The world’s fastest growing economies need bigger and better infrastructures, so it is only natural to assume that Brazil, Russia, India and China (BRIC countries) should be pinpointed with a gold flag on any project financier’s atlas.
Europe has been using a project finance structure called public private partnership (PPP) for decades to develop its own infrastructure. Canada, South Africa and other countries have also recently been boosting their PPP portfolios.
PPP projects include various types of contracts between the public and the private sectors, ranging from the pure introduction of the private sector into state-owned businesses to the highly sophisticated Private Finance Initiative (PFI) of the UK, whereby the government purchases public interest services from the private sector and transfers some risks to its private sector contractors.
With more than 800 signed project deals for a total value of almost £60bn, the UK is leading the developed market for PPP. Both private investors and lenders have had their appetite for steady cash flows satisfied by long running, highly paid PPP contracts – although the scheme has suffered its most significant setback recently in the shape of the financial troubles of Metronet, one of the managers of the biggest UK PPP, the £17.5bn London Underground project.
If this is the result of the UK’s infrastructure development needs, where the country’s economy has grown at a mere 2.7% per annum, thinking of what business the BRIC countries could bring to the project finance department should make bankers’ mouths water. Taking a closer look, however, the recipe for success is quite hard to achieve, even for the most experienced PPP professionals.
“Very often there is a misconception in the public sector that PPP is a magic bullet and is applicable in any area of infrastructure financing,” says Paul Leatherdale, head of DEPFA Bank’s infrastructure finance unit and a member of the executive committee. “If the deal is too small, for example, particularly if it is a first transaction for a country or is conducted by a public sector body that is not accustomed to the process, it can take an awful amount of time, a lot of advisers fees, legal, financial, technical, designers, due diligence costs and others, so that any savings that you might gain by improved competitive procurement and transferring risk to the private sector are eroded by the other transaction costs.”
