Bridging, synergizing and delivering the need of the hour

The Asian Development Bank estimates that between US$250 to US$300 billion will be needed every year for the next five years to maintain infrastructure in the Far East Asian region. Public Private Partnerships (PPP) can provide additional resources and bridge the gap between need and the availability of resources.

According to Russell Lamb, Regional Director of Infrastructure and Project Finance for Ernst & Young in Singapore, around 50% of the ever increasing global population will reside in cities over the next year. The population is demanding and governments are under enormous pressure to maintain the existing infrastructure and improve on it.

During a seminar organized by Ernst & Young this past week, Lamb explained that PPP's are relevant to Sri Lanka because 'sound infrastructure forms the backbone that is critical to maintaining and enhancing regional economic growth, competitiveness, productivity and quality of life.' PPP's can assist the government in ensuring sound infrastructure is maintained. Sri Lanka must compete in a global market and will become increasingly attractive to investors if it is more efficient to do business in.

Project finance deals were responsible for around US$200 billion for 2005/2006. Infrastructure and power accounted for US$117 billion, oil and gas petrochemicals for US$66 billion and the remaining US$18 billion came from the mining and industrial sector as well as telecoms.

The number of project finance deals on infrastructure has risen to over 70,000 in 2006 from just 30,000 in 2003.

Country Managing Partner for Ernst & Young, Asite Talwatte said PPP's have a major impact on developed and developing economies alike. The United Kingdom, for example, which already has an established infrastructure is spending substantial amount of money on the maintenance of facilities already built but still requires continued investment. "Sri Lanka's need for physical infrastructure is pressing," said Talwatte, adding, “particularly with regard to power, highways, seaports and airports.”

What are PPP’s?
PPP's are alternative ways of funding projects which introduces private finance to public sector projects.

Lamb said that through PPP's, the public sector defines and buys a service, not an asset. Therefore, the private sector delivers the service. PPP's are usually structured in a way which created a single standalone business which is financed and operated by the private sector. Once the asset is created, the service is delivered to the public sector client in return for payment commensurate with the service levels provided.

Lamb said it is essential to understand that PPP's are not privatization. The government retains ownership of the land whereas the private sector has a lease to occupy the land.

At the end of the concession, the asset reverts back to the government.

The public sector must take into consideration the large capital expenditure required for certain projects and should look at private finance for affordable projects. The transfer of skills and the efficiency of the private sector, particularly their experience in competitive markets is another point of consideration.

The public sector must also look at value for money, risk transfer, third party or user revenues and the standard of service.

Risks for the private sector include pricing and bid costs.

Lamb explained that in Singapore for example, around twelve companies may bid for a project bearing huge costs and have to be ready to sustain those losses if they lose the bid. In addition, the private sector has to live with a level of uncertainty and must choose their partners diligently. Lamb said the rewards for the private sector may also be great including equity returns of 15 – 25%, typically depending on the sector. There might be commercial and leveraging opportunities amongst others.

Pitfalls
The lack of political support, insufficient public sector capacity and skills and insufficient private sector expertise can prove problematic.

Lamb also cited poor adherence to the procurement process and a lack of standard documentation as setbacks. Success depends on long term political support, a stable regulatory framework and legal recourse. A clear procurement process which is coordinated, efficient, competitive and fair is a necessity. Similarly, there have to be clear realistic project goals and the private sector must be able to satisfy the public sector’s requirement. (NG)