A strange irony persists in today’s infrastructure investment market: private capital waiting to be deployed into the sector is at an all-time high, yet investors seem reluctant to commit. Even in developed countries, few investors are willing to partake in transactions with merchant or construction risks without taking a higher risk premium.
This can make the financing of infrastructure projects more costly—a challenge particularly acute in emerging markets where further investment risks abound.
Before diving into a new year, I like to take some time for reflection. This past year, I’ve seen a real shift in how public-private partnerships (PPPs) are perceived and understood—both their benefits and risks. Many governments are considering PPPs to help them deliver infrastructure and services their citizens need. They also better understand the complexity of PPPs as a procurement method and are more strategic in when to use them.
If so, what must be done to ensure they’re sustainable and deliver on public sector goals? Thinking back on 2018, I saw these developments:
In the Africa Chief Economist’s Office, we seek to generate knowledge on key development issues around the continent. We also host the Gender Innovation Lab, which – as the name suggests – specifically generates evidence on how to close the gender gap in Africa. Over the course of 2018, we’ve produced a range of products (regional reports and updates), but we also produce academic articles and book chapters seeking to answer key, specific development questions.
The Msimbazi River makes a volatile neighbor. With depressing regularity, the river breaks its banks and inundates houses built on its low-lying floodplains. During the 2014 rains, 600 houses were flooded in the riverine Kigogo Ward alone; thirteen of which were completely destroyed. Yet, as the floodwaters recede, people return.
“What is wrong with these people?” people often say. “They should not be there; they know it’s not safe!” Citizens, journalists, and policymakers, express disbelief that people relocated to safer parts of the city return to their former, flood-prone neighborhoods. So why do they do it?
Using Islamic finance for infrastructure development attracted more attention recently in the quest to maximize finance for development.
At the recent World Bank-IMF Annual Meetings in Bali, the World Bank and the Islamic Development Bank (IsDB) co-hosted a symposium on Islamic infrastructure finance, building on the institutions’ strategic partnership. As we note in Mobilizing Islamic Finance for Infrastructure Public-Private Partnerships, the asset-backed, ring-fenced, and project-specific nature of Islamic finance structures and their emphasis on sharing risks make them a natural fit for infrastructure public-private partnerships (PPPs).
It takes a lot to do a first Public-Private Partnership (PPP) well. In the past 12 months, we witnessed the successful financial close of two landmark PPPs: the Tibar Bay Port PPP—a first for Timor-Leste, one of the youngest countries in the world—and the Kigali Bulk Water project in Rwanda, considered the first water build-operate-transfer project in Sub-Saharan Africa.
To make these projects happen, deal teams, sponsors, and financiers did outstanding work in difficult environments. The Public-Private Infrastructure Advisory Facility (PPIAF) also earned some bragging rights and a share of the battle scars along with these actors.
With support from the World Bank Group, Singapore invested heavily in infrastructure during the early stages of our growth. This included 14 World Bank loans between 1963 and 1975, which financed the development of the deep sea terminal at the Port of Singapore, the doubling of the country’s energy capacity, and the construction of water pipelines to Malaysia—all of which remain a part of our core infrastructure today.
investment in quality, sustainable infrastructure helps finance the transition towards a low-carbon, more environmentally friendly economic model. This happens notably in the renewable energy and low-emission transport sectors. Given the scale of resources needed to address the infrastructure investment gap, mobilizing the private sector for this goal has become imperative, especially in countries where financial transactions in banking and capital markets follow Islamic law (or shari’ah) principles.
They define an asset-oriented system of ethical financial intermediation built on the principles of risk-sharing in lawful activities (halal) rather than rent-seeking gains. This “entrepreneurial” approach by investors requires a high degree of transparency and creates incentives to monitor projects more carefully, which, in turn, strengthen the efficiency in building and operating infrastructure.
In 2002, Sao Paulo’s embarked in one of the most transformative transport projects of the decade: the construction of Metro Line 4. The new line had big ambitions: it was meant to significantly improve the commuting experience, better connect the south and western regions of the Sao Paulo Metropolitan Region (SPMR) to the center, change the metro system from a radial to a flexible network, and interconnect all transport modes, including buses, suburban trains (CPTM), bicycles, as well as existing and future metro lines.
Line 4 was also the first metro project in Brazil to be designed as a Public-Private Partnership, whereby operation and maintenance (O&M) was concessioned to a private company for 30 years. The project was segmented into 2 construction phases, both of which were technically and financially supported by the World Bank from 2002.
When finished, Metro Line 4 will feature a total of 11 stations along a 14.4-km alignment, 29 trains in operation, four integrated bus terminals, and one dedicated train yard. It will carry nearly 1 million passengers per day. Since the opening of the first segment in 2010, the line has experienced high passenger traffic and allowed for a significant reduction in journey times. In 2012, Line 4 even featured among the 100 most innovative infrastructure projects in the world.
A new station was inaugurated just a few weeks ago, and the line is now just one station away from completion. Once the whole project is operational by 2020, aha resident of Vila Sonia in the western part of the city will need only 20 minutes to reach Luz station at the opposite side of the city, compared to one hour in 2002.Today they can already reach it in 32 minutes!
Now that the Line 4 odyssey has almost concluded, it can teach us a number of valuable lessons about what it takes to implement such complex infrastructure projects in a dense urban area like Sao Paulo.
Like winter and summer solstices of investment cycles, every six months we take stock of how much private participation in infrastructure has come to financial close across emerging markets. From Mozambique to Moldova, Chile to China—in power, water, transport, and the backbone of telecom services—the World Bank Group tracks every new public-private partnership (PPP), privatization, auction, concession, lease, and management contract through our PPI Database.