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Minimizing Infrastructure Investment Risk through P3s

Doug Maher's picture


Photo: Giuseppe Milo | Flickr Creative Commons 

This year’s Infrastructure Week held in May came as public support for infrastructure investment is at an all-time high. According to a recent Gallup poll, three out of four Americans support increasing investment in the U.S. transportation and energy systems. And with the majority of infrastructure projects in the U.S. already funded by the private sector, all the pieces are in place for large-scale investments.

If there is one thing that could hold investors back, it’s risk. Large-scale infrastructure projects are often so complex that potential investors are cautious about the level of risk involved. Public-private partnerships (P3s or PPPs) offer a solution. In this type of agreement a private entity shares project risk with a public agency, offering an attractive framework for structuring large-scale projects such as airports, tunnels, and bridges. Due to the long service life of P3s, efficient risk sharing requires a reliable basis for long-term planning.

An investor with technical proficiency, such as Siemens Financial Services, can help ensure P3s are completed on time and on budget. As lead equity or debt investors in projects, such as Thameslink railway in the United Kingdom, Elazig Integrated Health Campus in Turkey and Bangalore Airport in India, we’ve individually tailored and evaluated risk to meet local needs of P3 projects in other regions of the world.

The same is true locally for states and municipalities in the U.S. Here are a couple of ways financiers can help minimize risk on P3 projects:
  • Due Diligence Boosts Investor Confidence. One oversight in a large-scale infrastructure project could lead to long-term risks throughout the entire project lifecycle, such as failure to complete construction on time. These types of risks can be mitigated by proactive action on the part of the financier, such as taking stock of economic conditions. 
  • Meeting Expectations. With big projects come big expectations. That’s why it’s essential that any P3 agreement meet all public service expectations. To accomplish this, contracts must be structured so that the public receives full, fair value for use of its property.
  • Budget Responsibly. In the same way that the private sector needs to be responsible with its profits from the project, overall P3 budgets must be structured to prevent a disproportionate shift of current capital costs onto future taxpayers.
Even with these ways to help reduce risk at the local level, I’d be remiss not to highlight the great opportunity the U.S. federal government has to play a critical role in creating a system for P3s to thrive in. If the federal government can maintain long-term commitment that withstands the headwinds of change in Congress and the White House throughout the duration of a P3 project, the project has a better chance at attracting private investment. Further, if the federal government can ensure reliable funding throughout the entire project, ultimately guaranteeing the ability to payback any debt from it, the project becomes more attractive to private financiers.
 
In an environment where there is a need for private capital to fill funding gaps, P3s offer an attractive technique to get infrastructure projects off the ground. I’m hopeful the demand for P3s will continue to grow and the country’s vast infrastructure needs will be met.
 

The original version of this blog appeared on Siemens website.
 
Disclaimer: 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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Comments

Submitted by KATO Philip Fred on

Interested in Credit Funding Programs for PPP Infrastructure Development Information Sharing for Africa Region. Most especially those related to Renewable Energy Development like Solar Technology for Lighting, Cooking and Water Schemes--Domestic Sanitation and Commercial Irrigation for Farming. Thanks.

Submitted by Dr.Mohamed Taher Abdelrazik Hamada, Ph.D on

I always have the honor to make comments on the World Bank achievements all over
the globe .
Public support for PPPS projects is essential , because it means that these projects are of high demand , as clear in infrastructure projects of (PPPS), these
projects are widely supported by the public , because they touch the daily life of
human beings .
It is clear that the private sector is playing a bigger role in the US more than in any other part in the world.
This is considered a healthy phenomena that illustrates the share of the majority
of the population in the US in the investment projects.
The risk in this issue is the extent of the ability to choose the well capacity enabled private sectors , specially in case of large scale projects.
The well capacity of the private sector shuold be considering the time and the meeting ecpectations , so it may not be dependable on the abilities of the
public sector, but the private sector should prove that it has the full empowerment,
similarly as the public sector , maybe more as in the case of the US where legal
competiteveness controls the market.
Yours Very Respectfully,
Dr. Mohamed Taher Abdelrazik Hamada, Ph.D
Retired Professor at Strayer University, USA
*edited for privacy*

Submitted by ADRABO ALOYSIUS STANLEY on

The federal or National Government's support and commitments to honour pledges and to buffer, in case of "Force Majore",will go along way. The people must have a say in some way. I also agree on the responsible use of profits out of such ventures.

Submitted by Cesar Queiroz on

It is a bit surprising to read that "the majority of infrastructure projects in the U.S. [are] already funded by the private sector." Other sources seem to indicate that only a small fraction of US infrastructure is financed by the private sector.

Submitted by Riaz Ahmed Dayo on

"Due to the long service life of P3s, efficient risk sharing requires a reliable basis for long-term "

Submitted by Olufemi Oyedele on

PPPs do not hold the ace in Nigeria infrastructure development. Over 90% of projects involving PPPs failed. This is because of the High rate of corruption in the countty. The parties are not also knowledgeable about the principles of PPP. Organisations like Siemens Financial Services should be able to offer solution in PPPs risk management as people's confidence that the governments can deliver on PPPs is poor. People of Nigeria see PPPs as sellout to cronies. In most cases, the originator of PPP projects are not the executors as the proposals/ideas of the proponents of the projects will be 'stolen'and other parties called to come and execute the projects. In some csses, the terms and conditions given by the government representatives to the private developers do not add up. For example, tenure of lease of a concessioned project is determined by the cost of executing the project, plus agreed amount for profit divided by the income to be generated per annum. In most cases, the tenure is in perpetuity therefore representing a mortgaged-future of the poor masses. PPPs are also an off-record way of borrowing large sum of mobey. Governments of African countries scramble to execute more projects than their predecessors not because of their interests in the welfare of the people, but because of their interest in what is in the projects for the executors. The poor masses suffer in a PPP project that's transparent.

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