World Bank study finds demand for public-private partnerships recovering; advocates governments go ‘back to basics’ in policy, design and implementation
WASHINGTON, May 16, 2011 – The recent global financial crisis has set back ambitious infrastructure development plans in several Eastern Europe and Central Asia (ECA). Governments facing tight budgets were unable to fund these projects alone, while private investors were also severely affected and became increasingly selective about which projects and countries they chose to invest in. Total private sector investment in the region decreased by more than 40% between 2008 and 2009.
Yet, while projects in some countries have been delayed or cancelled, others, supported by strategic choices by governments, have achieved more success. These choices, and what they tell us about best practices for attracting private investment post-crisis are examined in Public-Private Partnerships in Europe and Central Asia; a new study released today by the World Bank in Washington, D.C.
Notably, the report finds that despite the challenges of the past three years, public-private partnerships (PPP) globally, and in the ECA region in particular, can still bring value to the economy. However, getting access to private funds requires that governments adapt to the “new normal” of the post-crisis environment.
“Even though we are seeing a timid resurgence of interest amongst private investors, what policy makers need to realize is that the days of easily attracting funding are essentially over. It’s no longer as simple as preparing projects without close considerations of the capacity of the private sector to finance them,’” says Vickram Cuttaree, Senior Infrastructure Economist & Public-Private Partnership Coordinator for Europe and Central Asia, one of the report’s co-authors. “Private investors still have limited access to long-term financing and need to reduce their risks. They are looking at countries with institutional, regulatory and financial frameworks that will minimize key risks and reduce the cost of doing business. They want smaller projects with established demand, and often need increased government support and more conservative risk allocation; all of which means that coming to a final deal is now more complex, expensive and time consuming.”
Citing successful public-private arrangements that were able to successfully move forward after the crisis broke, such as the St. Petersburg’s Pulkovo International Airport; the report recommends that governments in the region focus on three key areas for improvement in designing projects in order to make it easier to attract private investment and move projects from concept to completion:
- Policy: Governments need to rethink the role of the private sector beyond simple off-balance sheet accounting and carefully assess the underlying investment on economic and social grounds. Projects are likely to require more support from the budget but private participation can also bring improvement in efficiency and quality of services. The overall institutional and legal framework may have to be adapted to provide additional flexibility to the private sector while ensuring transparency and competition in the selection of the private partner. The issues facing individual projects may benefit from a national policy or financing mechanism, which would require more coordination between line Ministries and the Ministry of Finance.
- Strategic Design: Every project is unique. Governments will need to break from a traditional – “let’s maximize private investment” – approach to designing projects and give higher priority to smaller projects that are more likely to be financed by the private sector; the bidding schedule and process should be flexible and allow sufficient time to secure financing. Adequate financial and human resources can increase the quality of projects and reduce the perceived risk for the private sector.
- Implementation: Applying global “best practices” is now even more important given that the private sector is more selective in terms of country, project and risk allocation. Once financing is secured, projects will still require continuous supervision and mechanisms to adapt to unforeseen changes. These practices are not new but should not be overlooked during the post-crisis period.
The report also calls on governments in the ECA region to look not just at private investors; but to also seek a larger role for international partners. International Financial Institutions (IFIs) and the European Union (EU) will likely play a more crucial role in helping the design and financing of projects, strengthening institutional capacity and mitigating risks. IFI lending and guarantee instruments can help mitigate key Government and project risks, making them more attractive to private investors and improving financial sustainability. Meanwhile, technical assistance and advisory services offered by the IFIs can be helpful to governments in identifying and designing projects; helping them apply global insights and best practices from the outset. Likewise, EU regulations (including Eurostat accounting of PPP projects) will shape the future of PPPs across the region.
“The key takeaways for policy-makers in Europe and Central Asia are that private investment is improving, and that there are things they can do to attract it,” says Cledan Mandri-Perrott, Senior Infrastructure Specialist, and co-author of the report. “What governments need to do now is take stock of their current PPP projects and programs; and design specific solutions to address the issues facing PPP in their countries.”
Public Private Partnerships in Europe and Central Asia: Designing crisis-resilient strategies and bankable projects was the result of a study conducted over 12 months. Data sources for this report included a survey carried out on the highway sector; internal Bank research on projects that secured private financing since the end of 2008; and interviews conducted with private sector representatives, including Banks and transaction advisers, and IFI’s engaged in the region. Survey responses were received from: Croatia, Latvia, Montenegro, Poland, Russian Federation, Slovak Republic, Spain, and Ukraine; respondents included Ministries and government agencies, advisors, and independent consultants.