PUBLIC-PRIVATE-PARTNERSHIPS FOR INFRASTRUCTURE FINANCING IN THE MENA REGION

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PUBLIC-PRIVATE-PARTNERSHIPS FOR INFRASTRUCTURE
FINANCINGIN THE MENA REGION The Political
Economy of PPPs by Charles Kovacs, Vice
ChairmanCommittee on Non-Member EconomiesBIAC
Business and Industry Advisory Committee to the
OECD
Istanbul, Turkey 8 November 2006
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The Political Economy of PPPs The Background

• EUROPES AND AMERICAS INFRASTRUCTURE WAS
  BUILT MAINLY BY PRIVATE CAPITAL
• 18th CENTURY POSTAL NETWORKS, TURNPIKES, CANALS
• 19th CENTURY RAILWAYS(PPP), UTILITIES
• 20th CENTURY TOLL ROADS, PIPELINES,
• RECENTLYPRIVATIZATION OF INFRASTRUCTURE, PRIVATE
  CAPITAL FOR GOVERNMENT FACILITIES OF ALL TYPES

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The Dynamics of PPPs 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
•  

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The Dynamics of PPPs 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

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The Dynamics of PPPs 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 GOVT OWNED) LIKE OVERSEAS
  PROJECTS FOR PROFITS, VARIETY, AND AS POTENTIAL
  POISON PILLS AGAINST PRIVATIZATION
• RISK ALLOCATION IS A MAJOR ISSUE

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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

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Advantages for the Public Sector

• CERTANITY OF CONSTRUCTION AND ITS COSTS
• EFFICIENT OPERATION
• INCREASED AND POSITIVE ATTENTION FROM ABROAD
• POSITIVE BUDGETARY IMPACT

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Risks for the Private Sector

• CONSTRUCTION
• PERFORMANCE
• COMMERCIAL
• POLITICAL
• LEGAL
• ENVIRONMENTAL

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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

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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