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Can P3 Help Tackle Asia’s Corruption Problems?

By Henry Teitelbaum, P3 Planet

(A version of this story previously appeared on Aon One Brief)

The Big Picture

Economic growth, supported by huge flows of foreign capital, has expanded prosperity in many countries across the South and East Asian region, leading to declines both in poverty and political risk.

But now, as China’s growth engine for the region subsides, regional competition for capital is likely to increase. While economic challenges in the short term create uncertainty, a renewed focus on anti-corruption efforts in the region could help states remain preferred destinations for foreign investment over the long-term.

The impact of anti-corruption campaigns in China, India, Indonesia and Malaysia are already being felt, according to the 2016 findings of Aon’s annual Political Risk Map. Across the Asia-Pacific region, tackling corrupt practices in both public and private sectors could not only reduce political risk, but also economic inefficiency. This in turn should support resilience in individual Asian economies at a time when emerging economies remain under intense pressure, helping them to more effectively address their growing infrastructure needs.

The challenge is very real. Urbanization and population growth is driving huge demand for basic essentials such as water, sanitation, transportation and electricity. This will place a clear focus on inclusive, sustainable development, that will reduce the already significant impact of development projects on the environment. At the same time, public financial resources are stretched and existing multilateral bank funding is insufficient.

New multi-lateral lenders, including the Asia Infrastructure Investment Bank (AIIB) may help to attract private investment to meet the region’s infrastructure needs. But ensuring this foreign capital remains for the long-term may also depend on progress in anti-corruption efforts. Clearer legal and regulatory frameworks and more transparent procurement structures could become important ways to accomplish both goals.

Deep Dive

Developing countries in Asia – including India, China, Indonesia, Malaysia, South Korea, Taiwan, Thailand and the Philippines – have achieved great success in generating prosperity, alleviating poverty, and encouraging political stability over the past 20 years. Much of this has been due to their ability to attract foreign investment through skilled labor, low wages, pro-market policies and political stability.

Political and economic risks in many Asian countries have also declined as stable currencies, and in some countries the adoption of pro-market policies the spread of democracy have expanded prosperity and created middle classes. But now, the physical infrastructure that is needed to keep apace with the demands of growing and increasingly urbanized populations is proving inadequate to the task. Asia’s infrastructure market is set to grow to 60% of global demand by 2025, according to PwC’s Capital project and infrastructure spending: Outlook to 2025.

Balancing Reform, Growth and Uncertainty

Nevertheless, as the Political Risk Map reported, countries such as China may face uncertainties in economic policy as their governments try to strike a balance between implementing reform and managing growth. In China, President Xi Jinping continues to consolidate power through his anti-corruption campaign – the economic outcomes of which are likely to be positive – while in India, Indonesia and Malaysia measures to counter corruption are expected to improve political and economic resilience.

“Anti-corruption campaigns may rebalance concerns regarding a stalling Chinese economy, but improvements in political risk do not necessarily translate into economic gains,” says Karl Hennessy, President of Aon Broking and CEO of the Global Broking Centre in London.

“Macroeconomic drivers are behind the current slowdown in China,” Hennessy continues. “While a war on graft is likely to have a positive, long-term impact on China, it may also reflect efforts to stabilize an economy going through an unprecedented deceleration. Following stock market uncertainties earlier in the year and a slide in GDP, Beijing may be turning to additional levers to instill greater confidence in its future economic program.”

The Rise Of Institutional And Private Funding

Outside of China, public funding resources for investing in this infrastructure are largely not up to the task. This is especially the case in poorer countries, where scarce government funding is needed to care for poor, largely rural populations. In countries such as India, this leaves little discretionary public funding available to support investments that would allow public infrastructure to keep pace with growing demands for better schools, healthcare facilities, care for the elderly, water, waste, electricity, broadband and other basic requirements.

As long-term investors in developed countries seek ways to diversify globally, opportunities to attract private investment from abroad to help meet this demand are increasing. However, competition for capital from other countries in the region also means that foreign investors will be weighing the relative risks more carefully than ever.
Existing multi-lateral lenders such as the Asia Development Bank (ADB) are inadequately funded to meet expanding demand for infrastructure, bureaucratic and slow. New multi-lateral lenders, such as the Asia Infrastructure Investment Bank (AIIB) and possible increased in capital flows from regional trade agreements like the Trans-Pacific Partnership (TPP) may help to attract private investment to meet infrastructure needs.

The robustness of legal, regulatory and market structures are important factors for determining where this private capital will gravitate. But corruption, in addition being a drain on public finances, is a major risk factor for both public and private investors and is a key determinant in their choice of where to invest.

In China, where state-controlled enterprises, including infrastructure developers, absorb a huge proportion of the country’s financial resources, the government’s current anti-corruption drive is a central part of its goals to make the state more efficient, thereby freeing up capital in the more efficient private sector.

Some Asian countries, notably India, have significant Public-Private Partnership (P3) programs underway to help tackle their infrastructure needs. When they work well, the competitive bidding and need for transparency involved in P3 tendering can itself help to reduce or eliminate corrupt influences. At the same time, the contract forces greater accountability on to the private sector by specifying penalties for inadequate delivery or maintenance of the asset.

Partnership structures such as these can also bring stability to foreign investment flows into the country, create local jobs, encourage the development of a domestic investor base and even respect for the rule of law. At the same time, foreign institutional investors gain investment and currency diversification and the potential to earn strong returns on investment.

For Asian economies to overcome the potential ripple effect of China’s current economic slowdown and secure sustainable long-term growth, increasing political stability can play a key part. While much progress has been made in recent years, as seen in the findings of Aon’s Political Risk Map, there is still work to be done – and political stability is only part of the story.

How Can We Tackle The Infrastructure Crisis?

By Henry Teitelbaum

(Originally Published in Aon One Brief, March 3, 2016)

We often don’t think about it until it breaks down, but the reality is that much of modern society in the developed world is dependent on public infrastructure investments in roads, airports, schools, water, sewage and electricity utilities that were made half a century or more ago. Without these, developed economies and societies simply wouldn’t be able to function.

But in recent years, a lack of public investment has forced many of these basic building blocks of prosperity to serve beyond their intended lifespans. In the U.K., the lack of upgrades or replacements for ageing power plants have begun to threaten electricity blackouts, while the recent toxic tap water in Flint, Michigan, has highlighted that ageing infrastructure may not just lead to an economic impact, but also create serious health issues. As many as half a million children may have been affected by lead poisoning from ageing pipes in the U.S. alone.

Why has the condition of our public physical infrastructure been allowed to deteriorate so sharply – and in our current age of over-stretched public purses, and with ageing populations putting increasing pressure on tax revenues, what are the options for addressing this worsening challenge?

In Depth

Globally, the World Economic Forum estimates that the planet is under-investing in infrastructure by as much as $1 trillion a year – since 1990, the global road network has expanded by 88 percent, but demand has increased by 218 percent in the same period.

With the global population continuing to grow – and urban populations in particular – the pressure on existing infrastructure is only set to worsen. And in the developed world that infrastructure is creaking: in the U.K., 11 coal-fired power stations are nearing 50, the end of their operational lives, and replacements have yet to be built; in the U.S., the average age of the country’s 84,000 dams is 52; in Germany, a third of all rail bridges are over 100 years old; parts of London’s Underground rail system, still in daily use by hundreds of thousands of commuters, run through tunnels that are over 150 years old.

According to the Report Card on America’s Infrastructure by the American Society of Civil Engineers (ASCE), the U.S. alone will need $3.6 trillion of infrastructure investment by 2020, assigning near-failing grades to inland waterways and levees, and poor marks for the state of drinking water, dams, schools, road and hazardous waste infrastructure.

Europe’s infrastructure is in worse shape – The Royal Institute of International Affairs has suggested that the continent needs $16 trillion of infrastructure investment by 2030, more than any other region in a world.

Taxing Issues, Tragic Consequences

While taxes once covered the cost of building and maintaining public infrastructure, entitlement programs such as social security and healthcare have started to claim a larger share of these funds as a percentage of government tax revenue, particularly as the number of people in retirement expanded.

In addition, as the cost of social programs grew, governments came under pressure to cut taxes, leaving even less money available to maintain existing infrastructure, let alone invest in the requirements of growing populations. “Too often infrastructure is seen only through the lens of cost, expenditure and not core to society prosperity”, says Geoffrey Heekin, Executive Vice President and Managing Director, Global Construction & Infrastructure, Aon Risk Solutions.

“Since the 1950s, investment in infrastructure in developed countries has been declining,” he says. “In the U.S., for example, investment as a percentage of GDP has fallen from around 5-6 percent in the 1950s to around 2 percent today.”

Tragically, train derailments, road closures, water mains breaks, and even bridge collapses to become commonplace. “Until situations like the water crisis in Flint or a bridge collapse happen, infrastructure does not hold proper weighting in the psyche of leaders in government,” says Heekin.

This lack of attention to infrastructure is costing developed economies billions of dollars in lost productivity, jobs, and declining competitiveness. Without addressing the infrastructure investment gap, the U.S. economy alone could lose $3.1 trillion in GDP by 2020, according to the ASCE, while one estimate attributes 14,000 U.S. highway deaths a year to poorly-maintained road infrastructure.

A Private Sector Solution To Public Sector Under-Investment?

To begin reversing the infrastructure gap, it is likely that governments will need to find ways to encourage private sector investment towards replacing, renewing and upgrading physical infrastructure.

Governments of all political stripes are increasingly supportive of private investment in infrastructure. One model that is now gaining attention is the Public Private Partnership (P3) model.

P3s in one form or another have been used successfully in developed countries for several decades. They are being used to procure everything from public health care facilities, schools and courthouses to highways, port facilities and energy infrastructure. While the volume and type of P3 deal can vary widely by country, there continues to be an upward trend for the model’s usage by the public sector.

In 2015, for example, Canada procured 36% of its infrastructure with the P3 model. Aon Infrastructure Solutions anticipates that 21 P3 projects will close in Canada in 2016, with a total capital value of USD$12.8 billon – the highest value of P3 projects in Canadian history. In the US, where adoption of the P3 model is less widespread, 11 projects are expected to close in 2016, with a capital value of USD $8.7 billion dollars.

Like traditional design-bid-build procurement, P3 projects involve public authorities putting out tenders for public projects or programs for competitive tender, and selecting a preferred bidder from multiple bidding consortia. The key difference is that the contractual structure in P3 allows the public authority to transfer a different set of risks to the private party – including (but not always) the financing for the project. The arrangement can allow the private partner that designs, builds, and finances construction of the asset to operate and maintain it in return for either, 1) a share of the revenue generated by the use of the asset, or 2) a stream of constant payments from the public authority (also called availability payments).

Keeping Focused on the Big Picture

“The public sector benefits from P3 delivery when the model is applied to a project that meets a community need and is procured through a transparent, accountable process,” says Gord Paul, Senior Vice President & National Director of Public Private Partnerships, Aon Risk Services, Canada.

“Public authorities seek ‘value for money’ in a P3 project by looking to the long-term value,” Paul says. This means identifying whether the private sector party is able to design, build, finance, operate and maintain an infrastructure project for a price lower than if the public authority did it on its own over the same period. It’s about the full lifecycle of the project – not just the build costs.

Taking a big picture view is equally important for the private sector party, says Alister Burley, Head of Construction for Aon Risk Services Australia. He points to the importance of taking a holistic view to P3 projects and investments to enable efficiencies to be built that will carry forward over time.

If done right, P3 arrangements can be a significant benefit to both the public and private sectors. Public bodies gain a much-needed boost to their infrastructure, often with long-term maintenance included in the deal, reducing the potential negative economic and health consequences of infrastructure failure. And private investors can secure a stable, long-term return through a stake in some of the underlying essentials of our economies.

Whatever route governments take to secure the integrity of our underlying infrastructure, one thing is clear – without a significant increase in infrastructure investment over the coming years, the world’s economy and health could well be put at further risk.

Climate Change Reshapes Infrastructure Investing Frontier

By Henry Teitelbaum
Editor, P3 Planet

Unless you’ve been living under a rock, you may have noticed that  climate change investing is finally starting to get the widespread attention it deserves.

In this regard, December’s COP 21 Paris Climate Change Conference was the watershed moment we’d been waiting for. The signed document that came out of that particular event legally binds all countries to work towards limiting the rise in average global temperature to less than 2% from pre-industrial levels. In terms of adaptation effort, it also brings clarity to how the government and business need to proceed with their investments in the physical infrastructure.

“COP 21 was a clear signal to business that any investment in infrastructure has to be low carbon,” Laetitia De Marez, senior climate policy analyst at Climate Analytics Inc. in New York tells P3 Planet. She says the international agreement to limit CO2 in the atmosphere means that governments can no longer commit public funds or, for that matter facilitate private sector funding for carbon-intensive projects. Beyond funding issues, she believes there is a growing risk that these investments will create “stranded assets” as economies shift towards renewables.

Stranded assets are investments, such as those in fossil fuels, technologies or related businesses, that suffer premature write-downs or conversion to liabilities. This reduction in their value becomes more likely as regulatory, tax and other indirect costs penalize the burning of carbon.

Climate Change Tops Risk Survey

The speed with which climate change has moved to the top of the global agenda is evident in January’s World Economic Forum 2016 Global Risks Report http://www3.weforum.org/docs/Media/GRR16_ExecutiveSummary_ENG.pdf. The 11th edition of the report found that the possible failure of climate change mitigation efforts is for the first time the top concern among survey respondents. What’s more, concerns about cascading risks related to climate change, including water crises and large scale involuntary migration are now in the top five concerns in terms of potential impact.

There is also a growing recognition of the investment opportunities in delivering the physical infrastructure that addresses climate change risks. Business leaders understand that green infrastructure, whether for public transportation, renewable energy or climate adaptation projects such as flood barriers, sea-walls and coastline conservation, is a good investment in and of itself. Not only do these  investments help to safeguard human and natural habitat, they are capable of generating  stable  long-term returns.

Mobilizing the private sector is important for two reasons. One is that we live in an age of fiscal austerity and constrained public budgets. This means that achieving any of the targets set by the United Nations Framework Convention on Climate Change (UNFCCC) will require private sector funding, particularly in underdeveloped countries. The other is that many investments in public infrastructure generate economic growth in both the short and long-term that more than justifies the initial expense.(http://www.frbsf.org/economic-research/publications/economic-letter/2012/november/highway-grants/)

PPP Model Draws New Interest

One UNFCCC-supported approach to tapping into the financial resources, efficiencies and technologies that the private sector brings to efforts to tame global warming is through the Public Private Partnership model.

PPPs are partnerships between public institutions or non-governmental organizations (NGOs) and private sector developers, who in addition to providing expertise bring their own financing to the table. In the context of climate change mitigation efforts, they have been already been successfully used to support forest and coastal wetlands conservation efforts, among others. Looking ahead to the growing challenge that global warming poses to existing economic and social infrastructure, their use is becoming even more important as the rising cost of adaptation places a greater burden on public finances in both developed and developing economies.

The growing interest in attracting private sector investment to climate change mitigation also comes at a time when there is strong structural investment demand for the assets that are created.

Rising Demand, Constrained Supply

Institutional investors in the developed world, particularly those with very long investment horizons such as public pension funds, are finding it challenging to meet their liabilities as more and more baby boomers reach retirement age. More than a decade of low interest rates has meant that many of these funds can no longer expect government bonds to provide the yield they are committed to paying out to pension recipients. As a result, trillions of long-term investment dollars are searching far and wide for high-quality cash-generating investments backed by physical assets with sufficient yield to cover their liabilities. And this increasingly points them towards investments in green infrastructure projects.

There is much work to do. Years of under-investment and neglect of physical infrastructure in developed and developing economies alike have left many countries with huge infrastructure deficits. McKinsey & Co. has estimated the global infrastructure deficit for the period from 2013 to 2030 at around $57 trillion. http://www.mckinsey.com/insights/financial_services/money_isnt_everything_but_we_need_$57_trillion_for_infrastructure

Governments, typically burdened with shorter-term political priorities, have consistently failed to make the necessary long-term investments that would put a dent on this deficit. Many have also been unwilling or unable to incentivize private sector investment by extending credit guarantees, and some do not even have the legal and regulatory structures in place. A further complication is that some of the private sector banks that used to play leading roles in arranging project financing have withdrawn from the sector since the financial crisis.

Institutions Becoming Early Stage Investors

One important development has been for pension funds, private equity firms and other long-term investors to take on leading roles in the financing of PPP projects themselves. In more and more cases, this means leaving their comfort zone and find new ways to manage the risks involved in early stage investment.

Public sector authorities around the world can do much to encourage this trend at minimal cost. Among the several ways they can help to incentivize private sector investment in climate resilient infrastructure would be to adopt PPP enabling legislation. Beyond this, governments should  provide credit guarantees to enhance the credit quality of debt funding for specific projects, remove structural impediments to infrastructure development, and promote best practice by establishing local centers of excellence.

A multilateral facility whose advancement would also support these efforts is the UNFCCC’s Green Climate Fund. This fund is designed to encourage programs and policies to support thematic investments in climate change mitigation, such as in climate resilient infrastructure for developing countries. It currently has more than $10 billion of funding in place and a goal of raising $100 billion by 2020. But the fund, which was established more than five years ago, is beset by disagreement over board transparency, country ownership and the role private enterprise should play in financing solutions. Developing countries want fund resources to focus on financing locally sourced solutions that support small- and medium-sized businesses. But developed countries are pushing for a Private Sector Facility that focuses on tapping into the huge capital resources available from institutional investors.

Explosive Growth Of Green Bonds

Other facilities for attracting private investment to climate change mitigation projects are faring better. Early progress from multilateral and national development banks in developing a global market for Green Bonds has led to explosive growth in the past three years. New issuance topped $41.8 billion in 2015, and is expected to rise to $100 billion in 2016, according to the Climate Bonds Initiative. https://www.climatebonds.net/

Governments and public sector authorities at every level can help to deepen the liquidity of this market further by issuing their own green bonds. But they should also consider offering credit enhancements such as guarantees to improve the risk profiles of important projects. Tax incentives are another tool that could be used to attract long-term investors. http://www.climatebonds.net/files/files/10%20point%20policy%20guide.pdf

What the world’s climate cannot afford is a drawn out debate over modalities. Global warming is a reality that cannot wait for consensus. We need to act now.

If you’d like to support P3 Planet’s mission to promote sustainable public infrastructure, please contact Henry at hthq@hotmail.com.

Global Fraud Alert: PPP Model Boosts Fight Against Corruption

fraudBy Henry Teitelbaum
Editor, P3 Planet.com

A priority issue for governments around the world as they contemplate large scale infrastructure programs should be the ruinous cost of corruption. For one thing, it exists nearly  nearly everywhere, even in countries regarded as well-governed. And its effect  on development can be as catastrophic as it is insidious.

While there is no substitute for vigilance, the transparent processes and incentives that go into Public-Private Partnerships can do much to prevent corruption from disrupting large-scale public development programs. When executed with clear policy objectives and consistent political support backed by a robust legal framework, PPP can also go a long way towards rooting out the fraud that is too often accepted as the cost of doing business.

PPPs, unlike traditional Design and Build projects, require private sector companies and their financial backers to bid not only for the right to deliver a public asset, but to provide up front funding as part of a long-term design, build, operate and maintenance agreement. They have a record of not only providing better value-for-money over the life of a public asset, but better resistance to corrupt influences. They accomplish both of these goals by locking in private sector partners to a system of performance measurements that come with mandatory financial penalties for failing to meet them.

Nicholas Jennett, head of the European Public-Private Partnership Expertise Centre (EPEC) at the EIB, says PPPs are a vast improvement over standard procurement models because “they tie down contractually what is happening,” and uphold the principle of “competition at every level.” This principle is put in place through the course of project tendering, when financing is arranged, and throughout the delivery, operational and maintenance phases. On top of this, says Mr. Jennett, “scrutiny is brought by third party funders” so that performance is monitored by parties who are incentivized to deliver the best results.  It is on this basis that the EIB and EBRD are providing a majority of their financial support to pan-European development projects, including the Trans-European Transport Network (TEN-T) program for multi-modal freight and passenger transportation.

The superior level of third party scrutiny that PPP, or as it’s known in the UK, PFI (Private Finance Initiative) encourages was recently evidenced in the UK Ministry of Defence’s decision early this year to abandon the £6 billion SAR-H rescue helicopter PFI project. The decision followed revelations regarding improper access to confidential information by one member company in a bidding consortium, that helped the consortium, Soteria, to win preferred bidder status for the project’s delivery.  What is interesting is not that the irregularities were found out, but rather that the consortium itself brought the information to the attention of the MoD. What’s even more interesting is that even before the MoD had decided what to do in response, the consortium’s banker, RBS, pulled its funding rather than continue associating itself with a tainted project.

PPPs in North America are known as P3s, while in the UK and other countries they are either PFIs (Private Finance Initiatives) or just PPPs. The model in its various forms in the developed world has a generally good record of delivering value for money, but is becoming especially popular in emerging countries. This is because many of these countries lack either the public infrastructure – whether it’s highways, bridges, schools or hospitals – or the means to pay for one. Civil servants in many of these countries, moreover, often lack the skills needed to manage large scale projects, and are handicapped by entrenched practices that discourage a fair competitive environment.

Richard Clegg, partner at Wolf Theiss, a leading law firm in Central, Eastern and Southeastern Europe, says problems with standard procurement practices in these countries begin with the fact that public money is tapped upfront. “This leaves decision making in the hands of officials who are likely to be either directly influenced by price without consideration for quality, or when long-standing business relationships built on one form or another of corrupt influences causes decisions to be made in favor of particular contractors.”

There’s also a large gray area of decision-making where local tenders for projects, particularly in developing countries, can be made to look artificially attractive on cost, Mr. Clegg says. This is because vertically integrated local companies can offer cost advantages by sourcing raw materials internally or through their own long-standing relationships, based on kickbacks to local materials producers.

At least as troubling is how corruption prevents the private sector from playing its crucial role in development. It discourages honestly run businesses from competing for public projects because it undermines faith in the tendering process.

“Corruption stops development because it turns away the long-term investment that is most desperately needed in developing countries” says Mr. Clegg.

In last year’s annual Global Fraud Survey, commissioned by Kroll and carried out by the Economist Intelligence Unit, 48% of respondents indicated that fraud deterred them from engaging in business in at least one foreign country. Of those that have entered new markets, 21% believed that their exposure to fraud has increased because of the move.

Corrupt practices are by no means limited to developing countries.  In the euro zone, development in both large and small economies, typified by Italy and Greece respectively, suffers due to long-standing and deeply entrenched corrupt practices. A recent study found, for example, that in Italy, where contracting decisions follow long-standing closed procedures that overwhelmingly favor local players, highways cost on average seven times as much per kilometer as in Portugal, where PPP is the norm.

The added costs, it is worth noting, can be measured in lower productivity and higher government deficits. Italy, which in 2010 had a debt to GDP ratio of 118 per cent, was exceeded  in Europe only by Greece, with a ratio of 144 per cent.

The US is also far from immune from corruption. The Global Fraud Survey showed that a troubling 7% of respondents indicated that fraud had deterred them from operating in North America.

Of particular concern is that criminals are attracted to precisely the kinds of large scale public works programs that are now being undertaken in the US.  During the 1930s, corruption thrived during the implementation of President Franklin D. Roosevelt’s Public Works Administration and other programs, with spending and hiring decisions becoming hostage to political patronage while newly empowered labor unions brought large scale abuse, much of it against union members themselves. Many historians now point to corruption as a key factor in the failure of the Roosevelt administration’s main economic policy initiative before the war.

Some have argued that the administration of President Barack Obama may be making the same mistakes with the $787 billion American Recovery and Reinvestment Act of 2009 that was enacted a month after taking office. There are certainly similarities between the two programs, at least in that neither has been able to generate much in the way of private sector job growth and both have been susceptible to fraud. One senior fraud investigator put the level of fraud risk to the current stimulus package at 10% of its value.

What’s more, Mr. Obama is not done with investing in infrastructure: a key initiative for his administration over the next year involves the creation of an Infrastructure Bank with $50 billion of federal funding to help catalyze long-term private infrastructure investment, with much of it funded through P3 initiatives.

The use of PPP as a procurement model is already well established in Europe. Interest in its use in the developing countries of central and eastern Europe has even become a priority for western-supported financial institutions due to deeply established cultures of corruption in many of these countries. The current focus is on scaling up their use in programs aimed at closing the infrastructure deficit that exists between the EU members and candidate countries, primarily through the European Investment Bank and the EBRD.

Blake Coppotelli, a senior managing director for Kroll’s Business Intelligence and Investigations division, says the PPP model holds good potential for fighting corrupt influences in the US as well, but warned there’s “no fail safe mechanism.”  Mr. Coppotelli, who was previously chief of the Labor Racketeering Unit and New York State Construction Industry Strike Force in the Manhattan District Attorney’s office, says the increased transparency and level playing fields that are built into the competitive tendering of a P3 project are helpful measures. But he warns that there’s no substitute for close oversight.

“The P3 format is a step in the right direction,” Mr. Coppotelli says, “but it’s only as good as the integrity of the players.”

He has good reason for skepticism. The value for money proposition in Japan’s PFI program over the past decade was diminished by a tangled bureaucracy, a slow and expensive tendering process, poorly understood goals and a near-absence of cheap long-term private sector funding. In the UK, where the PFI model was first developed during the early 1990s, similar problems have sometimes negatively impacted outcomes.

But in Japan, the cumulative effect of these influences was to discourage competition and leave projects in the hands of a few well-heeled domestic infrastructure delivery companies. Even worse was that projects fell victim to the country’s deeply rooted culture of corruption, where party politics mingles with business interests and organized crime.

Gary Sturgess, executive director of the Serco Institute, said one key lesson from Japan’s experience is that public sector contracting requires “norms and rules that result in more transparency” and encourage healthy competition.

That corruption can impact major policy initiatives in Japan, which ranks among the world’s most transparent and accountable nations, underscores how pervasive the problem remains in developed countries. The Economist Intelligence Unit recently reported that 84% of construction companies in the developed world were hit by fraud, with 18% of this related to corruption and bribery. Mr. Coppotelli says that even though publicly funded projects have better protections against fraud than commercial projects, they remain “unbelievably susceptible.”

And the stakes are growing. In its 2007 report, “Infrastructure to 2030”, the Organisation for Economic Cooperation and Development estimated that the amount of investment that will be needed by 2030 just in roads, rail telecommunications, electricity and water infrastructure will reach $71 trillion. That figure, which doesn’t even take into account social infrastructure such as schools and hospitals, airports or seaports, represents about 3.5% of global GDP over the same time period. With so many new public infrastructure projects entering the procurement pipeline around the world, it’s no surprise that more and more public sector authorities are looking to scale up their use of fraud-resistant procurement models such as PPP.

Some countries, most notably Canada, have adopted the best of the UK PFI model and made it far more efficient and thus better able to resist corruption while delivering greater value for money. The UK’s own experience, while often portrayed as a mixed one at home, has produced a great deal of valuable data, skills and knowledge that are now being made available to other countries through organizations such as the CityUK.

Mr. Jennett says much has been learned from early experiences with PPP and PFI about the building blocks to making programs more effective. For example, he says PPP works best when it has broad popular support. “Consistent political support for PPP is important,” he says, “so it’s important to come to the market with programs rather than individual projects.”

Moreover, says Mr. Jennett, building support for the PPP model across party lines requires the successful implementation of programs over the course of several terms of government. “Consensus can only emerge over the question of value for money, so the more we can focus on circumstances where value for money can be demonstrated, the more political consensus will follow.”

This feature has also been published in Infrastructure Journal

South Africa World Cup Showcases The Success Of Its PPP Model

wc2010logo

By Henry Teitelbaum, managing editor, P3 Planet.com

When the 2010 FIFA World Cup kicks off in a few days  in South Africa, it will cap an extraordinary years-long effort by the leading economy of Africa to host the world’s favorite sports extravaganza.

In no small way, it will also show how partnerships on a grand scale between the public and private sector, when executed with the right planning, can deliver infrastructure projects on-schedule and on-budget. Even more important than a successful football tournament, though, South Africa will have demonstrated to the world that the PPP model can simultaneously build badly needed public assets, create long-term employment and stimulate a flagging economy  while inspiring the can-do spirit of a nation.

It is a moment to savour not just for Africa, but for all of the developing world because many said it couldn’t be done.

 

Success Is No Accident …

It’s important to note  that while South Africa’s successful delivery of infrastructure for the games sets the standard for future large undertakings of this kind in other developing countries, it would be wrong to assume that it can be done without a great deal of intelligent long-term planning. PPP requires not only a well-developed legal framework to be successful, but skilled public administrators that can manage a transparent and rigorous process through the life of a long-term contract to ensure value-for-money for the public is maximized.

South Africa’s government has in fact been getting acquainted with the PPP model since 1997. The National Treasury formalized PPP regulations and created an active PPP unit to provide technical assistance in 2000, and now has well-developed legislative frameworks in place for national, provincial, public authority and municipal PPP projects. The scale is still small, with the country having procured a total of 19 projects to date. But the list of projects being evaluated or in the pipeline, currently around 55, includes activities in everything from roads and prisons to municipal water, tourism and hospitals.

PPP has also started to take up a significant share of the South African government’s spending, accounting for some  5.7% of the most recent fiscal year’s spending and 6.6% of GDP – its highest ever. Further enhancements to the legal and regulatory framework, notably for the harmonization in 2007 of guidelines for undertaking PPPs that deliver municipal services, are generating a strong pipeline of municipal PPP projects.

… But Investing Needs To Start Early

When South Africa failed to win its previous bid to host the World Cup in 2006, it came down to what organizers deemed the country’s inadequate infrastructure. So in its ultimately successful bid to host the 2010 event, the South African government outlined and then set about delivering an ambitious program of infrastructure investment. Between 2006 and 2010, that investment has totaled some 600 billion rand ($78 billion), with 170 billion rand of that going into transportation infrastructure alone.

Infrastructure investments included upgrading airports, renovating stadiums, and expanding road and rail networks. Many of the projects were delivered using conventional procurement methods. But the most iconic of these infrastructure projects undertaken, and certainly the most significant in terms of its long term impact on the lives of ordinary South African citizens, will be the R25.4 billion rand Gautrain PPP rail project.

The Gautrain is a 80 kilometer mass rapid transit rail project, the first phase of which is now complete, except for some final testing of the trains. It officially enters service on June 8, when sleek trains will start whisking thousands of fans from the newly renovated OR Tambo International Airport towards Johannesburg and its nearby sports venues.

When the final phase is completed next year, the route will stretch through the densely populated Gauteng province to link South Africa’s largest city, Johannesburg, with its capital, Tshwane (Pretoria) as well as the airport.

Sustainable Urban Transport Solution

The Gautrain is a masterful expression of mega-planning at its best.

Designed to eventually carry 100,000 passengers a day, the Gautrain will relieve congestion on one of South Africa’s busiest motorways, where traffic is growing at a rate of 7% a year. Equally important, it will create the first public transport link between two cities with a combined population of New York and Paris, whose city centers are only 58 kilometers (36 miles) apart.

Besides lowering traffic congestion long after the World Cup crowds have returned home, the Gautrain will produce annual savings equal to $58 million in accident costs, travel cost savings of three South African cents per kilometer and significant reductions in vehicle operating costs.  Once it  is permitted to reach its 160 km maximum speed, it will reduce the time it takes to travel from end-to-end to 42 minutes, and along the way save the planet a whopping 100 tons of carbon dioxide emissions each year.

The Gautrain project is a 20-year construction and operating PPP concession awarded to Bombela in 2002 after two groups submitted bids for the project. Bombela is a consortium made up of Canada’s Bombardier, construction firms Bouygues and Murray & Roberts, and Strategic Partners Group, a broad-based consortium of black-owned companies. France’s RATP Developpement, although not an equity partner, is also a key contributor.

A Keynesian Lift For South Africa’s Economy

At least as startling as the benefits that the Gautrain will bring to the people of South Africa are what it has already helped the economy to achieve. In 2008, while the U.S., Europe and much of the developed world began to feel the effects of the financial crisis, South Africa’s commodity-driven economy suffered its first recession in 17 years and one of the sharpest economic slowdowns on the African continent. GDP contracted by nearly 2% that year, and things might have gotten far worse had the government’s spending program for the World Cup not already been underway.

The Gautrain project alone has created 63,200 direct, indirect and induced jobs, according to the consortium, which also estimated that Gautrain will create 93,000 jobs during the construction phase and another 3,000 jobs per year during operation. Another estimate valued the amount of  business activity that will be generated by Gautrain at R3.6-billion per annum.

Perhaps, then, it should come as no surprise that South Africa’s economy is now one of the most resilient in the western world, with GDP in 2010 expected to rise nearly 3% after three consecutive quarters of positive growth, much of it attributed to preparations for the World Cup.

Besides contributing to South Africa’s economic recovery, the Gautrain project will achieve key objectives described in Gauteng’s Growth and Development Strategy, including requirements for Broad Based Black Economic Empowerment in terms of ownership and control; skills transfer and preferential procurement. Emphasis is also placed on the empowerment of women, youth and people living with disabilities.

Justifiable Pride

All-in-all, South Africa’s willingness to engage private sector skills, financing and delivery capacities through the PPP model look likely to deliver not only one of the most successful World Cup tournaments ever, but a permanent boost to its economy and to its people’s well-being that will inspire future generations.

With the eyes of the world tuned to the games that will take place there over the next month, one can only hope that South Africa’s example will inspire public authorities (everywhere to master the skills they need to use PPP effectively.

Henry Teitelbaum is a London-based international financial journalist and author, most recently of the PFI Market Intelligence Report, PPP: Challenge and Opportunity After the Financial Crisis, which was published by Reuters in September 2009. He is reachable at Henry@P3Planet.com.

(This article has also been published in Infrastructure Journal)

 


Business Needs Healthy Oceans, too. So, why Isn’t the Private Sector Biting?

By  Henry Teitelbaum, Editor, P3Planet.com

If anyone knows how to get stakeholders involved in schemes that protect the environment by paying people to act as guardians of the ecosystem, it’s Al Appleton. The former head of New York City’s water, sewage, and environmental protection operations, he helped initiate parts of the city’s landmark watershed agreement that pays farmers in the surrounding Catskill Mountains to protect the watershed – a scheme that has saved the city billions in filtration costs over the years.

Despite its success – and despite the efficacy of demonstration projects across the United States – that scheme remains one of the few payments for watershed services projects delivering results on a large-scale. That, says Appleton, is because a successful project requires more than intelligent market models if businessmen are going to get involved.

For one, he says, successful projects need scale if they are to become interesting for businesses. For another, he adds, the public and non-profit sectors need to understand the entrepreneurial mentality by which business people operate.

“You people who are on the cutting edge of environmental economics… need to really get much more involved in creating a climate of opinion that makes ecosystem services proposals more attractive,” he told delegates to the recent Forest Trends Marine Ecosystem Services (MARES) Katoomba Meeting in Palo Alto, California.

He added that a similar awareness of the needs of elected officials must also be taken into account when designing solutions to specific ecosystem challenges.

“Politicians hate incrementalism,” he says, because of the risk that the projects either won’t solve the problem or will do so in a timeframe that won’t justify their investment of political capital. With these stakeholder considerations in mind, Appleton says that as efforts to take on the challenge of creating deep ocean ecosystem markets gather momentum in addressing issues related to acidity, temperature, nitrogen runoff, plastic waste, pirate fishing or fish farming, it’s strategically very important to think big and to “hit the first targets with care” so as to build credibility for further attempts at creating ecosystem markets.

Where to Begin

Beyond structure, schemes designed to save the oceans by enticing payments for specific marine ecosystem services face the same challenges faced years ago by schemes designed to slow global warming by paying to save the rainforests and reduce greenhouse gas emissions from deforestation and forest degradation (REDD). Chief of these is that much scientific research needs to be done to gain the understanding of how marine ecosystems work, how they interact with each other and terrestrial ecosystems, and how market-based mechanisms can be applied in support of them.

MARES Program Director Tundi Agardy says the challenge is compounded by the fact that humans, as terrestrial beings “have difficulty understanding the ways in which we influence marine environments.”

She says we also are just beginning to understand the true value of marine ecosystem services for communities, economies and to businesses. There remains much uncertainty as well over what critical thresholds exist in marine ecosystems, a consideration that should influence how and where resources are allocated.

Speaking at the same event, Forest Trends MARES Program Manager Winnie Lau said it is critical to develop a range of voluntary market-based mechanisms, notably through the Payment for Ecosystem Services model, but also through water quality services, ocean zoning, marine spatial planning, and leasing activities to attract private financing for sustainable coastline and ocean resource management. To do this effectively, she says the private sector needs to forge closer partnerships with communities, with governments, and with regulators as well as with existing terrestrial ecosystem service providers.

The Evolving Tool Chest

Agardy says that while much work has been done to apply the models that have been used successfully to preserve terrestrial ecosystems in marine protected areas, marine parks, coastal parks and in wetlands preservation, “what we haven’t done is really apply these new tools to the marine environment on a full scale.”

There’s also a lag in the legal and regulatory framework that underlies marine conservation efforts, though this too is evolving quickly, according to Agardy.

“Many countries are shifting to a much more strategic view of marine conservation ecosystems”, she says, with a “real emphasis on marine spatial planning and zoning in almost every coastal country in the world.”

This is a very important development from a commercial perspective, Agardy notes, because clear and codified property and use rights are a pre-condition to setting up markets tied to fisheries, water quality, carbon sequestration and other services.

The Externality Quandary and the Need for Legal Drivers

Ricardo Bayon, of EKO Asset Management Partners (and co-founder of Ecosystem Marketplace), reminded MARES participants that ecosystem markets, far from being a product of free enterprise and private sector innovation, are fundamentally reliant upon governments and government-sponsored regulation for their creation. This is particularly true of wetlands, which do not produce readily identifiable products of interest to consumers or industry, but are nevertheless essential habitats for fish and the preservation of coastline.

“Nobody wakes up in the morning wanting a bowl of wetlands,” he says, citing a friend from the wetlands mitigation banking sector, so “most of these markets are in fact created by governments and by rules set up by governments” to achieve policy goals.

Albert Cho of Cisco Systems says laws don’t just provide a whip to markets’ carrot – they provide clear rules upon which all participants can rely. This regulatory certainty reduces market risk and creates consensus around how to incentivize private-sector risk-taking, and in aligning the design of the market with long-term political goals.

Linda Sheehan of the California Coastkeeper Alliance, says that a “strong regulatory system supported regularly with strong science can create and uncover the hidden costs that don’t appear on balance sheets.” This, in turn, allows the emergence of markets that are much more closely tailored to achieving the environmental goals that societies seek. But she warned against regulation for regulation’s sake. “The goal is not a suite of regulatory tools, but a market that reflects the cost of healthy ecosystems.”

Science and Technology: the Sharpening Saw

Science, technology and our understanding of marine ecosystems and their connectivity to terrestrial and wetlands ecosystems have made enormous advances in recent years. This has opened up opportunities to measure with an improving degree of accuracy the inter-relationships that exist between them. Peter Mumby of the University of Exeter says this has significant implications for the creation of new ecosystem services because the increasing reliability of sonar and satellite mapping makes it easier to determine the impact of a service and to choose where it is most likely to be effective.

“Mapping can help determine the value of a particular mangrove or reef for maintaining ecosystems,” he says, making it possible to more precisely estimate the survivorship of fish that rely on the former to reach a level of maturity that is optimal for survival on the latter.

Besides the implications for fisheries, the ability to predict differences in biomass that result from the protection or restoration of particular ecosystems and coastal habitat has implications for a host of private sector stakeholders. These include those who have interests in making carbon sequestration mappable, in improving coastal defenses against storms and erosion, in selecting building materials or in promoting tourism.

Mumby noted, as an example, how the potential for coastal marine ecosystem services to shore up terrestrial coastlines should enable coordination with the insurance industry in making solutions more effective as well as in scaling them up.

Learning from Success: Iceland and New Zealand

Besides outlining the enormous profit potential in developing market-based ecosystem services, such as the $2.4 trillion estimated value of business services to be derived from maintaining a frozen Arctic alone, the MARES Katoomba meeting also brought attention to some of the ongoing market-based marine projects that have been successfully delivering profits since the 1970s.

Jim Sanchirico of the University of California at Davis, says there are very successful fishery management programs in Iceland and New Zealand, with the latter now having demonstrated that fish species entered into a program that reduces the Total Allowable Catch can actually produce higher profitability than those that don’t.

Operating on the hypothesis that as fish stocks rebuild, the cost of fishing will fall and the consolidation of the fishing fleets will produce greater efficiency, he found that the annual growth rate in sales of the fish entered into the quota system was 9%, versus only 1% for fish for which quotas were not restricted.

In a final presentation, Bettina von Hagen of the EcoTrust advised attendees at the meeting to be mindful of opportunities to “leverage funding and sympathetic players.” She cited one example in Oregon where by taking ownership of a relatively small plot of watershed property adjacent to a much larger area of publicly owned property, EcoTrust has been more effective at meeting biodiversity challenges and critical needs than if it had been working with just the isolated plot. Similarly, she said it is important to be mindful of regulatory changes, tax incentives and industry restructuring for opportunities to develop new markets.

She also called on ecosystem market designers to look for ways to assist distressed communities by showing them how to create jobs from new services to the natural resources that they have available.

“If your only currency is timber, you’re going to make certain choices that are not optimal, when you have a forest that produces this whole range of goods and services,” including carbon storage, habitat creation, salmon spawning, recreation and scenic attractions.

“You have to look for value in the most unexpected places,” von Hagen said.

This article has previously run on Ecosystem Marketplace and in Business Green

Bridging The Public/Private Divide May Be COP15’s Main Achievement

LONDON. March 12th 2010 — The hand-wringing over the failure to reach consensus on targets and timetables for reducing greenhouse gas emissions at December’s United Nations Climate Change Summit in Copenhagen may persist for some time to come.

But looking beyond the effort to reach a strong international agreement, the excitement that COP15 has generated among businesses for developing market-based initiatives and public-private collaborations on infrastructure that will mitigate climate change is only just beginning to be felt. Whether it’s green cities, clean vehicle partnerships or trading schemes that monetize the cost of carbon, COP15 has made it clear that the private sector is not waiting for a government consensus to develop.

“If practical solutions to the problem of climate change are going to be found, financed, and implemented, it is global firms that will get it done,” says Anant K. Sundaram, visiting Professor of Buiness Administration at Dartmouth’s Tuck School of Business. He says that while the international public policy apparatus – including the UN – is needed to enable and oversee this, “it needs to get out of the way” so that companies can deliver technology solutions in energy efficiency, energy alternatives and capturing and storing carbon on a scale that is meaningful.

Nowhere was positive momentum for engaging private sector expertise and financial support more on display than in efforts to promote REDD, or Reducing Emissions from Deforestation and Forest Degradation in Developing Countries. REDD helps support forest conservation by creating a mechanism whereby carbon emitting businesses in one country can buy offsets in the form of pollution allowances that essentially pay for the upkeep and preservation of rainforests in poorer countries.

Stewart Maginnis, director of Environment and development at IUCN, a Switzerland-based environmental conservation group, says that COP15 produced significant progress in spreading understanding of REDD. “A clear idea of what is required to make REDD-plus work has now emerged, with real potential to contribute up to 30% of the global effort to stabilize atmospheric greenhouse gas concentrations over the next decade.”

While no legally binding REDD-plus mechanism was adopted at the conference due to the larger failure to reach binding agreements on how much money rich nations would contribute, enough progress was made to allow the private sector to begin implementing sub national demonstration activities and even scaling them up to the national level. The talks even produced $3.5 billion of short-term financial commitments to fund the effort from Norway, Japan, the United States, Britain, France and Australia.

Progress on REDD was due in large part to a very effective alliance of private sector, NGOs, scientists and governments, and this did not go unnoticed by other constituencies at the conference. Professor Diana Liverman, Visiting Professor of Environmental Policy and Development at Oxford University and former Director of the Environmental Change Institute, says that after seeing the success of the forest lobby, “the really powerful agricultural interests and countries came together I think for the first time to think very seriously about the role of agriculture and food systems both in adaptation and mitigation.”

There was no shortage of business leaders agitating for business to do its part, whether a political agreement was reached or not. Sir Richard Branson, chief executive of Virgin Group, set the bar high, stating: “If governments do not come to a resolution then I think it’s up to businesses to actually force through resolutions to this issue.” He called on industries such as shipping and aviation to set targets for themselves in reducing the amount of carbon they release into the atmosphere, and then find imaginative ways to achieve those targets, much as cities need to find imaginative ways to engage the private sector to achieve their targets.

The same panel also highlighted the need for private funding for municipal-level climate change mitigation projects, and found strong support from a group of leading mayors from around the world, who called for the greater use of public private partnerships at the municipal level to fund sustainability projects.

Los Angeles Mayor Antonio Villaraigosa outlined several groundbreaking partnership initiatives, including the world’s largest LED street-lighting program to improve energy efficiency as well as a Clean Truck Program at the LA seaport, where efforts to replace around 5100 old diesel trucks have already reduced truck emissions by 70%. California governor Arnold Schwarzenegger, who has become one of America’s leading advocates of public private partnerships in infrastructure after close encounters with a spiraling state budget, was similarly keen at the conference to promote municipally based private sector projects, as well as grassroots level efforts to combat climate change.

He has good reason. Private financing and delivery of public assets and infrastructure improvements at the municipal, state and national levels through PPP has become a global phenomenon over the past five years as national governments in developed and developing countries both look for new ways to get the modern economic and social infrastructure without breaking the budget. The model makes use of private investments for construction and maintenance of the assets, typically in return for a steady long-term flow of interest payments linked to tolls or to future government tax revenue.

Moreover, while the PPP model has been used until recently primarily for highway transportation projects, and to procure public schools, healthcare, prison and government facilities, there are an increasing number of projects in the pipeline to deliver clean water, clean energy, zero emissions transportation, sewage and waste recycling services.

Numerous governments have also been introducing sustainable development into their criteria for selecting PPP projects that they put out for competitive tender. The Netherlands, which has one of the most active PPP programs on the European continent, actively biases the award of projects towards those consortia that give attention to environmental considerations in their bid proposals. In France, PPP projects that are aligned with the goals of the “grenelle de l’environnement”, or ecological forum, such as heavy rail infrastructure projects, are currently given priority consideration for a special state signature guarantee that could cover 80% of the financing of the borrower’s loans during construction and operation.

In the U.S., President Barack Obama last month followed up his endorsement of COP15’s goals with the announcement of $8 billion of Federal Railroad Administration grants from the America Recovery and Reinvestment Act (ARRA) to act as seed money to create a nationwide high-speed rail network. In California, which alone will receive $2.25 billion of the grant, Governor Schwarzenegger has pledged to match the federal grant dollar for dollar, with $10 billion of bonds already approved for the rail line and a PPP envisioned as part of the project delivery mechanism.

Not everyone at COP15, or indeed in environment ministries around the world, is convinced that a prominent role for private sector participation in delivering climate change solutions is desirable. This is especially true with regard to sensitive assets such as water, which some consider too essential a resource for life to be entrusted to private suppliers. Many environmentalists also continue to oppose nuclear energy, notwithstanding its zero-carbon footprint, on grounds that it’s expensive to produce, generates toxic waste and carries other environmental risks. Still others are opposed to entrusting such facilities to large corporations on grounds that many of these companies have dubious environmental records.

Such views found ample expression not only in the violent clashes that took place outside the conference, but in the views of eco-avengers such as author Naomi Klein, who decried the lack of attention at the conference to “the role that corporations are playing in creating this crisis”, as well as the continuing influence of the fossil fuel lobby on shaping climate policy.

Geoffrey Hamilton, Chief, Cooperation and Partnerships Section for the United Nations Economic Commission for Europe, says it would be wrong to underestimate the strength of opposition to private involvement in designing and delivering climate change solutions. “Many environmental people reflect views within governments, where they are suspicious of the private sector and view it not so much as part of the solution, but as part of the problem.”

From his perspective, “One of the benchmarks in terms of determining the success of COP15 is the extent to which bridges are being built between the environmental ministries and the public infrastructure development ministries, because that’s been a difficulty in the past.”

It’s hard to predict whether COP15 will lead to the binding agreements that the private sector and the public-at-large see as needed to enable
the scale of investment that the private sector is capable of delivering this year. But if it does, it is likely that the deal comes as much out of an awareness of the green jobs bonanza that will result as by the need to invest in saving the planet.

When a group of 191 institutional investors managing more than $13 trillion met at the UN in January, the statement that came out of the meeting was as unambiguous on this point as it was about their commitment to taking action. But noting how Germany’s “comprehensive policies “ on developing a low-carbon economy have already helped to create eight times more renewable energy jobs per capita than the U.S., the statement concluded:

“For us to deploy capital at the scale needed to truly catalyze a low-carbon economy, however, policymakers must act swiftly.”

This article has previously been published in in Ecosystem Marketplace and BusinessGreen.

Henry Teitelbaum, Editor, P3 Planet.com

PPP Solutions To Climate Change Should Advance Whatever COP-15’s Outcome

COP15By Henry E. Teitelbaum, managing editor, P3Planet.com


 

The growing use of public-private partnerships to develop on-the-ground solutions to climate change around the world is likely to be undiminished by the widely perceived failure of government to reach a legally binding global agreement at the United Nations Climate Change Conference in Copenhagen this month.

 

But any comprehensive global climate and energy policy agreement that follows from COP-15 will do much to enable a much wider engagement with the model in a range of new undertakings. Not only would a global deal facilitate public authority planning and cross border coordination in the public and private sectors, it would vastly improve the commercial viability of projects, lowering political and regulatory risks to enable faster delivery and bigger scale. Most importantly, an agreement beyond Copenhagen would move the world towards mobilising vast amounts of private investment that might otherwise remain on the sidelines.

 

“The democratic, developed world needs to revolutionize current practice in the procurement of large scale climate change solutions,” says Mark Hoskin, partner at Holden & Partners LLP, a financial advisory firm that specializes in ethical and climate change investing. “An agreement in Copenhagen would help educate the electorates of the scale of the problem, giving politicians the political support and confidence in their home countries to countenance this kind of policy shift and financial commitment.”

 

The public-private partnership model as it is presently being used has been drawing on private capital for nearly 20 years in a variety of projects. In the UK, where the model goes under the name Private Finance Initiative, or PFI, it has delivered schools, highways, light rail and hospitals, as well as increasingly complex military procurement projects. Unlike traditional public sector procurement, where the private contractor simply designs and builds what the public authority orders, PPPs involve a competitive tendering process in which teams of private sector companies and their financial backers vie for a contract to design, finance, and manage the risks involved in delivering public assets. In return, the  private partners earn fees from the government and/or tolls from users for the long-term operation and maintenance of the asset.

 

The whole life costs of these projects can seem expensive, and PFI’s adoption in the UK has not been without controversy. Some have argued that the tendering process is cumbersome, that private sector participants profit too much and that risk transfer mechanisms are insufficiently robust to prevent taxpayer bailouts on failing projects. The opposition Conservative shadow chancellor George Osbourne recently said he would scrap the PFI name altogether, though it is unclear whether any substantial change in the way the model is used would accompany such a move.

 

Despite the opposition, the PPP model is being adopted with growing enthusiasm for public infrastructure projects in both developed and developing countries around the world. In the UK itself, notwithstanding the credit crisis, the value of PPP/PFI projects so far this year is at £3.6 billion, or twice the level of a year ago, according to Partnerships UK, a   government-sponsored partnership that supports infrastructure delivery. The  continued use of PFI is partly driven by the inability of public authorities to close massive and long-standing infrastructure deficits through public financing alone. But there’s also pressure to be as efficient as possible with scarce public money.The essence of PPP is that it allows projects to go forward when public sector authorities might not be able to afford them – at least not without borrowing beyond spending limits and risking sovereign credit downgrades, raising taxes, or selling essential public assets outright.

 

As part of efforts to combat climate change, PPP has been in use in a range of municipal- and regional level projects for cities and their surrounding suburbs for a number of years. Many of these projects have shown promising results in alternative energy, energy conservation, and public transportation.

 

The Chicago Solar Partnership, for example, has vastly improved energy efficiency in the Chicago Metropolitan area  while also boosting overall air quality and reducing CO2 emissions since it began in 2000. The partnership has even attracted new industry and technology to the city and burnished its image as an environmentally friendly city.

 

More recent projects include the installation of energy efficient street lighting in cities from New York to Bhopal, India, delivering cost savings of 30%-40% and reducing pressure on energy grids during peak usage hours. Mexico City’s award-winning Metrobus PPP project has reduced carbon dioxide emissions in the world’s second largest city by an estimated 80,000 tons a year by encouraging large numbers of commuters to opt for public transportation and leave their cars at home. There are also major municipal alternative energy PPP projects underway to use wind, tidal energy and gas recovery.

 

In Copenhagen itself, a free city bike partnership program operating since 1995 has made available some 2,000 bicycles in the city center, cutting CO2 emissions in the city significantly by reducing vehicle use. Along the way, the program has reduced maintenance costs for city center streets, demand for parking spaces and bicycle theft. It has even created new advertising space for corporate sponsors of the program on the bicycles themselves.

 

Many, if not most, climate change solutions like these will continue to be undertaken at various sub-national levels of government. Quebec premier Jean Charest estimated in a speech at Climate Week NYC in September that 80% of the work involved in implementing any global agreement will be done by provincial and municipal authorities. This, he says, is  because the de-centralization of government  in many countries has put most of the operational decision-making in their hands, rather than at the national level. With a majority of the world’s population now living in urban areas, behavioral changes and efficiencies gained in the use of resources in these areas can have a very significant impact on greenhouse gas (GHG) emissions on a global basis.

 

The Climate Group, a Non-Governmental Organisation that supported COP-15 has played a pivotal role in bringing municipal governments and corporate sponsors together for many of these projects. It takes the view that municipal level PPP projects will be undertaken whether or not a global framework is agreed because the benefits are so compelling. Their concerns are rather that larger scale undertakings still need a comprehensive treaty that can overcome bureaucracy, overcome conflicting national agendas and enable greater private sector financial participation.

 

“It would make things much more straightforward,” says Emily Farnworth, senior adviser for the financial sector at The Climate Group. “But the position we’re taking is that with or without it, we absolutely have to move forward.” She says that whatever the outcome of COP-15, “there’s still going to be a huge need for organisations to get on with the solutions that they can under the directive  that is currently available.”

 

The global scale of the challenge should leave few in doubt about the need for private sector funding and expertise to deliver solutions. Public funding is  likely to be restricted for years to come following the financial crisis. More fundamentally, says Yvo de Boer, executive secretary of the United Nations Framework Convention on Climate Change, engaging private capital is “a much more efficient way to go forward than by trying to subsidize your way out.”

 

Speaking at a recent forum, Mr. De Boer said public funding and the clarity of an international agreement are both needed to begin to capitalize that private sector investment. But he estimated that some 85% of the financing will still need to come from the private sector to achieve GHG targets. For many who are engaged in developing practical solutions to climate change, the issue boils down to what public sector authorities can do to mobilize that private capital.

 

“Private companies are unlikely to be willing or able to take on the huge construction costs and risks involved without government support both financially and in the planning process,” says Holden & Partners’ Mr. Hoskin.

 

Increasingly, the model’s use is being encouraged by policy-driven requirements, particularly those related to climate change mitigation, and these demands can be expected to multiply in coming years.

 

The shift away from landfill in throughout Europe is one such policy driver. The EU Landfill Directive of 1999, which mandates sharp reductions in the amount of waste going into landfill throughout Europe to avoid specific financial penalties that take effect in 2010, is mobilizing investment not only in waste recycling, but in GHG reduction, and alternative energy technologies. The level of commitment backing the policies was recently demonstrated by the massive package of financial support that was assembled by government, public sector authorities and multilateral financial institutions  to ensure that the first of six planned large-scale waste recycling PFI projects in the UK reached financial close.

 

In the face of some of the worst conditions ever seen in the capital market, £640 million of  funding for the Greater Manchester Waste Recycling PFI project was raised last April. The  package included  £125 million of PFI credits from the UK Department for Environment Food and Rural Affairs, a £120 million from H.M. Treasury’s newly established Treasury Infrastructure Finance Unit (TIFU), £35 million from the Greater Manchester Waste Disposal Authority (GMWDA) and a generous £182 million of long-term funding from the European Investment Bank.

 

The decision to use a PPP/PFI structure to deliver the waste recycling project was no accident. “PPP makes sense where you have a public or quasi-public sector body that has some control or influence over some infrastructure project,” says Ben Warren, head of Ernst & Young’s Advisory Services for the Renewable Energy Sector. “It provides us with a transactional framework that is sufficiently clear and transparent and this has been hugely instrumental in getting the UK heading in the direction it needed to go around diversifying from landfill.”

 

A growing number of other large scale policy driven projects are in the pipeline and multilateral institutions such as the EIB, the European Bank for Reconstruction and Development, the World Bank have allocated substantial financial resources towards financing waste recycling, water resource management, sustainable forestry and agriculture management, and alternative energy. As part of its effort to compensate for the credit crunch, the EIB sharply raised its bond issuance in 2009 and is funding up to 50% of project costs within the euro-area, among EU accession countries, and even in the Middle East. The bank has also launched the European PPP Expertise Centre (EPEC) in collaboration with European Union member and candidate countries and the European Commission to centralize public sector expertise and resources and disseminate best practice between countries engaged in PPP procurement.

 

For many large scale climate change-related undertakings, including the shift from landfill, it is broadly accepted that public sector partners will need to take the lead because the technologies are either too new and unproven, the markets too undeveloped, or the risks to private sector partners too high to attract equity investment or long-term private institutional funding.

 

But Nick Robins, head of HSBC’s Climate Change Centre of Excellence, says there are also ways to take these risks off the table to make projects more investable. “You could package public finance, particularly risk mitigation measures – loan guarantees, currency risk, political risk and other measures to essentially de-risk investments in emerging markets or developed countries, particularly for institutional investors,” he says.

 

“What we haven’t done is deploy them at scale for the low-carbon agenda and make the use of those mechanisms more business-friendly,” Mr. Robins says. “They’re still very bureaucratic.”

 

There are also basic economic issues in low-carbon projects stemming from the fact that most countries in the world do not have market mechanisms to reflect the cost of carbon. So far, the European Trading Scheme, which has given rise to five exchanges for trading carbon credits in little more that four years is  the only established market to provide such a pricing tool, though exchanges are planned in the US and elsewhere.

 

But there are good reasons to expect that conditions will change rapidly as more people and governments realize the critical importance of reducing greenhouse gases. “There are a lot of big institutional investors recognizing that this is going to change and they need to be on the right side of this transitioning,” says HSBC’s Mr. Robins. “They’re expressing their interest and want to be more involved in this. But at the moment the raw economics don’t add up.”

 

 

Henry Teitelbaum is a London-based international financial journalist and author, most recently of the PFI Market Intelligence Report, PPP: Challenge and Opportunity After the Financial Crisis, which was published by Reuters in September 2009. He is reachable at Henry@P3Planet.com.

 

The original of the article appeared in Business Green, Infrastructure Journal, and numerous other  publications. This version was updated Dec. 23, 2009