Financial Structuring of Infrastructure Projects in Public-Private Partnerships A Tool for Designing Feasible Structures
By Juan Benavides, Angela Paris, Antonio Vives (09/06, En) See also Infrastructure and Financial Markets
After twenty years, the approach to finance infrastructure investments in Latin America is coming back in its pendulum swing from mostly private towards a more public participation. The first part of the cycle was the shift from étatism to privatization. The return of the pendulum is driven by decreasing enthusiasm about the private alternative, as suggested by opinion polls. The cycle started in the beginning of the twentieth century, when the majority of governments of the Latin American region viewed infrastructure as a special kind of service requiring government ownership and management. Infrastructure was consecutively presented as a natural monopoly, a public good, a prerequisite for development, or a citizen's entitlement. Private participation or ownership of infrastructure projects was exceptional and not even considered as a serious choice. With a few exceptions, Latin American public utilities were poorly managed and unable to recover cost of service. The provision of other infrastructure services -mainly transportation- was biased toward building new assets (at maintenance's expense). Fiscal pressures mounted due to the combination of bailouts of government-owned utilities, cost overruns of civil works and the extra costs of rebuilding assets that were improperly maintained. By the end of the eighties, the étatist model of public infrastructure provision had collapsed in most of the region´s countries.
Coinciding with this crisis, the theory of economic incentives reached its pinnacle. Private participation in infrastructure looked appealing and somehow inevitable. On the positive side, the Latin American region pioneered the attraction of private participation in infrastructure, accounting for about half of the total US$786 billion investment in developing countries between 1990 and 2003. Technical studies show that, on balance, privatization and other forms of private participation have had a positive contribution to welfare, in spite of its implementation problems.
With the benefit of hindsight, we can say that over optimism and conceptual simplification pushed the private alternative across the board, even in circumstances where competition or independent regulation had little chance to deliver. Private participation in infrastructure declined steadily after 1998 (from US$70.8 billion in 1998 to US$15.7 billion in 2003), failing to make up for generalized public cutbacks in infrastructure that affected the region. Consequently, total investment in infrastructure has declined as well, yet the requirements look intimidating: infrastructure outlays of about US$ $117 billion/annum (about 6% GDP) would be needed for Latin America to reach Korea's current level of infrastructure per worker in 20 years.
The encouraging aspect of the swing's return is the acknowledgement that the alternatives to finance infrastructure cannot be reduced to the private vs. public dichotomy, as the discussion was often framed during the nineties. The irony of this admission is that conceptual simplification prevails, as the PPP label has been glued to a single mode of doing things, mostly driven by the British PFI model. A mix of confusion and high hopes about the role of public-private partnerships (PPPs) is everywhere, as well. In this paper we emphasize that the label PPP covers almost all arrangements as there is always some private and public involvement, PPP is a continuum of options that accommodate the public and private contributions. In this paper the emphasize the different structures that must be devised to encompass the relative participations of each party and emphasize the need to match these participations to project characteristics, local context and financial arrangements. This is crucial to clarify the scope of PPPs, calibrate expectations and withstand the pressures of returning to the mistakes of the étatist scheme as a response to the social discontent faced by the real or perceived failures.
The opinions expressed herein are those of the author(s) and do not necessarily represent the official position of the Inter-American Development Bank.
Last updated: 05/08/07
