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