Public Private Partnerships
for financing of infrastructure development
Akash Deep
Harvard University
December 1, 2005
Agenda
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The objective: infrastructure development
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The mechanism: public private partnerships
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The actor: government
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The institution: national development banks
The need for infrastructure …
The impact of economic infrastructure on growth is
substantial:
Canning and Benathan (2000) find that the rate of
social return on paved roads is 2.5 times higher
than the rate of return on capital in developing
countries.
Calderon and Serven (2004) find that infrastructure
stocks have a positive effect on long-term growth,
and a negative impact on income inequality
… but the shortage of financing
Estimates arrive a need for infrastructure investment
that are massive: $450b per year
 Electricity
$120b
2001-10
 Water &sanitation
$49b
2001-15
 China
$200b
2001-10
But current ($56b) and expected future levels of
investment are far short, making infrastructure…
A binding factor of production: agriculture and
manufacturing
And detriment to the development of social
infrastructure: health and education
The challenges of financing
infrastructure domestically
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Size: Large, lumpy, inelastic projects
Duration: very long -- maturity mismatch can be
problematic for local commercial banks
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Low volume of deposit mobilization
Volatile depositor base
Low level of credit provision to the private sector:
crowding out by government debt
Limited capital market penetration
Lack of non-government longer-term debt markets
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Lack of “fiscal space”
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The challenges of financing
infrastructure globally
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Denomination: local currency revenues cannot
support foreign currency liabilities
Distance: Political risk
Regulatory inadequacy
Political feasibility
Why must government
participate in infrastructure?
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Significant positive social externalities requiring the
socially optimal level of investment
Rate of return inadequate for private capital
Check on negative externalities
Missing markets for credit, especially long-term
Natural monopoly and need for regulation
Ensuring affordability and thereby access
Longer term perspective of development
Public Private Partnerships
Under a public-private partnership (PPP), a contractual
arrangement is formed between public- and
private-sector partners that involves the private
sector in the development, financing, ownership,
and operation of a public facility or service. In such
a partnership, public and private resources are
pooled and responsibilities divided so that the
partners' efforts complement one another.
Such a venture differs from typical service contracting
in that the private-sector partner usually makes a
substantial cash, at-risk, equity investment in the
project, and the public sector gains access to new
revenue or service delivery capacity.
PPP variants
Ownership
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B[O]OT: build [own] operate transfer
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BOO: build own operate
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Joint ventures
Provision
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Leasing
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Operations or management contracts
Creating distance from
government: Project Finance
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For private finance, need private assets
Project finance involves creating a separate legal
and economic entity with the primary role of setting
up an organizational structure and obtaining the
necessary financial resources to develop and
manage a project.
The main, and crucial, distinction from conventional
corporate or public financial structures is that
repayment to debt and equity providers depends
solely on the capacity of the project to generate
cash flows, with typically no recourse to the
balance sheets of the sponsors or the resources of
the government.
Typical project finance structure
Forms of public participation
Direct
 Subsidies on investment or usage
 Debt
 Equity and mezzanine financing
 Bridge financing
Indirect
 Contingent support
Why PPP?
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Greater regulatory convenience
Enhanced development capacity of the state by
leveraging public money
Mechanism for tapping into private money and
efficiency
Greater transparency requirements: usually
includes a competitive bidding process
Lower financing costs
Better risk containment and sharing
Directed benefits through subsidies
Better adherence to quality standards which
might be hard to measure
Concerns regarding PPPs
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Agency problems and moral hazard
Risk allocation: are transferred risks systematic or
idiosyncratic?
Service quality standards difficult to ascertain and
may be under- or over-estimated at the onset of
the contracts: need for renegotiating contracts
Inability of the government agency to pay the
service charge due to future budgetary constraints
Comparing with other alternatives: “Public Sector
Comparator” is too difficult to implement
Renegotiation in a non-competitive framework may
promote opportunistic behavior
National development banks
“…concerned with offering long-term capital finance to
projects generating positive externalities…”
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Provider of long term financing
Regulatory support and legitimacy
Catalyst for other forms of private capital
Developer of domestic credit markets
Developer of local derivatives instruments
A steady counter-cyclical financing source
National Development Banks:
A conduit for public participation
Financed by government borrowings, NDBs:
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Hold a diversified portfolio of government’s stake in
infrastructure projects
Adopt a more professional approach to government
participation
Learn across projects and creating a repository of
expertise and information
Gain an inside view of projects at par with private
investors and banks
Maintain a sustained role lending legitimacy and
continuity of public participation
NDBs: Questions
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Financial and economic performance of NDB
investments
Extent of complimentarily between different roles of
development banks: domestic capital markets
Are there agency problems between the
government and independent NDBs?
What is the optimal distance from government?
What are the forms of contingent support?
Are alternative conduits of public participation
financing more effective?
PPP: Typical risk allocation
Public
Demand and Revenue Risks
Shared
Private
X
Design and Construction Risks
X
Operating and Maintenance Risks
X
Financial risks
X
Legal risks
X
Political risks
X
Environmental risk
X
Force majeure
X