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Partnerships Help Bridge the Infrastructure Gap

Thedifferencebetweendemandandinvestmentininfrastructurearoundtheworldis$1trillionto$1.5trillionannually,
accordingtoanalysisbyTheBostonConsultingGroup.Thisinfrastructuregaphasimplicationsforthestandardofliving
inmanynations,aswellasforglobaleconomicgrowth.Publicprivatepartnerships(PPPs)willplayakeyroleinbridging
thegap.ButwhilePPPshavegreatpotential,theyalsoposegreatchallengesforgovernmentsandprivatesector
companiesalike.

PhilippGerbert,aseniorpartnerandmanagingdirectorinBCGsMunichoffice,recentlysharedhisthoughtsaboutthe
currentstateofglobalinfrastructureinvestment,thepotentialofPPPstodriveinfrastructureimprovements,andthesteps
thatgovernmentandprivatesectorleadersmusttaketomakethosepartnershipssuccessful.

BCGanalysishasfoundasignificantgapbetweenwhatisbeingspentoninfrastructureinvestmentandwhatis
needed.Whataccountsforthisshortfall?

Therearebothsupplyanddemandsidedriversbehindthisshortfall,andeachisapowerfulforce.However,the
challengevariessignificantlydependingonthecountrycontext.Indevelopedcountries,wheremostinfrastructure
investmentshaveoccurredinthepostWorldWarIIera,manyassetsareapproachingtheendoftheirusefullivesand
needreplacement.Atthesametime,governmentbudgetsand,consequently,infrastructuresupplyareincreasingly
constrainedasaresultoftheglobalfinancialcrisis.

Incontrast,tremendousdemandforinfrastructureinemerginganddevelopingcountriesiscausedbygrowing
populations,rapidlyprogressingurbanization,industrialization,andincreasingintegrationintoglobalsupplychains.In
additiontolimitedpublicbudgets,supplythereisoftenconstrainedbythepublicsectorslackofexpertiseinplanningand
preparingbankableprojects.Insufficientprojectpreparationonthegovernmentside,inturn,leadstowarinessonthepart
oftheprivatesector.Thatcautionstemsfromconcernoverrisksposedbyissuessuchasimmatureregulatory
frameworks,politicizeddecisionmaking,anddifficultieswithlandacquisition.

Whataretherepercussionsofagapininfrastructureinvestment?

Ontheonehand,thereareimmediate,highlyvisibleeffects,suchascongestionatports,airports,androads,aswellas
powershortages,whichareachronicfeatureofdailylifeindevelopingcountries,includingIndia,Brazil,andmostpartsof
Africa.Theseeventscanhavesevereimplicationsonthefunctioningofacountrysoveralleconomy.InAfrica,for
example,some40%ofthefoodproducedperishesonthewaytomarket.AndinRussia,thepercentageofaproducts
overallpricethatisattributabletotransportationcostsistwiceashighasitisinothercountries.

Theseinfrastructuredeficitsalsohavebothtremendouslongtermimplicationsforeconomicgrowthbecausethe
affectedcountriesarelesscompetitiveinattractinginvestmentandconductingbusinessismoredifficultandstrong
socialandenvironmentalramifications.Forexample,morerobustinfrastructurecanimproveeducation,health,andsocial
equity.

Howcanpublicprivatepartnershipshelpaddressthischallenge?

PPPsaddresstheinfrastructureinvestmentgapinthreeways.First,PPPscanhelptoscreenouttheleastneeded
projectsbecauseboththepublicsectorandtheprivatesectorareforcedtoconductearlyandthoroughduediligence.In
addition,PPPsbundlevariouslifecycleaspectsofaproject,includingdesign,construction,operations,andmaintenance,
intoonecontract.Asaresult,thecontractorweighsthetradeoffsofvariousdecisionsacrosstheentirelifecycleofa
project.This,inturn,leadstoamoreefficientprojectoverallandsavesscarcepublicfunds.Finally,PPPsalsomobilize
newsourcesofprivatefinance,forexamplefromlongterminstitutionalinvestors,suchaspensionfundsandinsurance
companies.Channelingthosefinancialresourcesintoinfrastructurecanaccelerateprojectsthathavestalledinthe
pipelineduetoinsufficientorslowpublicsectorfinancing.Intheendthismeansthatthepublicreapstheeconomicand
socialbenefitsofthoseprojectsearlierthantheyotherwisewouldhave.

Ofcourse,therearemanyvalidalternativestoPPPs.Equallyimportanttoclosingthegapareothergovernmentpolicies,
suchasthosethatimproveprojectprioritization,enhancetheefficiencyofassetdeliverythroughtraditionalgovernment
procurement,andmakeexistingassetsmoreproductive.Butformanycountries,PPPsareaviablesolution,andifdone
righttheycansignificantlycontributetothiseffort.

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WhatarethecommonelementsthatgovernmentshaveembracedacrosssuccessfulPPPmarkets?

Firstofall,successfulcountrieshavebuiltlongtermandcontinuouspipelinesofprojectstoattractcompaniestothe
marketandsignalgovernmentcommitmenttothePPPprogram.Ideally,suchprojectportfoliosshouldbederivedfrom
comprehensiveinfrastructureplans,andeachprojectshouldbeselectedaccordingtotheresultsofarigorousvaluefor
moneyanalysisthatconfirmsthataPPPisabetterdealfortaxpayersthantraditionalgovernmentprocurement.

Anothersuccessfactorisacertaindegreeofstandardizationintheprojectpreparationandprocurementprocess.Theaim
istoreducetransactioncostsandmaketransactionsmorepredictablefortheprivatesector.Thismayincludevarious
components,suchasestablishingaclearapprovalprocess,astandardizedprocessforlandacquisition,institutionalized
fundingmechanismstocoverthecostofprojectpreparation,andmodeldocumentsforthetenderingprocess.

SuccessfulcountriesalsohavetakenamethodicalandstagedapproachtotheirPPPprograms,startingwithbankable,
lesscontroversialprojectsinonesectorandthengraduallyexpandingthescopeandthetransactioncomplexity.

ThishelpstonurturethevariouscomponentsthatmakeasuccessfulPPPeffortpossiblewhatwecalltheenabling
environment.Thoughthisisalongtermprocess,itshouldbeakeypriority.Sothepublicsectorneedstobuildarobust
legalandinstitutionalframework,withanindependentregulatoryfunctionandatrusteddisputeresolutionprocess.
GovernmentsmustalsoensurethattheyhavethenecessaryskillsandtalenttomanagePPPs,insomecasesby
establishingPPPunits.TheyshouldtakestepstomakePPPsanattractivepropositionfortheprivatesectoraswell,for
examplebycreatinginnovativeriskguaranteeschemestochannelthefundsoflongterminvestors,suchaspension
fundsandinsurancefunds,intoinfrastructureassets.Lastbutnotleast,policiestoincreasetransparencyaroundthePPP
programandtoavoidcorruptpracticesareessentialtogetbroadbuyinfromtheprivatesectorandthegeneralpublic.

Fortheprivatesector,howdothechallengesofaPPPdifferfromthetypicalchallengesofpublicinfrastructure
contracts?

Indeed,PPPsarechallengingforboththepublicsectorandtheprivatesector.InaPPP,acompanyengagesina
partnershipwithagovernmentformultipledecades,withnumerousunknowns.Inadditiontotherisksassociatedwith
traditionalinfrastructurecontracts,suchasthepossibilityofmajorcostoverrunsorconstructiondelays,companiesin
somecountriesareexposedtopotentialfinancialhitsifdemandfortheassetdoesnotmatchforecasts.Thereare
significantpoliticalandregulatoryrisksaswell.Afterall,companiesmaysigntheoriginalcontractwithonegovernment
and,afterthepassageofanelectioncycle,findthemselvesdealingwithaverydifferentgroupofgovernmentleaders
severalyearslater.Asaresult,theabilitytoassessfuturescenariosandworkwithregulatorsisparamount.And
companiesneedtobepreparedforamorepublicrole,wheretheymayfindthemselvescenterstageinadebateoverthe
qualityoftheservicetheyaredelivering.

Privatecompaniesalsoneedtobuildabroadsetofskillsinhouse.Theymayneedtoorchestrateaconsortiumthat
deliverseverythingfromdesigntooperations.Andgiventhecriticalimportanceofriskmanagementandfinancing,
constructioncompaniesoftenhavetoexcelinskillsthatareusuallymorecloselyassociatedwithassetmanagersand
banks.

Copyright2016TheBostonConsultingGroup,Inc.

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