Financial Structuring of Infrastructure Projects in Public-Private Partnerships: An Application to Water Projects
By Antonio Vives, Angela Paris, Juan Benavides, Peter D. Raymond, Darío Quiroga, Javier Marcus (10/06, En) See also Environment and Natural Resources
This report sets out an approach and a set of tools for the financial structuring of public-private partnership projects, with a particular application to the potable water and sanitation sector. The analytical framework developed here arose from the experience and insight of investors, lenders, governments, advisors and Inter-American Development Bank staff, in the development and financing of infrastructure projects in Latin America.
In the most widely publicized version of public-private partnerships, which originated in the United kingdom with the Private Finance Initiative (PFI), the government contracts with a competitively selected private sector firm to deliver services on its behalf, which often involves building new infrastructure. the firm has to build, operate, maintain and finance the asset, and provide the service for the long term in exchange for recurrent payments from the public sector. At the end of the contractual period the operation of the asset reverts to the government. However, this variety of public-private partnership will only deliver under very stringent conditions: there must exist sufficient public funds for the government to comply with its payments schedule; and the judiciary system, regulatory institutions and the dispute resolution mechanisms must be solid enough to minimize the chances of ex post opportunistic behavior. these circumstances do not generally exist in developing countries, where contracts have been breached, changed arbitrarily or, very frequently, renegotiated. Most risks are considerably larger and the mitigation tools relatively less developed.
The Inter-American Development Bank took the lead in developing an initial analytical framework that provides an ordered protocol to examine the types of structures that may function in the context of developing countries (Benavides and Vives, 2005). PricewaterhouseCoopers was retained to further develop the framework in concert with the Bank. In this report we develop the continuum of solutions available by examining the conflicts that the private and the public sectors face under various configurations of local conditions that have a significant impact on investment decisions, and by analyzing the application of risk mitigation tools.
The approach and tools are meant to serve as a guide to assist governments and investors in evaluating different options to establish a successful public-private partnership, considering the political and economic realities of each country and the risk mitigation tools that can be implemented. the principles and analyses presented here, while comprehensive, cannot be considered to cover all possible cases. they are still being researched and refined, thus, feedback and comments are encouraged.
Even though the local conditions, case studies and examples discussed in the report originate in the water and sanitation sector, the framework is by no means restrictive in scope and could be used in other infrastructure sectors. We chose the application to the water sector because we consider it to be more complex given the wide ranging political implications of the service and the fact that many projects tend to be developed at a subnational level where complications are larger. thus, application to energy and transportation would be simpler than the ones presented here.
The authors hope that this report will make a contribution to the development of public-private partnerships for the financing of infrastructure projects and, in turn, lead to an increase in investments in developing countries. They would also like to thank the IDB-Netherlands Water Partnership Program for its financial contribution that made this report possible.
Washington, D.C.
September 2006
Last updated: 05/08/07
