To gain a better understanding of how innovation in public-private partnerships (PPPs) builds on genuine learning, we reached out to PPP infrastructure experts around the world, posing the same question to each. Their honest answers redefine what works — and provide new insights into the PPP process. This is the question we posed: How can mistakes be absorbed into the learning process, and when can failure function as a step toward a PPP’s long-term success?
Our eighth and final response in this eight-part series comes from Thomas Maier, Managing Director, Infrastructure with the European Bank for Reconstruction and Development (EBRD).
For countries new to PPPs, there is no doubt a steep learning curve. Fortunately, there is also a growing body of experience that such countries can learn from — the key is to understand the essence of the lessons and then incorporate these changes into the design of government support for PPPs.
Ultimately there is, of course, no substitute for good project preparation, local capacity and the development of solid legal frameworks and local capital markets — we all know these are the building blocks for the long-term success of any country’s PPP program.
Focusing on lessons learned from EBRD’s region, two current examples from Kazakhstan and Turkey come to mind.
Kazakhstan is an oil-rich country with an investment grade sovereign rating. While user charges are generally low, it is possible to structure good quality PPP projects based on the government’s fiscal stance. A decade-long effort has been required to get to this point. The concession law, adopted first in July 2006 and amended in 2008, was based on best practice in the West, but apart from localized small-scale PPPs, large-scale projects have not yet been developed.
In our view, the key shortcomings have included a cumbersome procurement process; the lack of an availability payment scheme; the impossibility of using international arbitration; the unwillingness to ensure creditors’ step-in rights in case of default of the concessionaire; and treatment of the foreign exchange risks.
Following a few failed tenders, EBRD and IFC were engaged in 2013 to assist the government to make the necessary changes in the legislation. As a result, the law was further amended in July 2013 to allow basic yet fundamental improvements: the introduction of a two-stage tendering and of the availability payment scheme as a measure of state support. In July 2014, further amendments were made to provide for step-in rights of creditors in case of default of the concessionaire, enable international arbitration, define/enable termination payments upon cancellation of a concession agreement in certain cases, and enable foreign exchange fluctuation adjustments to the state support measures provided in local currency.
Following these last amendments, EBRD and IFC have assisted the government to develop the Almaty ring road PPP based on an availability payment basis. The project, now under tender, has attracted a good level of bidder participation. Given the high profile of the Central Asian region and beyond, this project should also have a great demonstration effect.
The case of Turkey’s large hospital PPP program presents another interesting set of lessons learned. While the first of what is expected to be over 30 new facilities management-based PPPs for hospitals closed in October 2014 in Adana, the build-up took over five years. This was due primarily to the need for the government to mitigate certain critical risks for the private sector before they were able to reach financial close.
In 2014 the Turkish Government agreed to a set of measures and supports. First, a debt assumption by the Turkish Treasury directly covering up to 85 percent of the loan in case of default, with a cap which varies each year.
Another crucial step was to provide coverage of forex risk using an indexation mechanism. In this case, the Ministry of Health agreed to a formula in the payment mechanism of the hospitals PPPs that is triggered when the Turkish lira devaluates at a higher rate than inflation. Finally, the Ministry provided a cap on performance deductions within the PPP contracts that effectively creates a revenue guarantee to the project company. This, together with the ability to pass down performance risk to services subcontractors, means a secure cash flow to service the debt.
In my view, these examples show that there are practical measures that can be taken by governments to get projects over the line, and that sponsors and their lenders are willing to step up to the plate to deliver projects when governments are willing to meet them halfway. We look forward to many more well-structured PPPs — in fact, we will be playing an active part in a global effort to accelerate infrastructure investment, using EBRD’s new Infrastructure Project Preparation Facility. We look forward to seeing the pipeline grow.
Editor's note: this article originally appeared in the World Bank Group's Handshake journal.