Editor's Comment: The changing face of PPPs

10 June 2015

International Construction editor Chris Sleight.

International Construction editor Chris Sleight.

Wherever in the world you look at the infrastructure market, there is a common theme. The need for investment is obvious, if not overwhelming, but the stumbling block is often finding the money.

This applies in the developed world as well as fast-growing emerging economies, and finding the money is perhaps more difficult than ever in today’s austere times, as governments around the world look to cut their budgets and reduce their borrowing.

As a result, there is a stronger and stronger emphasis on public private partnerships (PPPs) to help close the gap, and this is a theme discussed in this month’s feature on the Asia-Pacific region, where Indonesia is just one example of a country looking to go down this route.

But it has to be said that while PPPs have contributed to infrastructure investment around the world in the past, they have not really filled the gap between what is required in terms of investment and what is successfully implemented.

But another interesting point in the wider PPP market is that there is fairly lively activity in what is termed the secondary market. This is the sale of stakes in PPP concessions once construction is complete and they are operational.

The reasons for this are understandable. Institutional investors like pension funds do not want the risk of financing a construction project. They do not understand the construction process in the same way contractors or consultants do, and there will always be nervousness about cost overruns and disputes.

As well as these construction risks, there are other uncertainties in some types of PPP like toll roads. The return on investment comes from road users, but if the traffic projections were wrong, the tolls are set too high or there are other deterrents to use, income will be below expectations.

This is why the secondary market tends to focus on projects where construction is complete, and the project has been operational for a few years. This gives a clear picture of income, profits and therefore a valuation for potential investors.

But for the construction industry, the more pressing need is to find ways of encouraging investment in PPPs from the outset, or being ‘bankable’ in PPP parlance. This is an area the sector is developing most rapidly, with governments and multi-lateral lenders looking at ways to make infrastructure schemes more attractive financial propositions.

Measures typically include government financing of feasibility studies and early surveys, increasing the publicly funded proportion of schemes, extending concession periods and facilitating financing on favourable terms.

The message is that governments may well look to PPPs to fill an investment gap, but there is still a cost to the public purse. PPPs are not a free ride.

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