There’s a lot of discussion about attracting more investors to invest in infrastructure in emerging markets. This will be one of the themes of the Financing for Development Conference next week. Last month the PPI Database’s 2014 full year updateshowed that total investment in infrastructure commitments in emerging markets for projects with private participation in the energy, transport and water and sanitation sectors increased six percent to US$107.5 billion in 2014, compared to 2013.
But what does the evidence tell us about how good those investments might be for investors?
One interesting source comes from a Moody’s study based on the performance of over 5,300 projects. This data represents more than 60 percent of all project finance transactions worldwide over 1983-2013. It is broadly representative of worldwide project finance activity by year, industry sector and regional concentration. The data shows that:
India needs large investments in infrastructure for accelerating inclusive growth aimed at poverty alleviation and improvement in quality of life. Given the fiscal constraints that leave little room for expanding public investment at the scale required, Public-Private Partnership (PPP) has emerged as the principal vehicle for attracting private investment in infrastructure.
However, much of the private capital required for PPP projects has to be raised from domestic financial institutions that do not have the capacity or instruments to provide long-tenure debt for projects having a long payback period. While financial sector reform is a long-drawn process, this essay demonstrates how a well-designed intervention can help in bypassing the extant constraints without compromising on the integrity and prudence associated with debt financing.
By setting up a government-owned financial institution with a mandate to provide about 30 percent of the project debt, a large volume of long-term debt was mobilised while leaving the remaining 70 percent to be financed by the normal banking system. This was perhaps, a first-of-its-kind financial institution which not only lent long-term funds, but also gave a strong signal to the banking system to participate proactively in the financing of infrastructure projects.
As a result, private investments aggregating about US$114 billion have been facilitated without any dilution in the prudential norms of banking. This essay explains the evolution and success of this initiative.
How valuable are lessons of experience in PPPs from other countries? Legislative and regulatory environments differ, as do market conditions and the overall investment climate. So replicating a successful PPP in another country isn’t a simple as following the same steps or using similar contract or tender documents.
But that doesn’t mean lessons cannot be transferred. Even if conditions vary, the underlying principles of PPPs remain the same regardless of where it is executed. For example, a PPP is always a long-term contractual agreement between a government entity and a private company; it must be financially sound if it is to work; and risks must be identified, mitigated and allocated effectively. The details of how these principles are applied will vary depending on the regulatory and market conditions of each country. But the examples remain valid nonetheless.
In Ukraine, PPPs have been slow to catch on, initially because the business climate was so weak. The country’s neighbors were all more successful at implementing PPPs: Poland has 65 PPP projects underway according to the Ministry of Economy’s PPP database, and Moldova’s first PPP established a radiology and diagnostic imaging center. But none of Ukraine’s neighbors have done as well with PPPs as its Black Sea neighbor, Turkey.
Turkey is a regional PPP powerhouse. The 2014 PPI Global Update, which provides information on private infrastructure investment in emerging markets, puts Turkey in second place globally for the second year in a row with US$12.5 billion. In 2014 alone, 17 new projects were launched in mainly in power and transport. Not surprisingly, Ukrainian officials have been looking with great interest to Turkey’s success.
On Monday, China officially launched the Asian Infrastructure Investment Bank (AIIB) in a ceremony with representatives from the bank's 57 founding-member countries. AIIB will have a capital base of US$100 billion, three-quarters of which come from within Asia.
At the inaugural ceremony in the Great Hall of the People, Chinese President Xi Jinping reaffirmed the new institution's mission, saying that "Our motivation [for setting up the bank] was mainly to meet the need for infrastructure development in Asia and also satisfy the wishes of all countries to deepen their co-operation."
Indeed, the AIIB is a major piece of China's regional infrastructure plan, which aims to address the huge needs for expanding rail, road and maritime transport links between China, central Asia, the Middle East and Europe. But the AIIB should also represent a huge opportunity for cooperation not only between countries in the region but also with other multilateral development banks.
Our experience working on transport mega-projects co-financed by several multilateral development banks (MDBs) already shows that this collaboration is much needed and critical for the success and viability of mega-projects. The most recent experience with the Quito Metro Line One Project, for example, shows that the co-financing banks – World Bank, Inter-American Development Bank, Andean Development Corporation and European Investment Bank – brought not only their financial muscle but also their rich and diverse global knowledge and experience. Incidentally, because of the Quito Metro project, all the MDBs involved in the project were dubbed as the “musketeers, ” precisely due to the high degree of collaboration and team work that is making this project a success.
Prior to about 2005, for many tourists their Jamaican vacation was ruined at the last minute, by the hot and overcrowded conditions inside Montego Bay’s Sangster International Airport. Fast forward 10 years, and waiting for a flight at Sangster is an altogether more pleasant experience. The air conditioning actually works, and the whole environment is infinitely less stress-inducing than before.
What’s the difference? The private sector.
In 2003, the Government of Jamaica finally succeeded in doing what it had been trying to do for a decade: privatize Montego Bay Airport. A private sector consortium, led by Vancouver International Airport, quickly invested millions of dollars in expanding the terminal building, doubling the airport’s capacity and opening dozens of new retail spaces. Since then, the consortium has invested more than US$200 million on expansions and improvements to the airport, all of which has been entirely off the government’s balance sheet.
Jamaica has gone on to implement several more public-private partnerships (PPPs), with mixed results. The second phase of its ambitious highway construction program — the Mount Rosser Bypass — was recently opened, cutting a swath through miles of virgin territory. However, early indications are that traffic levels are not living up to expectations, probably due to the Bypass’ steep eight percent gradient, which is beyond the means of most Jamaican trucks and buses.
In the energy sector, Jamaica is completing three PPPs with a total of 115 megawatts of renewable energy (RE) capacity, putting the country on track to meet its RE target of 12.5 percent of generating capacity by the end of 2015. Lastly, the government is currently completing formalities for the sale of Kingston Container Terminal (KCT) to a consortium of CMA/CGM and China Merchant Marine, a transaction that is expected to result in a US$600 million capital expenditure program by the port’s new owners.
Here is a new paper I wrote that provides perspectives on patterns of public-private partnerships (PPPs) in infrastructure across time and space.
PPPs are a new term for old concepts. Much infrastructure started under private auspices. Then many governments nationalized the ventures.
Governments often push infrastructure providers to keep prices low. In emerging markets, the price of water covers maybe 30 percent of costs on average, that of electricity some 80 percent of costs. This renders public infrastructure ventures dependent on subsidies. When governments run into fiscal troubles, they often look again for PPPs, and price increases. As a result, PPPs keep making a comeback in most countries, but are not always loved.
I would loved to have been at the PPP Days 2015 conference in London this week. But even though I was in Kyiv, I was able to join in. The opening plenary was streamed live, and on the second day, I was able to interact with a panel of PPP experts using Google Hangouts and Twitter.
I’m no stranger to either platform. I get most of my news through Twitter, and my daughter sends me messages from class on Hangouts (hi dady [sic], school is sooooo boring :P).
This time, however, I was engaging with giants of the public-private partnership (PPP) universe. Laurence Carter, the Senior Director of the World Bank Group’s PPP Group, moderated a panel of seasoned experts from EBRD, the Indian School of Business, and Meridiam, an investor in infrastructure. Together they provided perspectives on PPPs from international financial institutions, academia and the private sector. I joined about 200 other people from around the world and watched it live. But something was different: you could interact with the panel from afar and ask questions via Twitter using the hashtag #PPPMOOC (go check it out).
I was aching to test the system, so I tweeted a question about the value of small PPPs at the municipal level, like the Malyn Biofuel PPP I blogged about recently. I could hardly believe it when Laurence asked the panel for their views on the subject. How incredible: from Ukraine, I was influencing the course of discussion of a panel of PPP experts in London! They talked about it for five minutes and offered some valuable insights.
The second half of the PPP Days conference in London was devoted to country presentations of priority PPP projects, and a few projects – those most likely to be brought to market in the next six to 12 months – were showcased in detail. It was an inspiring example of collaboration for the greater good, proving that PPPs’ potential is limited only by our imagination. (OK, and budgets. And elections. And good structuring. And the presence or absence of natural disasters. But it all starts with imagination and commitment.)
PPP Days participants also exchanged ideas today with people around the world who are engaged in the ongoing Massive Open Online Course (MOOC) on public-private partnerships, via the first-ever PPP MOOC Google Hangout. This was an unprecedented opportunity for the over 23,000 people from more than 190 countries now taking the course to ask their most pressing PPP-related questions to officials and experts attending PPP Days – and for these officials and experts to learn from those in the field.
The PPP MOOC Google Hangout was facilitated by Laurence Carter, Senior Director of the World Bank Group’s PPP Group. Panelists included Julia Prescott, Chief Strategy Officer, Meridiam; Thomas Maier, Managing Director for Infrastructure, EBRD; and Pradeep Singh, CEO of the Mohali Campus and Deputy Dean of the Indian School of Business.
As your PPP Days Rapporteur, I feel like I should start this dispatch by typing “Dateline: London” on a manual typewriter in a newsroom thick with cigarette smoke. Alas, I am hunting and pecking the tiny keyboard of my phone from Exchange Square, the immaculate, smoke-free home of the European Bank for Reconstruction and Development (EBRD), our hosts for the PPP Days meeting.
“Doing More, Doing Better” is PPP Days’ ambitious-sounding theme. The event’s creators convened the gathering to enhance the collaboration among multilateral development banks (MDBs) that is already strengthening the PPP marketplace. One of the best examples of this collaboration, the PPP Knowledge Lab, launched at the conference this morning. The PPP Knowledge Lab, now live at www.PPPknowledgelab.org, is an online “one-stop-shop” for everything PPP. It’s an important online resource that will continually be refreshed and expanded.
Just as the PPP Knowledge Lab gathers great ideas onto one platform, PPP Days has gathered experts and thinkers in one place. These two days are packed full with talks, presentations, panel sessions, and breakout sessions that chip away at one of the most challenging questions of our day: “What would it take to double the right private infrastructure investment in emerging markets?”
In March we released the update from the Private Participation in Infrastructure (PPI) Database for the first six months of 2014, covering investment activity in energy, transport, and water and sanitation. The good news of a rebound of investment commitment from a decline in 2013 was noteworthy, alongside the heavy concentration of activity in Brazil.
The PPI Database’s 2014 full year update for these sectors has just been released, and it confirms the trends we began tracking for the first six months. Total investment in infrastructure commitments for projects with private participation in the energy, transport, and water and sanitation sectors increased six percent to $107.5 billion in 2014 from levels in the previous year. The total for 2014 is 91 percent of the five-year average for the period 2009-13, which is the fourth-highest level of investment commitment recorded – exceeded only by levels seen from 2010 through 2012.
This increase over 2013 was driven largely by activity in Brazil. Without Brazil, total investment commitments would have fallen by 18 percent, from $77.2 billion in 2013 to $63.4 billion in 2014. Although this is lower than H1 2014 (57%), Brazil’s large stake is a continuation of a recent trend.
The Latin America and the Caribbean (LAC) region saw $69 billion of investment commitments, or nearly 70 percent of the total for 2014. Three of the top five countries by investment commitments in 2014 were from LAC. The top five, in order, were Brazil, Turkey, Peru, Colombia, and India.