Caution! PPP work in progress

Of the 30 years since PPP projects emerged in developing-country markets, the Public-Private Infrastructure Advisory Facility (PPIAF) has been working in the last 20—happy 20^th anniversary PPIAF!—to establish regulatory frameworks for government PPP programs. We’ve provided technical advice to the most prolific users of PPPs in the developing world, as well as to the newest PPP units on the globe.

Today, nearly all developing countries (the PPI database tracks 123) have successfully brought an infrastructure PPP to market. With their seeming ubiquity and the controversy that follows them of late (particularly in Europe and Brazil), it’s hard to remember that PPPs only became widely popularized in the 1990s. Some 30 developing countries, the likes of Botswana, Ethiopia, and Kosovo, have only begun to use PPPs in this century.

This perhaps partly explains why a recent PPIAF-funded study - “Who Sponsors Infrastructure Projects?” — found that private investments still only comprised 17 percent of project financing in EMDE infrastructure investments committed in 2017.

For many countries where PPIAF has been present, our support to building PPP institutions was implemented only in the last decade. This indicates that many jurisdictions have just lately started to set up systems for PPP development and management. As more transparent operating frameworks and systematic processes for selecting projects suitable for PPPs take root we expect to see more countries deliver more consistently, and better, to the market.

In the meantime, PPPs in EMDEs are primarily a sporadic offering. Only a few, primarily middle-income countries in Asia and Latin America, have been able to close a steady stream of projects in the last 25 years, including Brazil, China, Colombia, India, Indonesia, Malaysia, Mexico, Peru, the Philippines, Thailand, and Turkey. These countries have well-developed legal frameworks and mature institutions. For these markets, PPIAF looks forward to fewer unintended re-negotiations as a sign of increasing maturity.

Unintended renegotiations typically result in increased project costs without a commensurate increase in benefits. Relatively mature institutions are capable of issuing acceptable (standardized) project documentation, actively managing contracts, continuing to engage with stakeholders, and working through disputes. All these allow changes in contract implementation to be managed well and to adjust to inevitable changes in project environment, technology, and user requirements over time—without putting the entire contract or its underlying value-proposition at risk.

Strong institutions, however necessary, are not sufficient. Two other inter-linked ingredients are needed: well-prepared projects and project financing. Conventional wisdom argues that the availability of non-recourse (or project) finance indicates that the underlying project is creditworthy (although in the United States and Europe, it’s the credit rating of monoline insurers of project bonds that drive the cost of capital and value-creation). Of course, commercial banks and institutional investors have alternative investment choices, and so, in spite of the underlying creditworthiness of a project, financing could still be constrained.

As we now know, development financial institutions (DFIs) can play several critical roles to unblock this: from supporting project preparation and offering credit enhancements and structured project finance, to simply providing debt financing to projects. In 2018, nearly 20 percent of total investment in developing-country infrastructure was financing from DFIs.

Yet, the willingness of private sponsors and financiers to participate in a project is largely because it’s considered to have well-balanced risks—a hallmark of a well-prepared project. Within the Colombia 4G roads PPP program, for example, the partnership arrangements reflect a high degree of commercial risk transfer to private counterparties, nonetheless bidder interest has been very robust (despite the Odebrecht scandal affecting a precursor 3G project). Key to this interest is the shift to availability deals and away from toll-risk transfer and the government’s fiscal stability.

For countries with weaker capacity and credit standing, PPIAF sees that focusing on simpler PPP and financing arrangements, such as long-term operations and maintenance and performance-based contracts, is a viable risk allocation proposition that still delivers value.

Well-prepared PPP projects that attract local and international market proponents and financiers can contribute to an overall active bidder market. The aspiration is to go from first-mover projects to PPP programs.

Finally, what do we know about how well PPP programs have done? PPPs are literally a work in progress: of the around 5,000 projects that have reached financial close since 1995 (and have complete data), less than 20 percent have come to term.

We won’t be able to judge the final outcomes for most projects just yet. That said, it’s not too early to learn lessons. Indeed, we can introduce ex-post assessments to dynamically improve PPP programs and facilitate sharing across jurisdictions. Here, PPIAF works with governments not only to overcome emerging constraints that block sustainable private participation in infrastructure, but also to understand how to do PPPs better.

It’s a privilege to be the partner of choice for so many client governments over the last two decades and we look forward to supporting more country institutions as they reach maturity in the years to come. Watch our anniversary video to learn more how PPIAF does our core work to improve lives and increase access to services by making infrastructure investible.

This blog is based in part on the work conducted by the Public-Private Infrastructure Advisory Facility (PPIAF) to assess the overall maturity of the PPP markets in select countries where we have provided at least $2 million in technical advisory funding. The Country Assessment “Markers of Progress” is a method that has been applied by the PPIAF Technical Advisory Panel (TAP) in 7 country assessments (Colombia, Indonesia, Lao PDR, Ghana, Kenya, Malawi and Senegal)

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