Risk pricing inefficiency in public–private partnerships*

Meeting the Challenge of Sustainable Infrastructure: The Role of Public Policy

In a previous article, the authors identified Value for Money (VfM) as the standard evaluation framework for infrastructure public–private partnership (P3) alternatives to traditional public-sector project procurement and financing. They noted VfM’s primary focus on a net present value cost comparison between the alternatives. In light of the challenges that U.S. state and local governments face in the current economic environment, they introduced “Value for Funding” (VfF) as an additional analytical framework that explicitly expands the focus to include public-sector funding and fiscal issues in the evaluation of an infrastructure P3, which they believe would be useful in many cases. This article presents an example of a VfF approach applied to a specific topic: the risk-absorption features of various types of P3 contracts with respect to U.S. state and local public-sector deficits. More generally, the article outlines a stochastic methodology for the comparative assessment of P3 and traditional alternatives that will likely be the basis of much other VfF analysis, especially where the funding stream is relatively independent of specific project operation and the public sector is fiscally constrained.

Public-Sector Deficit Risk and Infrastructure P3s: A Value for Funding Analytical Approach to Evaluation

Development and environmental sustainability, infrastructure and economic growth are closely interconnected. The world will need to more than double investment in infrastructure from current levels to meet its growth and development objectives over the next 15 years. This means raising infrastructure investment to more than $6 trillion a year. Energy, transport and cities dominate infrastructure needs. As much as three quarters of the incremental investment requirements will be in emerging and developing economies. Developing this new infrastructure capacity in sustainable ways can be a game changer in the fight against climate change.The agenda involves important transformations in the way infrastructure is developed and financed. It spans boosting investment in public and private sectors, and increasingly through public-private partnerships; reforming incentives to channel new investment toward efficient and sustainable infrastructure; strengthening institutions to ensure the feasibility and quality of investments; and promoting innovation in infrastructure technology to better address climate risks and sustainability, and in public and private financing modalities. Strong public policy leadership must be combined with new ways to catalyze private investment and financing, especially from institutional investors. More than half of the incremental financing will need to be mobilized from the private sector.While much of this agenda is the responsibility of national governments, national-level actions must be supported with stronger international cooperation through collective actions, peer learning and technical and financial support. The G20 and the BRICS grouping of Brazil, Russia, India, China and South Africa have an important role to play in this effort, both through successful individual and coordinated actions within these groups and more broadly through strengthening the policy, financial and institutional framework for global cooperation.

The Global Infrastructure Challenge and the Role of G20 and BRICS

It is estimated that Africa needs $93 billion annually until 2020 in order to bridge its infrastructure deficit. It is through significant investment in infrastructure development that economic growth and poverty alleviation can be enhanced. However central to all construction projects is an effective and sustainable procurement system. There is a notable shift by some African governments to turn to the private sector to design, build, finance and operate infrastructure facilities previously provided by the public sector in the form of Public Private Partnerships (PPP’s). As an innovative financing model, PPPs present an opportunity to governments to improve service delivery. Accordingly, this paper focuses on assessing international best practices as to how some developing nations tap into the resources of the private sector in implementing their infrastructure projects. The study is a result of critical review, synthesis and contextualization of relevant academic literature, conference and journal publications. A thorough document review method was employed to assess how some developing countries have institutionalized PPP as part of their development strategy. The paper will be of significant value to senior government officials as understanding the concept and dynamics of PPP will result in accelerated and effective service delivery.

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Public private partnerships: A possible alternative for delivery of infrastructure projects in Africa

Realizing the potential taxpayer benefits of public-private partnerships (PPPs) in infrastructure investment, including higher quality per dollar and faster project delivery, depends on allocating project risks to the party best able to manage them. Arguably, demand risk is the most important source of uncertainty affecting an infrastructure project’s financial viability, particularly in the case of new build, or “greenfield” projects in which the private partner’s compensation is determined by user volume, but for which no history of use exists. PPPs have typically used the basic user fee or availability payments models to allocate all demand risk and (therefore revenue risk) to either the private partner or the government, limiting the number of PPP deals that investors and project sponsors may find attractive. However, recent deals have migrated away from the basic user fee arrangement after several prominent PPPs using it encountered financial difficulty.This paper presents three alternative incentive structures for PPP contracts that can potentially benefit both public sector sponsors, by delivering higher quality per dollar, and private investors, by generating attractive returns. The rate of return model, price cap model, and “sharing” model all apply principles from the regulation of privately-owned energy and telecom infrastructure to PPP projects that generate user fees. In addition, these alternative risk- and profit-sharing approaches may create choices that are attractive to investors and sponsors with risk preferences and return expectations not accommodated by more commonly used models. By expanding the options for sponsors and investors to consider in PPP negotiations, these incentive structures have the potential to increase the number of PPP deals and improve the odds of the projects’ long-term success.

Expanding the Market for Infrastructure Public-Private Partnerships: Alternative Risk and Profit Sharing Approaches to Align Sponsor and Investor Interests

Elaine Buckberg

Papers

Expanding the Market for Infrastructure Public-Private Partnerships: Alternative Risk and Profit Sharing Approaches to Align Sponsor and Investor Interests