Emerging Markets, May 2015
The EBRD has issued a familiar call for private sector funding to help bridge the region’s vast infrastructure gap – but an IMF representative has warned about the dangers of the PPP model that is seen as the main hope to attract private investment.
Sir Suma Chakrabarti, President of the EBRD, said yesterday that the region expects $500 billion per year of infrastructure needs, saying: “This cannot be achieved without the strong participation of the private sector. Currently most infrastructure is funded by public budgets – in our region, 70% – and that’s not financially sustainable.”
But Azim Sadikov, resident representative in Georgia for the IMF, counseled that the majority of PPP structures end up being renegotiated, and usually to the disadvantage of the government.
Sadikov said that 55% of all PPPs are renegotiated, on average every two years, and that although complete contract cancellations are rare, the renegotiation usually favours private sector operators. He said 62% of renegotiations lead to an increase in tariffs, 69% to a decrease in private sector investment obligations, and 31% in a reduction in the concession fees paid to the government.
“The risks of PPPs are real,” he said. “They materialize, they happen.” He said countries considering PPP models “need to be advised this is likely going to happen.”
While not against PPPs – he suggested several measures around planning, project selection, management, oversight and transparency to avoid the need for renegotiation – he added that improvements in the efficiency of public infrastructure spending “could outweigh the benefits of PPPs. That should remain the focus of governments: improving traditional public investment.”
“Cash-strapped governments could be tempted to use PPPs to bypass fiscal risks,” he said. “When PPPs are good, they offer efficiency gains and value for money. But when they are done for the wrong reasons, they can lead to very high fiscal risks.”
Indeed, there is a sense that if anything, private sector involvement may have stalled. An EBRD policy note prepared for the G20 found that the total value of PPP projects in emerging markets that reached financial close in 2013, at US$44.3 billion, “is not higher than the levels seen in the late 1990s, and there is no noticeable steady upward rise in financial levels from the private sector.” It said the number of deals reaching financial close “seems to have leveled off at around 50% on a global basis.”
Nevertheless, private sector involvement will continue to be seen as vital for the region’s infrastructure needs. Natasha Khanjenkova, managing director for Turkey and Central Asia at the EBRD, said that an expectation to renegotiate was vital. “I would argue that one of the risks is for a government to come in with a very rigid approach and believe they have a 20 or 30 year contract that cannot be changed,” she told Emerging Markets. “Because these are such complex projects, it is important to have upfront an understanding that changes may need to be made.”
Cavit Dagdas, the Undersecretary of the Turkish Treasury and the EBRD Governor for Turkey, added that renegotiations may be a consequence of a project producing better than expected revenues, and argued the more important issue was a clear and early mutual understanding of risk. “If you can measure the risks, you can manage them,” he told Emerging Markets.