Public-Private Partnerships
Infrastructure as an asset class in its own right is becoming increasingly attractive to private investors, from pension funds looking for low-risk and economically regulated assets to banks working with experienced contractors to finance large-scale projects.
According to expert research, institutional investors and banks have US$120 trillion in assets that could partially support infrastructure, bearing in mind that institutional investors are eager to find investments, like infrastructure, that offer them a return that is not related to the volatility of the stock and bond markets.
Impediments to Infrastructure PPPs
There seems to be no correlation, however, between the scale of need for infrastructure and addressable opportunities for the private sector. Indeed, advisors engaged in the preparation of privately financed or co-financed infrastructure caution that the challenges are even more on the demand side of projects as on the supply of capital because, in their analysis, there are not enough “bankable” infrastructure projects on the market. Matching potential investors with projects requires solid cross-border investment principles. Impediments that restrict the flow of financing, from regulatory rulings on investment in infrastructure assets to the absence of an efficient market, have to be addressed.
EIC Position on Public-Private Partnerships
The frequent experience of European international contractors, not only in developing countries, shows that maintenance is frequently the first target for spending cuts under tightening public budgets even if delaying preventive maintenance results in much higher eventual overall costs over the project’s life-cycle. Ultimately, such negligence leads to a significant or complete loss of the residual value of the asset.
EIC argues that the PPP approach offers an alternative to overcome these defects by shifting the long-term investment planning risk for an infrastructure project to the private sector which, given the competitive tender situation, has a commercial interest in optimising construction and operation management over the duration of the contract. It thus provides a strong incentive for the private partner to perform well over time, which offers substantial advantages for the Contracting Authority:
Up-front and full cost transparency and security in terms of capital investment as well as subsequent costs for operation and maintenance;
Substantial risk transfer to the private sector, including all interface risks between planning, design, construction and operation of the project;
Payments dependent on the performance quality of the service itself, not merely the quality of the works required for the service.
The PPP approach is an innovative mechanism to integrate the key drivers of Value for Money, i.e. output-based specification, risk transfer, life-cycle costing, performance measurement and incentives, competition and private sector management skills, into all phases of the project cycle. Independent studies undertaken in various PPP markets have shown that the efficiency gains through properly procured PPP projects lead to significant overall cost savings in the range of 10% to 30% for the taxpayer as opposed to traditionally procured public projects.