By David Baxter
In June 2016 the World Bank Group and PPIAF released a cautiously optimistic report on the state of infrastructure Public-Private Partnerships (PPPs) in emerging markets and developing economies (EMDEs). The report makes interesting reading on the PPP trends and provides a concise synopsis of the state for PPPs over the last 24 years.
My post provides a summary review of selected highlights from the 36-page report and a few comments.
Since the 1990s when interest grew in PPPs in EMDEs there have been a number of financial events that have included growth and contractions in PPP investments. The Asian financial crises and the global financial crisis impacted investment in PPPs in the EMDEs. More recently, there was investment decline of 40% in 2013 when many economies contracted. The investment-cooling period over the last two years has been followed more recently by renewed interest in investment PPP infrastructure projects that optimistically points to the possibility of a slight upward increase in investments in the next five years.
The World Bank-PPIAF report points out the investment in PPP projects as a percentage of GDP has remained relatively flat over the last decade. Overall PPP investment trends have been influenced by 5 dominant EMDE economies that include Brazil, China, India, Mexico, and Turkey. Current declines in EMDE overall PPP total investment are a direct result of the declines in investment in these 5 countries.
Other regional clusters of EMDEs are starting to show upward trends in PPP investment opportunities, especially in the energy-sector. For example it must be pointed out that East African countries are currently developing PPP pipelines that might buck the overall global trend, which is disproportionately impacted by the aforementioned 5 large economies. The decline in investment in infrastructure since 2013 was particularly noticeable in India and Brazil, even though the 5 EMDE economies still continue to remain dominant in terms of investment in infrastructure as a percentage of their GDP.
Other factors have impacted the growth of investment in PPP infrastructure in the EMDEs. Effective procurement of PPPs is of critical importance to perceptions about the health of PPP markets, risk management, and investor interest. Transparent competitive procurements are in important indicator of the health of the PPP market in EMDEs as they ensure that international investors feel that they have a competitive opportunity to pursue large procurements without bias in domestic markets. This is not always the case unfortunately. The World Bank report points out that a significant number of PPP procurements (23%) originate through unsolicited proposals. This is identified as a cause of concern regarding transparency and I fully agree with this observation. If this trend persists, if might have a negative impact on investor confidence.
Additionally, direct negotiations between public and private sector partners has resulted in a lack of competition in contract awards in certain EMDE countries. This trend is particularly prevalent in energy sector projects (33%) and in Low Income Countries (LICs) where it is 39%. This approach to PPP procurements points out to me that legal reform is still needed in PPP laws and codified legal guidelines and practice in many countries that are exploring PPPs - if competitive markets that are attractive to principled investors are to be achieved. First hand exposure to non-competitive procurement practices in Sub-Saharan Africa has led to discussions with many PPP public sector practitioners who have pointed out that unsolicited PPPs are causing perceptual concerns that this practice is a thinly veiled gateway to corruption.
I was pleased to read that the World Bank stressed that good institutions and regulations have a positive impact on PPP success. Institutional capacity to perform PPPs in a consistent manner that is in compliance with legal requirements is critical. It is encouraging that political leadership in many Sub-Saharan African counties is beginning to sit up and take notice and institute governance reforms that will improve their capacity to implement successful PPPs. In the last few years Tanzania, Kenya, and Uganda for example, have taken measures to introduce specific PPP legislation and build institutional capacity to implement PPPs. This also the case in GCC states. Because of their efforts there has been an increase in the number of proposed and vetted bankable PPP projects and the beginning of the development of PPP sustainable national PPP pipelines, which will gain the renewed attention of investors in certain EMDEs. However, there has been an unintended result of well-intentioned reforms as well. In some instances legal reform has moved at a more rapid pace than the institutional ability of public sector officials to implement legal requirements with an unforeseen development where proposed projects have become stuck in bureaucratic inertia.
Although areas for improvement in the practice of PPPs have been pointed out in the World Bank report, the overall percentage of cancelled PPP infrastructure projects fortunately remains low at 3.7%. This is however not the case for water and sanitation projects where the rate of cancelled projects is much higher at 28%. It is important, in the next decade, that countries do the best to create enabling environments and practices that mitigate negative political, legal and economic missteps that unnecessarily contribute PPP project failures, as even a small number of failures typically has a visibly disproportionate negative impact on future investor confidence.
The transportation sector continues to capture a large share of overall investment. Many mega projects have contributed to this trend. Roads have been the biggest transportation subsector for PPP investment. Railroads, seaports, and airports are also attracting major investment in the EMDEs. For example, Brazil has closed on 23 mega transportation projects that have exceeded $1 billion. Rio de Janeiro's Galeao Airport 25 year concession, which closed in 2014, was valued at $10.5 billion and accounted for one-fifth of global investment. The potential and rewards of mega projects is vast, but the potential failure impact risk to future projects is also enormous. It will be interesting to see how Galeao Airport Concession fares during the current economic downturn in Brazil's economy.
PPP investment in the Energy sector has been in decline. The World Bank report points out that in 2015 a 22-year investment low was reached in the big five PPP markets. However, 2015 data confirmed that other EMDE countries are investing more in the energy sector. During this time 59 projects with a combined value of$12 billion were closed in the first half of 2015. It will be interesting to monitor investment in sustainable energy projects over the next few years to determine what impact emerging technologies have on energy investment opportunities.
However, one should not only focus on the top five countries. The rest of the EMDEs have seen investment growing steadily in the energy sector. Of particular interest to me were the comments on the number of cross border projects, which have stagnated over the years. In many regions landlocked countries economic survival is dependent on cross border (transnational boundary) projects which give then access to global and neighboring markets. It will be important to monitor cross border projects in East Africa over the next few years where infrastructure is being proposed for large regional transportation projects such as the Lamu Port and Lamu-Southern Sudan-Ethiopia Transport Corridor (LAPPSET), where many of its supporting projects will be financed as PPP projects.
When it comes to paying for projects three sources of revenue exist - user fees, PPAs/WPAs, and annuity/availability payments. Of projects closed in the last 5 years, the World Bank Reports that 69% required government transfers (PPA/WPA) with public entities, 22% were funded by user fees, and 9% with PPA/WPA with private entities and wholesale markets. I am interested to see what the potential impact of economic decline in the 5 top PPP countries will be on user fee agreements in the next five years.
For robust PPP infrastructure market growth to occur over the next five years, it is important that government support remains strong. In economic uncertain times it will be important that governments continue to offer indirect support through guarantees to reduce project risk. Positive actions and messages from governments in this regard will continue to pay a critical role in encouraging and facilitating private sector investment in infrastructure projects that are critical to economic growth. The water sector is particularly reliant on government support and I do not see reliance on government support changing in the foreseeable future.
Many PPP projects that are being considered in EMDEs are greenfield projects. Greenfield projects in EMDEs will also continue to need government support as they are riskier and require large amounts of investment. Where countries do not have the resources, they will continue to reach out to the multilateral development Banks and donors, which have played important facilitation roles in developing bankable Greenfield projects.
Support over the years has included financial assistance as well as risk management instruments. Risk Management instruments introduced by the MDBs have included the promotion of reforms that created regulatory and institutional frameworks for PPPs that instill confidence in investors. Investment interest is highly susceptible to corruption, adherence to laws and regulations, and political stability. Fortunately, as previous mentioned, support from MDBs has allowed governments to make institutional changes that have improved investor confidence. With the advent of e-government procurement platforms and access to information, countries have been more able to manage perceptions of risk and attract greater investment when they are willing to reform and implement best practices.
The World Bank is sober in its report when it states the following.
“The current global landscape is not very promising. Macroeconomic factors, such as depreciating emerging market currencies, a commodities deflation, and Basel III regulatory requirements, have recently affected the investment landscape. Country specific issues, such as the liquidity crunch, coupled with land acquisition issues, have affected investment in India for the fifth straight year. Political distress has also inhibited investor sentiment in developing countries and particularly in Brazil.
The post-2015 development agenda offers an opportunity to think more broadly about development finance and the role of PPPs. One of the targets of the Sustainable Development Goals (SDGs) is to “Encourage and promote effective public, public-private and civil society partnerships, building on the experience and resourcing strategies of partnerships.” If public-private partnerships are to play a prominent role in the post-2015 development agenda, PPP investment as a percent of PPPs must increase. This will require all EMDE countries to develop their PPP markets, especially those outside the top five economies. “
I look forward to reading future reports and see what progress has been made in the world of PPPs. I have no doubt that PPPs will continue to play an important role in all countries, not only the EMDEs.
Source: World Bank Report - http://www.worldbank.org/en/topic/publicprivatepartnerships