PSD Blog - The World Bank Group

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.

We will not be silenced

“We will not be silenced”—That is the main message I remember from reading about the PPP regeneration project in Dublin, which captured the attention of many Irish citizens. They went out to the streets and demonstrated. They demonstrated surprisingly in support of the regeneration deal, saying:

They hope we will go away and stay in our long forgotten ghettos across Dublin City. We will return to our homes not to forget our dreams of a decent place to live but to organize our fight against Dublin City Council. We are asking people to come out and support us, to wear black and bring pots and pans to make plenty of noise. We will not be silenced. We want our 14 acres site developed as agreed.

This shows the unprecedented support the community of citizens provided for the redevelopment of Brownfield ghettos. This kind of PPP is much closer to the hearths of all citizens living in a city undergoing regeneration, and every success and failure is immediately recognized.

PPPs endorsed on the banks of Lake Victoria

There is a place where the Nile is born, and the locals can show you exactly where it is. It is quite a privilege to see it in person—a place that was searched for by generations of explorers in Africa. I am talking about that spot on the northern bank of Lake Victoria where the White Nile first enters the world. Another important birth is taking place nearby in a ritzy neighborhood of Kampala called Munyonyo.

At an upscale resort in this neighborhood, Ugandan president Museveni is hosting over 1000 delegates from a number of African countries (including 4 other presidents) to discuss how to move ahead in the transformation of Africa. The first day of dialogue kicked off with a strong call for public private partnerships (PPPs). When I was in Munyonyo last year to hold a Regional PPP Forum for Anglophone Africa, we had no idea that only a year later our efforts to push PPPs in Africa would receive the endorsement of the top of the public sector pyramid—the most basic element required to get a PPP off the ground. This clearly happened in Munyonyo this year, and it is not just the political endorsement of one country or one president but the consensus of Africa.

PPPs in India

In a recent post, Filip talked about the role of EPEC in promoting Public-Private Partnerships (PPPs) in the EU. Filip’s post highlighted some of the problems facing PPPs, such as a lack of adequate finance and insufficient capacity within the public sector to define, manage and/or implement its PPP policies and programs in accordance with market best practice. The EU is not the only one facing these kinds of challenges. Below, I report on the problems faced by PPPs in India, suggesting that the concerns raised by Filip have a broader implication for developing countries.

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.

EPEC: The best example so far of the regional PPP knowledge centre

Not only is regional cooperation around public private partnerships (PPPs) possible, but I would say that it is certainly more than desirable. The EU seems to agree - it made the big jump into this field last September and established EPEC at a meeting in Paris convened for this purpose.

What does EPEC stand for? It is the European PPP Expertise Centre, hosted by the European Investment Bank (EIB) and therefore located in Luxembourg. According to the EU Structural Funds Directorate:

The general aims of EPEC are providing support to, and assisting its Members in the development of the skills and capacity required within the Public Sector to define, manage and/or implement their PPP policies and programs in accordance with market best practice. Moreover, based on the Members’ experience, the expertise center will provide its Members with guidelines, papers and comments on relevant issues concerning the structuring of effective and efficient PPP projects.

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?