Recently, I published a book about infrastructure public-private partnerships (PPPs) in the most challenging developing countries—a private sector perspective on what is required to bring investment and expertise to partner with governments in providing vital infrastructure services.
There is already a substantial body of work on the potential of PPPs and how to design, finance, and implement them—even in countries where there are limited legal and regulatory frameworks on which to build. What compelled me to write my book is the urge to share, as a practitioner over two decades in some of the most challenging markets, common pitfalls I’ve seen and what appear to be the critical elements of success in creating successful and replicable PPPs.
A particular focus is to work more efficiently through platforms of multiple-asset investments and programmatic approaches designed to grow and accelerate the contribution of private investment beyond what can be achieved in a project-by-project approach.
Query, though, whether mobilizing additional resources will be enough. The promise of compensation many years later for material adverse government action or other political events doesn’t necessarily persuade private investors and lenders to flock to take risk in an untested country or sector. Nor can vast mobilized capital in a platform structure be magically translated into multiple complex infrastructure projects if the operational experience to build and operate them on the ground is absent.
Private sector’s exposure to political risks
It’s tempting for governments to shift or share some—or all—of the political risks that the public sector doesn’t control to private stakeholders. This is a worthy ambition for governments aiming to maximize the benefits of a PPP program. But history warns against over-ambitious starts.
Governments must be prepared to attract, build, and sustain the confidence of private stakeholders progressively. Early investments should provide the most robust termination and other protection for investors and lenders. If there isn’t an established track record for the country (and particularly if there have been failures), this will be a key concern for investors from the outset and can affect the competitiveness of tenders by limiting the number of potential investors and driving up the cost of the project as investors price for these risks. This is just as important in countries attempting to reignite private sector interest and rebuild confidence after challenging incidents.
The DFI community should—and often does—assume risks borne by the government with the increasingly numerous and innovative menu of political risk instruments they offer, including some offered by the Bank Group. While often critical in persuading a corporate board to make the leap into a new country, these instruments are usually not enough; enforcing rights or getting satisfaction can take some time.
(including the time to enforce), or DFIs might consider new products or protections that are easy and swift. Perhaps a sort of “superfund” could be accessed through an expedited (possibly provisional) dispute resolution process designed to compensate well-performing sponsors and remove them early on from the dispute—whether short-term liquidity payments that encourage them to continue performing or termination compensation.
This would enable sponsors to become nearly as comfortable taking risks in developing countries as they are undertaking projects in established markets. The details of the dispute resolution process would be designed to strike the right balance of incentives and disincentives.
Platform approaches to infrastructure investments
The delivery of funding through clear contractual structures, amplified through platforms with subsidiaries replicating the investment many times, is powerfully attractive. Where it involves relatively simple, uniform technologies and businesses and a strong fund manager or controlling owner, the case is all the clearer.
However, the understandable allure of mobilizing large sums for such platforms shouldn’t blind us to the complexity of building and operating the individual projects sustainably and to high standards, so they last for decades in countries that may have little experience, public or private, of achieving this in the past. Each entity needs to have adequate in-country skilled teams—with experienced execution skills and the right incentives—to implement the investment and then maintain and manage it.
The DFI community has a large role to play in attracting strategic stakeholders into these investments. They can reasonably be expected to deliver the individual projects on time and on budget and to operate them long term to meet expected investor returns. These two factors, among others raised in my book, will allow the DFI community to make a more certain and larger development impact.
Disclaimer: The views expressed are the personal views of the author. The content of this blog does not necessarily reflect the views of the World Bank Group, its Board of Executive Directors, staff or the governments it represents. The World Bank Group does not guarantee the accuracy of the data, findings, or analysis in this post.
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