New approach to Public-Private Partnerships can help region spend better, not necessarily more
SÃO PAULO, May 4, 2017 – A new World Bank report launched today states that Latin America and the Caribbean has significant potential to increase Public-Private Partnerships (PPPs) to help close its infrastructure gap. However, to achieve that the region should move beyond the common perception that PPPs are mainly an instrument to tackle fiscal constraints, and maximize their potential impacts on infrastructure quality, spending efficiency and transparency.
Private Financing of Public Infrastructure through PPPs in Latin America and the Caribbean is an in-depth assessment of the PPP scenario in the region. It analyzes the challenges and policy options countries have to increase private sector financing in public infrastructure through PPPs.
“Combining public and private capital and taking advantage of the efficiency and innovation of the private sector can make a huge difference,” said Jorge Familiar, World Bank Vice President for Latin America and the Caribbean. “When well designed, PPPs bring greater efficiency and sustainability to public services. As the region emerges from six years of economic slowdown, PPPs can help it boost infrastructure investments and strengthen the momentum for growth.”
Most countries in the region have improved their legal and policy PPP frameworks in the last two decades, and 17 countries in the region already have fully functional PPP units. Currently, PPPs account for about 40 percent of Latin America and the Caribbean’s yearly infrastructure commitments, although there is great variation across countries and in time. Over the past 10 years, most PPPs in the region have been greenfield investments, mainly in the energy sector. However, the report reveals that private equity accounts for less than a third of total PPP financing, and about half of all PPP deals in Latin America received some form of government support between 2010 and 2014.
The report finds that a key factor to boost efficiency and quality in PPP projects is suitable risk sharing, based on the capacities of the state, concessionary companies, users, financiers, and insurers. Most importantly, countries should avoid trying to offset poor project preparation by increasing risk for the public sector.
Overcoming distortions and achieving Latin America’s PPP potential will also require tacking challenges such as improving project preparation, boosting project finance capacity, and increasing the depth and sophistication of regional financial markets, a key requirement to support PPP transactions. The report states that most countries in the region struggle with effective project preparation, resulting in projects that go to tender without an adequate base. According to the report, well-designed PPP project screening saves time and money by quickly discarding bad projects or projects that are not suitable to PPPs. Likewise, maintaining a project pipeline based on cost-benefit assessments that include social, economic and country political priorities, would enable more strategic decisions about whether a project if suitable for PPP financing.
Finally, the report argues that multilateral and domestic development finance institutions should play a more active role in both funding and provision of expertise, including knowledge transfers among countries, and in particular helping raise project quality and bankability to a level that enables private sector participation.
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