PPP

1
PPPS FORINFRASTRUCTURE FINANCINGIN THE MENA
REGION

• Istanbul, 8 November 2006
• Jón Ragnar Blöndal

2
To begin

• Im the one who takes away the punch bowl when
  the party is warming up."
• William Martin, former Chairman
• U.S. Federal Reserve System

3
Agenda

• Rationale for PPPs
• Cost of Capital
• Risk Transfer
• Budget Treatment

4
Rationale

• Increase efficiency
• Whole-of-life perspective (design-build-maintain)
• Escape from public sector dysfunctional
  behaviour
• But not necessarily more efficient
• Ease fiscal constraints
• But can bypass spending controls
• But can move public investment off-budget while
• government continues to bear most of the
  risks

5
Cost of Capital

• Governments enjoy risk-free cost of capital
• It is not related to the underlying risk in
  individual projects but their sovereign power
  to tax
• Private sector borrowing costs will be higher
• By definition
• But it should reflect the risk of the individual
  project
• Difficult to demonstrate efficiency gains / risk
• transfer as outweighing higher cost of capital

6
Types of Risks

• Construction risk
• Late delivery, additional costs, and technical
  deficiency
• Performance risk
• Asset is not delivered
• Fails to meet specified quality, safety or
  certification standards
• Demand risk
• Higher or lower demand than originally expected
• Due to business cycle, new market trends, direct
  competition or
• technological obsolescence
• Financial risk
• Variability in interest rates and exchange rates

7
Assessing Risk Transfer

• Very Difficult
• Legal complexity of PPP contracts
• Implications of re-negotiations
• Guarantees, explicit implicit
• Providers of essential services others too big
  to fail
• Very Important
• Determines whether PPPs are more efficient !

8
Budget Treatment

• How to assess PPPs vs. traditional procurement
• Up-front funding vs. annual
• Locking-in annual payments for 20-40 years
• Less future flexibility re. infrastructure
• No agreed mechanism at present
• Financial reporting
• An analytical tool, not a decision-making vehicle
• Joint IASB/FASB-IPSASB work underway

9
Conclusion

• Adequate risk transfer to private sector
• Ensuring value-for-money
• Public Sector Capacity
• Special PPP Units
• Budget Implications
• Transparency
• Efficiency first, budget scoring second
• Prevalence of PPPs
• 10 in the United Kingdom