BY ENRIQUE SANZ
In an era of tight government budgets, increasing social and economic demands and global competitiveness, the public sector alone cannot make the grade when it comes to delivering infrastructure: the existing gap between what is needed and what is delivered is not closing, but widening fast.
The public and private sectors working together can do much more to face the challenge of closing the infrastructure gap. This can be done successfully with Public Private Partnerships (PPPs).
LATIN AMERICAN SUCCESS
PPPs have been utilized with great success in Latin America where states have given concessions to private investors, involving those investors in the process of building and running infrastructure. While the majority of public-private cooperation had been in the fields of telecommunications and energy, investment and cooperation in transportation has been growing. Port control has been arranged with private investors in Panama and Argentina, and concessions for urban transport services have taken numerous forms in Chile and Colombia. Freight rail concessions have developed in Argentina, Chile, and Mexico though road development remains higher as trucking is considered more reliable transportation than rail in many developing nations.
Data from the World Bank indicates that in the decade from 1990 to 2001, 295 public-private infrastructure projects were completed in Latin America involving more than $66 billion in funding. This includes both projects with private financing and projects where operating risk after construction was assumed by a private entity, though divestiture was by far the most popular form of private participation, accounting for 54 percent financial flow between 1990 and 2003. Bolivia demonstrated the strongest commitment to private participation in infrastructure with private investment accounting for 4.35 percent of GDP between 1996 and 2001.
SHARING THE RISK
PPPs are tailor-made contractual agreements, signed between public agencies (federal, state or local) and specialized private sector entities, that are designed to deliver a service or facility to the general public. Through PPPs both parties share their skills and assets to enhance the value of the final product, allocating each risk to the party that can manage it best, whether it is public or private, and sharing the potential rewards of the project.
In PPPs the private entities finance, deliver and operate the facility during its whole life cycle. However, it is the public authority that sets, monitors and enforces the construction and operation standards, thus keeping complete control over the quality of the asset and the service rendered to the public.
It is extremely important to point out that it is not until the private entities deliver the facility and that this facility is commissioned and accepted by the public authority, that the private entities are entitled to collect the revenue generated by the operation of the facility. Therefore, both the public and private sectors share the goal of delivering a high quality infrastructure facility on time.
Moreover, as construction contracts included in any PPP agreement are fixed price turnkey contracts, both the public and private sectors share a second goal: delivering high quality infrastructure within budget.
Furthermore, the public authority permanently monitors the private entities´ performance and is entitled to penalize (via knocking off portions of the facility’s revenue) eligible events that affect the quality of service during the whole operational period. Again, both the public and private sectors share a third goal: to render a high-quality service to the facility users.
In many developed countries with strong budgetary constraints (i.e. UK, Spain, Germany, Canada, Australia), PPPs allow the private sector’s vast resources to be successfully tapped by the authorities to complement those of the public sector. The result is that necessary high-quality infrastructure is being delivered years and sometimes decades before the planned delivery date under traditional procurements. At the same time, large portions of public budgets are liberated to cover other urgent needs.
Currently the average U.S. city works with private partners to perform 23 out of its 65 basic municipal services. Due to competition and the efficiencies that exist in the private sector, these governments achieve cost savings of 20 percent to 50 percent when private partners are involved.
One country that can provide deep insight into the development of PPPs is Spain. For many years the Spanish authorities have suffered a similar budget dilemma and have made PPPs a cornerstone of their solution. Traditionally, PPPs in Spain have been focused on the transportation sector. PPPs have helped to expand and upgrade the highway, railway (including high-speed and subway), port and airport networks and have produced a solid and sustainable boost in job creation and economic development for local companies and communities.
Each year more projects are being procured as PPPs, not only in Spain but all throughout the world, and today the top Spanish firms lead the industry: according to the prestigious Public Works Financing magazine, in 2006 as many as 6 of the top 10 international transportation developers were Spanish.
Although the dominance of Spanish firms in transportation is clear, the role of PPPs is beginning to change with its application in new sectors such as healthcare, education, public buildings and general accommodation projects. In 2004 the Spanish government disclosed its plans to spend up to €214 billion ($290 billion) by 2020 in the next phase of public sector projects in Spain, and it is expected that PPPs will account for 20 percent of that figure. The shift in sectors is also evident in the €1 billion ($1.35 billion) hospital scheme launched by the Madrid regional government, which has delivered in record time and within budget 8 new hospitals to the community.
By allowing private capital to complement public funding, it will be possible to provide services to Latin American citizens that until now had been considered out of reach.
Enrique Sanz is director of Global Via Infraestructuras SA, a unit of Spain-based FCC. He wrote this column for Latin Business Chronicle.