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Financing Best Practice

Public–Private Partnerships in Emerging Markets

by Peter Koveos and Pierre Yourougou

Executive Summary

  • A public–private partnership (PPP) is an “arrangement in which the private sector supplies infrastructure assets and services traditionally provided by governments.”

  • The public and private sectors have different goals and organizational philosophies and cultures. Reconciling these differences requires a strong commitment, and a clear vision regarding expectations and outcomes.

  • The essence of PPP is risk allocation—whether these operations add value depends primarily on how risk is identified, managed, and priced.

  • In emerging markets, international partners must address not only the project risk and country risk, but also the risks posed by the lack of local managerial skills, inadequacy of institutions, corruption, lack of transparency, and others.

  • Project financing can be used for PPP projects, thus clarifying a key element of the partnership financing structure.

  • One of the most significant and interesting global economic developments of the past few years is the emergence of Africa as a competitive region for business.

  • The Bujagali Hydropower Project represents the largest mobilization of private financing for a power project in Africa.

Introduction

Given the poor state of public-sector resources around the world, made even worse by the global financial crisis, governments have been seeking to enhance resources by attracting private sector participation. Such participation may be somewhat unstructured, or more formal. The public–private partnership (PPP) is one of the formal approaches to cooperation. PPP, in various forms, is not a new construct. The current frailties of the global economy have forced governments to reduce costs and limit risks. This paper examines the nature of PPP, and describes some of the advantages and disadvantages of PPP. The discussion then focuses on the viability of PPP in emerging markets in general, and African countries in particular. A case study, Bujagali Hydropower Project in Uganda, illustrates many of the major concepts discussed throughout this paper.

Definitions/Nature of PPP

There are many definitions of PPP. Most versions of PPP are very similar, although the degree of control shared by the partners, and several other characteristics of the partnership may receive different emphasis from definition to definition. Thus, PPP is an “arrangement in which the private sector supplies infrastructure assets and services traditionally provided by governments” (Michel, 2008). Other terms for PPP include: PPI (private participation in infrastructure); PSP (private sector participation); in the UK, the term used is PFI (private finance initiative); in Australia, the reference is to PFP (privately financed projects); and P3 is commonly used in the US (see Yescombe, 2007). Other variants include the build–transfer–lease (BTL) and build–own–operate–transfer (BOOT) options. In some cases, two or more of the above terms can be used in combination. For example, project financing can be used for PPP projects, thus clarifying a key element of the partnership, financing. Project financing schemes may involve a variety of instruments such as the special-purpose vehicle (SPV), a legal entity with its own assets and obligations. Creation of this joint venture among project sponsors enables the flow of funds. An SPV is a highly leveraged company, with typically limited-recourse debt and limited equity participation. PPP can indeed be very complicated, and requires thorough analysis of associated terms and conditions.

PPP: Some Advantages and Disadvantages

PPP is part of the recent movement of “new public management.” PPP is a means through which the two sectors can become interdependent. Managers in each sector must independently answer some basic questions: Why are we participating in this partnership? Where are we going to operate? Who are our partners? How are we going to proceed? What is our exit strategy?

Specific benefits for the public sector include:

  • reduces project costs and time, while enhancing its overall efficiency and effectiveness;

  • enables access to and learning from private sector resources, technology, and managerial skills;

  • credit enhancement and, consequently, access to long-term financing;

  • shifts risk to the private sector;

  • pursues an integrated approach to project completion;

  • involves participation from various partners, and may legitimize the project in the eyes of the citizenry, and other stakeholders;

  • PPP may provide greater economic benefits than other forms of cooperation, such as public sector procurement. These extra benefits are usually referred to as value for money (VfM).

For the private sector participant, the analysis is based on the profitability of the project in terms of dollars and cents, and is usually more objective than that conducted by the public sector. Participation in a given project can be analyzed using standard finance tools. These projects usually involve a great deal of risk, but government backing and involvement of international financial institutions help mitigate risks. The limits of risk–return trade-offs, and the ensuing risk allocation, are even more crucial factors leading to project assessment. A great deal of emphasis is placed on risk management, including the formulation of an exit strategy.

PPP also involves potential disadvantages. PPP entails considerable agency costs, as it must be thoroughly cultivated and managed in terms of planning, monitoring, and acceptance of loss of some control. Private and public sectors often have different goals, and organizational philosophies and cultures. Reconciling these differences in order to bring about the desired project results requires a strong commitment, and a clear vision regarding expectations and outcomes.

The above are especially relevant to public authorities in emerging markets. As emerging markets are so diverse, the analysis must be adjusted to fit the particular country’s environment.

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Further reading

Books:

  • Akintoye, Akintola, Matthias Beck, and Cliff Hardcastle. Public–Private Partnerships: Managing Risks and Opportunities. Malden, MA: Blackwell Science, 2003.
  • Asian Development Bank (ADB). Public-Private Partnership Handbook. Manila: ADB, 2008. Online at: tinyurl.com/blbwxwv
  • Grimsey, Darrin, and Mervyn Lewis. Public Private Partnerships: The Worldwide Revolution in Infrastructure Provision and Project Finance. Northampton, MA: Edward Elgar, 2007.
  • Mobius, J. Mark. Mobius on Emerging Markets. New York: Irwin Professional, 1996.
  • Osborne, Stephen P. (ed). Public–Private Partnerships: Theory and Practice in International Perspective. London: Routledge, 2000.
  • Yescombe, E. R. Public–Private Partnerships: Principles of Policy and Finance. Oxford: Elsevier, 2007.

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