PUBLIC-PRIVATE-PARTNERSHIPS FOR
INFRASTRUCTURE FINANCING
IN THE MENA REGION
“The Political Economy of PPP’s”
by
Charles Kovacs, Vice Chairman
Committee on Non-Member Economies
BIAC – Business and Industry Advisory Committee to the
OECD
Istanbul, Turkey
8 November 2006
The Political Economy of PPP’s – The Background
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EUROPE’S AND AMERICA’S
INFRASTRUCTURE WAS BUILT MAINLY BY
PRIVATE CAPITAL
18th CENTURY: POSTAL NETWORKS,
TURNPIKES, CANALS
19th CENTURY: RAILWAYS(PPP), UTILITIES
20th CENTURY: TOLL ROADS, PIPELINES,
RECENTLY:PRIVATIZATION OF
INFRASTRUCTURE, PRIVATE CAPITAL FOR
GOVERNMENT FACILITIES OF ALL TYPES
The Dynamics of PPP’s – Public Sector Issues
THE NEED FOR INFRASTRUCTURE:
• OBJECTIVE FACTORS: COMMUNICATIONS,
ECONOMIC GROWTH, PUBLIC HEALTH
• SUBJECTIVE FACTORS: PRESTIGE, POLITICS, AND
PATRONAGE
• PPP FOR RISK REDUCTION AND OFF BALANCE
SHEET FINANCING
– INABILITY TO INCREASE TAXES
– CHANGES IN IDEOLOGY
– POLITICIANS DESIRE TO AVOID HARD CHOICES
AND/OR RESPONSIBILITY
The Dynamics of PPP’s – Private Sector Issues
THE PROFIT MOTIVE:
• LARGE BANKS ARE NOW FOCUSED ON RETAIL
RATHER THAN WHOLESALE, CORPORATE,
INTERNATIONAL FINANCE
• LENDERS RECEIVE A LOWER RETURN THAN
BUILDERS AND/OR OPERATORS FOR ESSENTIALLY
THE SAME RISK
• PROJECT/INFRASTRUCTURE FINANCE LESS
ATTRACTIVE THAN BEFORE,
ESPECIALLY IN DEVELOPING COUNTRIES
The Dynamics of PPP’s – Private Sector Issues
THE PROFIT MOTIVE:
• INTERNAL STRUGGLES IN BANKS OVER CREDIT
APPROVALS FOR PPP FINANCE
• PREFERENCE FOR ADVISING AND RAISING
FINANCE FROM THIRD PARTIES
• CONSTRUCTION COMPANIES NEED LARGE
INFRASTRUCTURE WORK ABROAD
• OPERATORS (SOME GOV’T OWNED) LIKE
OVERSEAS PROJECTS FOR PROFITS, VARIETY,
AND AS POTENTIAL POISON PILLS AGAINST
PRIVATIZATION
• RISK ALLOCATION IS A MAJOR ISSUE
Risks for the Public Sector
• LOSS OF CONTROL (EMPLOYMENT,
PATRONAGE)
• LOCAL HOSTILITY TO FOREIGN PRESENCE,
PRACTICIES, AND/OR OWNERSHIP
• HIGHER COST OF FINANCING
• LACK OF REGULATORY CAPABILITY
• POPULAR HOSTILITY TO PAYMENT FOR
PREVIOUSLY FREE OR CHEAP
INFRASTRUCTURE
Advantages for the Public Sector
• CERTANITY OF CONSTRUCTION AND
ITS COSTS
• EFFICIENT OPERATION
• INCREASED AND POSITIVE
ATTENTION FROM ABROAD
• POSITIVE BUDGETARY IMPACT
Risks for the Private Sector
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CONSTRUCTION
PERFORMANCE
COMMERCIAL
POLITICAL
LEGAL
ENVIRONMENTAL
Striking a Balance = Mitigating Risks
• BOT TO MITIGATE NATIONALISTIC
OBJECTIONS
• USE OF FOREIGN LAW AND ARBITRATION
• EXTENSIVE AND DETAILED CONTRACTS
• INSURANCE
• AVOID POLITICS OR POLITICISATION
• INCLUDE INTERNATIONAL FINANCIAL
INSTITUTIONS
Conclusions
• PPP HAS A GOOD TRACK RECORD
• PPP IS A DILEMMA FOR MANY GOVERNMENTS
DUE TO POLITICS AND/OR IDEOLOGY
• GOVERNMENTS NEED TO UNDERSTAND PPP
AND THEN DECIDE WHETHER OR NOT TO
PROCEED
• APPROACH/REQUIREMENTS FOR ATTRACTING
CAPITAL ARE SAME AS FOR FOREIGN DIRECT
INVESTMENT
• IMPORTANCE OF DOCUMENTATION AND
LEGAL ISSUES