ASSIGNMENT 2

A Two-Way

Street Public-private partnership projects can help emerging economies fill infrastructure gaps— if governments define a clear ROI.

BY SARAH FISTER GALE

ILLUSTRATION BY PETER AND MARIA HOEY

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nfrastructure projects help nations build a better future. Emerging economies need upgrades to roads, railways, energy grids and broadband networks in order to sustain domestic growth. But these countries face a particular conundrum: how to build highways, power plants and ports that will stimulate economic development when public funds are

in short supply. To make ends meet, many governments are

turning to public-private partnerships (PPPs). PPPs allow the public sector to leverage private funding and expertise to more rapidly plan, launch and deliver infrastructure projects. In exchange, private- sector partners are given long-term maintenance and operation contracts that tu rn a profit.

“O n the face of it, PPPs are a great project model to fill in the funding gaps these countries face," says Andy North, a former senior vice president of strategic development and management in Kuala Lumpur, Malaysia, for AECOM, a global design, engineering and construction firm.

The global gaps are staggering. According to

McKinsey & Co., an estimated US$57 trillion will be needed to finance infrastructure development around the world through 2030, with much of that invest­ ment needed in developing countries. Latin America and the Caribbean, for example, will need more than US$700 billion to double power-generation capac­ ity by 2030, according to the U.S. Energy Informa­ tion Administration. And sub-Saharan Africa needs US$93 billion per year to address its infrastructure shortfall, according to The World Bank.

Given these urgent needs, PPP projects hold huge potential. But governments m ust clarify proj­ ect roles, risks and ROI before private organizations will be prepared to foot the bill.

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"In a lot of cases, the private investors cannot see how they will get the full cost recovery,” Mr. North says.

PAVING THE WAY To attract private-sector investments, governments must paint a clear picture of what they bring to the table. But this will be easier for some projects than others. While energy and toll road initiatives may offer a distinct ROI, projects to generate clean drinking water or treat wastewater have less obvi­ ous revenue streams once construction is complete.

Indeed, power projects are among the most common types of PPPs, says Alexander Nicho­

las Jett, public-private partnership specialist, PPP office, Asian Development Bank, Manila, the Phil­ ippines. He notes that Pakistan recently closed several wind power PPP project deals, thanks to proper risk allocation.

“One of the key reasons these projects were attractive to the private sector is that the govern­ ment addressed many of the risks in their project agreements,” Mr. Jett says. Planning documents factored in how currency fluctuations would impact budgeting, how much power must be reliably deliv­ ered to the grid and who will buy the power at what rate to solidify the project’s long-term value to investors.

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A rendering o f a proposed new in te rn a tio n a l a irp o rt in M anila, th e Philippines

“Good risk allocation is critical to attracting the private sector to these projects,” he says. “Once the first deal closes, the next ones are easier." For proj­ ects with a murkier ROI, such as rail infrastructure initiatives, governments may need to find additional sources of revenue to attract private partners. Offer­ ing perks like real estate rights along rail lines or commercial space at rail stations can help sweeten the pot, Mr. Jett says.

“That can change the financial picture consider­ ably. The government gets a connected country and it doesn't have to spend as much money to incentiv- ize private investors."

Beyond offering incentives, governments must

“Selecting a pipeline o f projects tn a t have a clear p ay o ff is one o f th e biggest challenges w ith prom oting a sustainable PPP environm ent.” — M o h a m m a d Abu Rashed, PPP o ffic e , p rim e m in is te r's

o ffic e , Dhaka, Bangladesh

build confidence that projects will deliver their projected value, says Mohammad Abu Rashed, PPP advisor, PPP office, prime minister's office, Dhaka, Bangladesh.

“Selecting a pipeline of projects that have a clear payoff is one of the biggest challenges with promot­ ing a sustainable PPP environment,” he says.

PAYLOAD CAPACITY Private-sector partners are also hesitant to invest in infrastructure in countries with a short PPP project resume. They worry governments won’t hold team members accountable for implement­ ing new rules and that PPP laws are stronger on paper than in practice.

The Philippines has worked to change that perception. Since launching its PPP program in 2010, the national government has awarded 10 PPP projects collectively worth PHP189 billion. The program aims to overhaul the country’s transportation infrastructure and includes road, airport and building projects.

To take these projects from conception to reality, the government created the PPP Center, which acts as the central coordinating and monitoring agency

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for all PPP projects, providing project advisory and facilitation services. The country has also set up formal rules for financing, risk sharing and project management. All of this has helped spur the success of the country’s first PPP project: the Muntinlupa- Cavite Expressway, which was completed success­ fully in July 2015.

That project was delivered in partnership with Ayala Corporation Infrastructure Holdings, an infrastructure development group that invested PHP2.2 billion to support the project, including a PHP902 million up-front cash payment to the government. In exchange, Ayala will operate and maintain the new road for 30 years, generating a return on the investment through tolls.

The government is now bidding out 13 more projects, including airport terminal, rail, highway, prison and water infrastructure projects.

"Tie Philippines is taking the lead in Southeast Asia in developing successful PPP projects,” Mr. North says. “We are optimistic that more will come out of this country.”

FROM DEAL TO DELIVERABLES Once projects are funded, project and program

"Good risk allocation is critical to a ttractin g th e private

sector to these projects. Once th e firs t deal closes, th e n ext

ones are easier." —Alexander Nicholas Jett, Asian Development Bank,

Manila, the Philippines

managers must carefully navigate varying requests coming from a range of public and private stake­ holders, says Wachira Gervasio, PMP, project superintendent for Kenya Power in Nairobi, Kenya.

Conflicting pressures from key stakeholders can tempt project managers to make promises they can't deliver, like agreeing to overly aggressive timelines or unrealistic return scenarios. That may be a short­ term solution, but it spells disaster in the end. “Don’t rush the planning process,” Mr. Gervasio advises.

To create a plan that will deliver a viable ROI, project and program managers should identify past PPP projects that can serve as a roadmap. Reviewing lessons learned can help confirm whether the team

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“You have to know w h a t

you are going to measure

and how it w ill be measured

as part o f th e project plan."

— J o n a th a n S te v e n s , T h e W o r ld

B a n k , W a s h in g t o n , D .C ., U S A

has the skill and experience needed to identify and mitigate risks.

Practitioners also should identify key performance indicators (KPIs) that will allow them to measure things like performance, quality and environmental impact, says Jonathan Stevens, senior technical advi­ sor, infrastructure and environment, The World Bank, Washington, D.C., USA, “You have to know what you are going to measure and how it will be measured as part of the project plan,” he says.

And measuring success shouldn’t stop at the rib­ bon-cutting ceremony, Mr. Jett adds. A PPP project technically continues as long as the private sector owns the concession rights, which can stretch to as many as 30 years. “A good PPP will define expecta­ tions for how the concessionaire will maintain the asset, and penalties if KPIs aren’t met,” he says. “A government may need training to effectively mea­ sure KPIs and apply penalties if it is its first PPP project in a particular sector.”

Governments new to PPP projects may need outside help to ensure a comprehensive project plan is in place. That might mean bringing in experts from academia and global organizations like The W orld Bank or the African Development Bank to offer training and guidance on the implementation of early PPP projects. But showcasing initial suc­ cesses will help emerging economies attract more private-sector partners—and make PPP projects a linchpin of future infrastructure portfolios, says M tchera Johannes Chirwa, chief infrastructure and PPP specialist for the African Development Bank in Pretoria, South Africa.

“If we take the tim e to plan and manage these projects, I have no doubt they will play an im portant role in filling the infrastructure gap.”

4 PPPs P<ivi HYDERABAD METRO RAIL PROJECT Location: Hyderabad, India Budget: INR147 billion PPP duration: 2012-2047 (construction phase 2012-20 Partners: Government o f Andhra Pradesh, India and L& Metro Rail Description: Construction, maintenance and operation 72-kilom eter (45-m ile) train system

G A L E A O -A N T O N IO CARLOSJOBIM IN TE R N A TIO N A L AIRPO RT EXPA N SIO N Location: Rio de Janeiro, Brazil Budget: BRL2 billion PPP duration: 2014-2039 (construction phase 2014-2016) Partners: Brazil's National Civil Aviation Agency, Odebrecht Transport, Changi Airports International Description: Construction o f a th ird term inal and renovations to tw o existing terminals; maintenance and operation o f entire airport through 2039

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ng the DESIGN BUILD FINANCE OPERATE (DBFO) ROADS PACKAGE 2 Location: Northern Ireland Budget: GBP250 million PPP duration: 2007- 2041 (construction phase 2007-2011) Partners: Northern Ireland's Department for Regional Develop­ ment Roads Service and Amey Lagan Roads Description: Con­ struction and mainte­ nance of 125-kilome­ ter (78-mile) highway

SOUTH WHARF CONTAINERTERMINAL Location: Port of Cotonou, Benin Budget: US$610 million PPP duration: 2009-2034 (construction phase 2009-2013) Partners: Benin's federal government and Croupement Bollore Description: Construction and operation of a new terminal at the port

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