When Public-Private Partnership (PPP) investors are asked what they look for in a project, they would normally reply they like projects that are bankable, where risks are fairly allocated between the government and the sponsor. When one probes deeper, though, as to where they normally invest, they would typically say in a market where there is deep commitment by the government to undertake an effective PPP programme. This is a very telling answer which sometimes is lost to governments who want to pursue ambitious PPP programmes.
Bankability for a developing country involves more than de-risking projects. More importantly, it entails de-risking the country and its PPP programme.
Creating an enabling environment for private sector participation is a task for the whole of government. First of all, aligned and consistent policies on ease of doing business need to be put in place. This includes registration of new businesses, and for foreign investors – ease of capital repatriation. The country’s creditworthiness is also a fundamental requirement.
Availability of local financing enables ease of structuring of deals and lowers attendant financing costs. Frameworks for aligned and smoother infrastructure implementation, such as right of way laws, sectoral regulations and arbitration processes, are also a must. Lastly, a clear direction on the sectors governments want private participation on should be consistently communicated. Any major changes in government policies impact on private sector confidence and commitment, which could take years to regain.
To be effective as a major agenda of a government, PPPs must be undertaken in a programmatic approach. This is due to massive pre-investment activities that investors commit to. It takes a deliberate decision to invest in a country and set up the ancillary support systems.
Two critical building blocks are necessary to launch an effective and sustainable PPP programme: a legal basis (could be in a form of law and/or policy guidelines); and a central unit that will be the prime advocate for the programme. This body will enhance policy and regulatory frameworks for private sector participation in infrastructure delivery, improve processes, develop deeper appreciation and capacity of government on doing PPPs, and develop a real pipeline of projects through proper project preparation aided by reputable experts.
What do markets with developed PPP programmes have? Policies and frameworks that mitigate the risks investors undertake.
While the essence of a PPP procurement is to transfer substantial risks to the private sector, investors still seek a stable and predictable environment that would enable them to recover their investment and earn a reasonable return.
The investment recovery and returns are of course premised on the delivery of better infrastructure and services that the public sector could not typically provide.
That means having a PPP framework that maximises value for money potentials and gives the private sector the ability to effectively manage the risks they bear. For example, subsidies for massive projects that cannot be recovered by user fees alone. Availability of such subsidies (better known as viability gap funding) enables the private sector to undertake construction, operation and maintenance (O&M) of a public infrastructure. That arrangement minimises interface risks between construction and O&M, and gives a substantial free hand to the private sector to design and build structures of better quality that would allow them to efficiently operate and maintain it, thereby reducing lifecycle costs.
Under a competitive bid process, that would also translate to lower fees and best deal for governments.
Another example is the provision of contingent liability fund by governments. Under a PPP contract, the public sector also undertakes to deliver critical components of projects that largely impact the ability of the private partner to deliver the infrastructure (ie land, permits) and to exact payment (either through user fees or fees from governments).
In a fairly structured PPP contract, penalties caused by delay or non-delivery of obligations can be imposed to the erring party, including the public sector. The private partner would normally be asked to post a performance bond throughout the concession period where penalties will be deducted and in such event, will be subject to topping up periodically. The private sector will normally ask for a similar arrangement.
The contingent liability fund assures private partners that payment for delayed or noncompliance of the government’s obligation to the contract will be done in a timely manner. Absent this, financiers will add cost of probable delays in payments into their assumptions, which would increase overall financing costs.
Another important factor that serious investors look for are real projects in governments’ PPP pipeline. Serious PPP players are cognisant of the probability of winning bids under competitive tenders. Hence, a real pipeline enables them to set up offices and attendant supply chain on a longer timeline while trying to win bids. A pipeline of PPP projects provides the rationale and justification to do so. It underscores the commitment of governments in pursuing a sustainable PPP programme.
These are just some of the ways of de-risking PPP programmes. If most are in place, costs go down.
De-risking projects are easier these days due to various credit enhancement instruments that are available. While these would mean additional transaction costs, it enables governments to roll out necessary infrastructure projects.
More innovative deal structuring, thanks to multilateral development institutions, are being done to allow countries with low investment ratings launch and financially close critical infrastructure facilities.
This article was first published in Partnerships Bulletin.
Contact our team
Let's start a conversation.
Keep up to date with our work and thinking.