New Dimensions of the Public-Private Partnership: Private Equity Options in Developing Countries

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New Dimensions of thePublic-Private
PartnershipPrivate Equity Options in Developing
Countries

• Alan G. Straus
• Skadden, Arps, Slate, Meagher Flom LLP
• Istanbul
• November 8, 2006

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Investigating New Dimensions

• Meaning of infrastructure
• Meaning of private equity
• Reasonable targets of private investment in a
  developing economy
• How the public sector can assist
• Investing in a bottoms-up manner instead of
  from the top down

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Traditional Private Equity

• High-profile financial investor/ major
  corporation
• Taking target operations private, no public
  reporting
• Stock market exit at high multiple

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Infrastructure Investment in Developing Countries
Urgently Needed

• Infrastructure investment can directly assist the
  poor by
• Enhancing economic activity
• Removing bottlenecks in a local economy
• Generating distributional effects by increasing
  the access of the poor to product markets

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Infrastructure

• OECD defines as power, telecoms, roads, and water
  supply
• More really constitutes infrastructure that is
  suitable for PPP investment
• Political and social constraints

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Expanded Infrastructure

• Small and medium sized businesses where a
  relatively small, targeted private equity
  investment can have a general multiplier effect
• More targets for investment
• Maintains local ownership of resources in the
  host country

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SME-targeted Private Equity Investment

• Stresses the importance of small and medium sized
  enterprises (SMEs) to produce economic growth and
  human security
• Portfolio investment
• Jumpstart a business that needs development
  capital but for various reasons cant access more
  traditional capital
• Stimulate growth in the SME sector that in itself
  will be able to have a greater opportunity to
  expand and build infrastructure, as widely
  defined

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SME-Targeted Model

• Not a controlling investment
• High risk
• Ties to Management Training
• Usable with Islamic Financing Techniques
• Lower Leverage

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Afghanistan Renewal Fund

• Mix of European and Afghan management
• 20 million committed
• High-net worth individuals
• Development finance institutions and donors
• Pipeline over 200 potential deals
• Entrepreneurs seeking total investment of 380
  million
• Deal-pipeline growing at 10-20 deals/month

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Effective Public Sector Participation

• May come in various forms
• Public sector participates as investor
• Publicly funded development finance institutions
  can partner with private sector in investing
• Public Sector as asset owner
• Private sector participates with low capital and
  investment risk through service or management
  contracts

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Effective Public Sector Participation

• Public sector participation in the form of
  financial project support, such as guarantees and
  insurance, can mitigate investment risk
• Public sector participation, through tax or
  concession incentives, might encourage packaging
  of investment in infrastructure that has sectoral
  or regional significance with business licenses
  for tradable opportunities
• Public and private interests to create a
  fundamental utility (for example, water, power
  and sewage treatment and development rights)
  might support