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How are PPPs really financed?

Jenny Chao's picture



One of the prevailing notions about PPPs is that upfront costs are wholly paid for by the private sector, allowing the public to spread their costs (whether as users or through taxes) throughout the life of the project. However, this is a myth – governments, multilateral development banks (MDBs), and bilateral financing institutions all play strong roles in the various stages of financing PPPs. Just what kind of role, and how big, requires looking at the data.

Fortunately, now for the first time, it is possible to view the breakdown of financing sources for PPPs in low- and middle-income countries on the PPI Database. Accompanying the data is a recently released note that analyzes the sources of financing for 2015 PPP projects in these countries. The findings indicate that, in fact, financing for PPPs comes from a diverse mix of sources.

The Sources of Financing Note, available on the PPI Database website, breaks down the data on how upfront capital costs in PPPs in the dataset are financed globally, and by region and sector.

And the gold medal for PPP goes to…Galeão International Airport’s record-setting deal

Isabel Marques de Sá's picture
When the Olympic Games comes to Rio in 2016, new medal-worthy sports will include kitesurfing, golf, and rugby sevens. If the Olympic Committee ever considers including our “sport” – the practice of public-private partnerships (PPPs) – the top medal would surely go to the home-grown Galeão International Airport PPP, which set the 2014 record as the largest PPP deal that closed globally. For this gateway to Rio – which is in the midst of preparing to accommodate more than 10,000 athletes and tens of thousands more visitors for the 2016 Olympics – even the concessions merit global rankings.
 
Image: Wikimedia Commons

Standing by for liftoff
The concession of Galeao International Airport (official name: Rio de Janeiro/Galeão–Antonio Carlos Jobim International Airport) got off the ground in the second round of airport concessions. The first round dates back to early 2012, when the government issued tenders for three major airports: Guarulhos (São Paulo), Viracopos (Campinas) and Brasília.  

In mid-2012, following the successful outcome of these three projects, the Brazilian National Development Bank (BNDES) approached IFC to assist with a second round of airport concessions, including Confins airport (Belo Horizonte) and Galeão (Rio de Janeiro).  IFC teamed up with the Estruturadora Brasileira de Projetos (EBP), a project preparation company owned by some of the biggest Brazilian commercial banks and BNDES. Together, IFC and EBP were responsible for the financial, technical/economic/engineering, and environmental studies. 

PPI and the poorest: New private participation in infrastructure results highlight critical role of MDBs in IDA countries

Clive Harris's picture
During this week’s Financing for Development conference— sponsored by the United Nations in Addis Ababa, Ethiopia — ongoing discussions have focused on how private sector finance and expertise can be leveraged to help meet the UN’s Sustainable Development Goals. My take on that important conversation has been informed by some of the newest numbers available on trends in private participation in infrastructure in the poorest countries. Today’s update to the PPI Database, which highlights the role of multilateral development banks (MDBs) in the 77 IDA nations, introduces an important perspective to the ongoing debate over how to structure development financing for the best — and most sustainable — outcomes.
 
First, the numbers
The newest PPI Database results show that investment commitments to infrastructure projects with private participation investment in IDA countries from 2009 to 2014 totaled US$72.8 billion. This is significant because it accounts for just seven percent of the total recorded over this period for all emerging markets and developing economies covered in the database. This is not that surprising, but does show that we have a long way to go.
 
The number of projects with private participation in IDA countries is also only 10 percent of the total — a little better, and indicating that, unsurprisingly, projects are smaller on average in IDA countries. (For more information on IDA countries and detailed information on the IDA’s mission, please see: http://www.worldbank.org/ida/what-is-ida.html.)
 
But what does it mean?
Examining these figures in terms of sector activity reveals some especially useful facts for development initiatives — both those underway and those still in the incubation phase. Activity in IDA countries is heavily focused on telecommunications; even energy projects, which remain well represented, take a back seat to telecom. Fully 57 percent of investment commitments in IDA countries were in telecommunications and 31 percent in energy, compared to 32 percent and 41 percent respectively in other (non-IDA) countries. In contrast, only 12 percent of investment in IDA countries was in transport, compared to 25 percent in other countries. As we’ve seen before, telecommunications is the most commercially viable sector.  IDA countries specifically are facing greater difficulties in attracting projects in energy, transport and water.

​Is infrastructure in emerging markets a good investment?

Laurence Carter's picture
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 update showed 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:

Sharing PPP experiences across borders

David Lawrence's picture
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.

Obrigado, Brasil!

Clive Harris's picture
Paving a highway in Brazil. In 2014, Brazil's
 infrastructure investment commitments
​drove an overall global increase.
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.