By Matthew Jordan-Tank, Head of Infrastructure Policy & Project Preparation Facility (IPPF) at the European Bank for Reconstruction & Development (EBRD)
The potential impact of private markets on the future of infrastructure projects should not be understated: improved efficiency, lower costs, greater reliability, enhanced user experience and ultimately higher overall satisfaction with the services being provided are among the potential benefits private market involvement can bring. The challenge, particularly for national, regional and municipal public bodies in emerging markets, is the ability to access and unlock that potential. A lack of established track-record, formal processes and experience when it comes to working in partnership with the private sector can stand in the way.
Private capital’s role in infrastructure
The private sector has an ability to bring technological innovation to critical infrastructure projects and investments that is difficult for the public sector to match. The way that some of the largest and most successful private sector companies are using data to deliver apps and smart technologies, highlights the role that private markets can have in this regard. The public sector certainly has a very important role in giving the guidance and setting the parameters for the direction of infrastructure projects, but it's hard - and not necessarily desirable - for them to be prescriptive about what the shape the solutions should take from a technology standpoint.
Another area where private capital is well suited to infrastructure projects, is asset management on a whole life-cycle basis under a long-term contract. When framed correctly and with the right incentives and payments structures in place, it achieves positive results; indeed it’s one of the fundamentals of why PPPs exist. It's something the private sector is well set up to do and something that's very hard for the public sector to do as motivations administrations and people change. In a downturn, for example, maintenance budgets tend to be one of the first areas that are cut, which is to the detriment of the asset quality.
The private sector can also spot innovative financing approaches and is typically much more attuned to the financing options than the public sector agency. The private sector is likely to build a financing package that’s best suited and most efficient for a given project. We're seeing a greater use of the capital markets for infrastructure, for example. It’s not necessarily an easy market to tap as it relies on a proper capital markets and legal framework, a country and a market that's interesting and stable enough for a bond issuance, but when it can be an efficient way of financing infrastructure when the conditions are suitable.
Breaking down the barriers
Tapping the potential of private capital, particularly for emerging markets public bodies can present a challenge, however. Much of this comes down to how the projects and contracts are structured.
The lack of a significant pipeline of PPPs can be off-putting for a would-be private bidder, for instance. A municipality might come with the first ever project in a sector or even the country as a one-off project and present that to the private sector. While the project may be of interest, preparing a PPP is a time consuming process: the learning curve of entering a new market and territory is steep and it costs a lot of money and weighed against these barriers, the single PPP may not be seen as sufficiently worthwhile. We see this over and over again.
If, on the other hand, institutions can see some evidence of a pipeline then they're much more likely to be interested from the beginning because of the wider business opportunity. Take the Turkish hospital PPP sector, where there’s a pipeline of 30 new build hospitals, with a cumulative total of €15-20bn of public funding available. So far, nearly 20 of those contracts have been awarded. Not all countries are that big or have that level of need but nonetheless coming in with a development plan for the next 5-10 years - even if it's just at a conceptual stage - is very important and can go a long way to securing private capital involvement.
That’s where the EBRD’s Infrastructure Project Preparation Facility (IPPF) comes in. It’s set up to help countries create that pipeline of PPPs and help with the preparation of PPPs, such as with building a bankable structure with the input of experienced private sector advisors under framework contracts with IPPF. The PPP process needs to be robust; you can't work on intuition and there are no shortcuts. The system that’s developing among the IFIs simply didn’t exist 3-4 years ago and it’s gaining traction with the private sector.
For the private sector, structuring contracts appropriately and mitigating against risks is critical. There are plenty of cases where a change in government and approach has led to a change in the rules of the game mid-stream with payment streams drying up as a consequence. Firms are alive to these issues but just need to be prudent with contract structure and provision appropriately. For example, by having robust debt service reserve accounts in place in case of a default.
Again, this is an area where the EBRD has stepped in. Working with the World Bank’s Multilateral Investment Guarantee Agency (MIGA), we provided a risk mitigation credit enhancement product to support the financing efforts of a new hospital campus in the Turkish city of Elazig. It essentially provides liquidity facilities to mitigate risks of construction and operation, such as an issue where payments choke up because of dispute over some aspect of the construction. In this instance, the liquidity facility from EBRD would kick in to keep the bond payments flowing while the dispute goes through the often long, drawn-out resolution process. With this instrument in place, Moody’s rated the bond issuance for that project two notches higher than the sovereign rating of Turkey and it reduced the overall cost of financing for the project. More information on this is available here.
Greater knowledge sharing between the public and private sector is incredibly important and here too, the structures are developing.
One of these is SOURCE, run by Geneva-based Sustainable Infrastructure Foundation (SIF). This platform enables the public sector to upload basic information about projects, such as the objectives, capex, timeline, basic structure, details of the institutional promoter behind it and parties involved as advisors and so on. There are about 150 projects uploaded so far from around the world. This is very important as it relieves some of the difficulties the private sector faces to understand where opportunities are. That contrasts with the labour intensive and inefficient approach of sending people around the world, knocking on doors, sitting down with ministries and trying to understand on a one to one basis what the state of a project is.
All of the IFIs that are working on PPPs are uploading their projects onto this platform already and it’s fast becoming the place to go for serious and robust project opportunities for the private sector.
Another platform is GViP. This is essentially a social network of 3,000 individual PPP experts from across the world. If you're a public sector official, you can reach out to the network with enquiries to put you in contact with people that have worked on similar projects, in the same geography or sector or who has skillsets that could help provide advice. It's an interesting concept that again lowers the barriers around knowledge sharing and understanding and improves the ability - particularly in emerging economies - to access information from experts quickly.
EBRD is supporting both SOURCE and GViP via our IPPF.
A final thought on future directions. I think that the public sector agencies, be they national or regional, that collect and analyse their data in real time and make it available to their service providers, the private sector and their citizens in a robust manner are those that will benefit most from the promise of improved efficiencies, lower costs, higher reliability and overall higher satisfaction with their service. Cities and public entities are sitting on tremendous amounts of value in the form of data that they could be utilising if managed correctly. The private sector has an essential role to play in helping these agencies unlock that value and we’re beginning to see the structures emerge that are helping foster a greater collaboration between them.
Matthew is the Head of Infrastructure Policy and Project Preparation at EBRD, providing support for the Municipal Infrastructure and Transport sectors. The focus of his policy work covers PPPs, emerging market infrastructure support, regulation, tariff reform, commercialisation of SOEs and municipal utilities, public service contracting, and performance-based contracting. Matthew leads the Bank’s EUR 40m Infrastructure Project Preparation Facility (IPPF) dedicated to improving the quality and efficiency of project preparation for both PPPs and sustainable infrastructure projects in the public sector, building local capacity, and providing policy advice to the Bank’s clients. He is also active in various MDB, G20 and OECD working groups on infrastructure support initiatives. Previously, he was Senior Urban Transport Specialist at EBRD from 2007-2013, where he focused on both private and public sector urban transport projects. Prior to joining EBRD in 2007, he worked as a Transport Specialist for Inter-American Development Bank in Washington, DC and San Jose, Costa Rica from 1999-2007.