at fire sale prices to big international companies. These international companies—often connected with aggressive animals like sharks and lions (and even monsters)—became vilified. Governments did not respect clauses and tariff readjustments, and the famous instability of the region was again reconfirmed.

Nigeria: Taking the lead on PPPs in Africa?

For quite some time, I’ve suspected that Nigeria would become the leader in Africa for PPPs. Several projects have been announced, and serious government interest has been demonstrated by discussion on policy, legislation and deal flow. The Global Legal Group has provided excellent insight into this in their 2007 Guide to PPP/PFI Projects. In a surprisingly short amount of time, Nigeria has been able to sign a 25-year concession agreement with Bi-Courtney Consortium, concessionaires of the Lagos-Ibadan Motorway (reportedly 27 months). Nigeria has also utilized a PPP-approach to areas such as ports, tourism, healthcare and housing.

Is it a good idea to bail out privately financed infrastructure projects?

When I first heard about public private partnerships (PPPs), most of the emphasis was on PPPs being privately financed with private money at stake. But now, I hear the news about needing to bail out PPP projects with taxpayer money and I wonder: Is this a good idea?

To answer this, we first have to look at whether the reasons for the failure of the PPP are due to (1) mismanagement of the project by the private partner, or (2) macroeconomic impact, which could not have reasonably been foreseen by the public or private partner. If it’s the latter, then I’d argue there’s a very good rationale for a public sector bailout. How then to find the best solution for the project to survive and deliver the hoped-for results?

What can the London Underground tell us about PPPs?

If you’ve ever been to London, then you’ve almost certainly seen the emblematic red circle and blue stripe with the word UNDERGROUND emblazoned on it. The Underground is a huge operation, made up of some 270 stations and 400km of track. So how does London keep this operation running?

Earlier this decade, the government experimented with a public-private partnership (PPP) under the name of Metronet. The hope was to generate efficiencies by bringing in the private sector. So did it work? A recent report by the UK National Audit Office (published 5 June 2009) makes it pretty clear the answer is "no." The report pinned responsibility for this failure on poor corporate governance: