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C. Financing Public-Private Partnerships
Working Group II
The discussions in Working Group II explored two principal questions concerning how private sector participation - and specifically PPPs - are being financed in developing countries: 1) How can municipalities attract private capital to public services and infrastructure? and 2) What can local and national governments do to create the kind of enabling environment that will support private funding of public services? The main points raised by the Working Group participants are summarised below.
In addition to an examination of the salient questions concerning financing PPPs, the Working Group also discussed the overall constraints facing municipalities seeking capital for infrastructure investments. The role of donors in this regard is particularly relevant, as their mandate is to help establish the right kind of environment for investment, rather than to make the actual investments. The need for direct private sector participation and private capital is acute because developing country municipalities are having difficulty obtaining loans from agencies and matching funds from the banks. Long-term debt is difficult to obtain, especially at the community level, in part because public services often require long payback periods. Other specific constraints to attracting capital will depend on individual markets, and Working Group participants pointed out that individual approaches should be geared to the circumstances of individual markets.
How can municipalities attract private capital to public services and infrastructure?
- The conditions for operating a public service have to demonstrate a clear-cut ability to generate a profit within the national rules set up for PPP development. This will preclude some markets and some services from private sector participation. An existing urban market in which public services are already being paid for by consumers increases the chance of public acceptance - hence political will - and provides a benchmark for projecting future consumption levels and revenue flows. Since the structuring of a utility also plays a decisive role in the level and type of investments that it will require, it is generally a good idea to allow potential private operators to present their own innovative approaches to designing cost-effective and profitable systems.
- Financing strategies must present a feasible system of incentives for private sector participation, and contract negotiation processes must be fair and competitive (to the extent that local conditions will permit). Information flows and investment frameworks also have to be predictable and transparent. This can often be a constraint in many developing countries, which in general are less transparent than developed countries, with fewer lobbying and media-related outlets.
- Investors must have access to lending mechanisms, appropriate options for financial guarantees, and sound and objective risk analysis studies.
- A local decision-making structure must be in place with delegation of authority to appropriate entities that can work directly with the private investors.
- Enabling legislation that allows the public sector to enter into partnerships with the private sector must be drafted in cases where it does not already exist. Legislation can also create the necessary conditions that ensure private companies engaged in the operation of public services are allowed to earn a profit.
- Appropriate regulations have to balance the needs of users (protect the public) with cash flow levels that will bolster investments (ensure appropriate levels of profitability).
What can local and national governments do to create the kind of enabling environment that will support private funding of public services?
- One of the first steps is to create a public mandate for governments to work with private investors on solving problems associated with services traditionally provided by the public sector. The mandate might include an awareness/educational campaign that raises the public's consciousness about the need to conserve natural resources or use energy efficiently. In line with the mandate, governments must then draft trustworthy legislation that will not necessarily be subject to political or electoral changes, and that will allow private investment in public services.
- To facilitate implementation of projects, governments can create special project units, which can serve in an advisory role or as a clearinghouse for potential PPPs within the country or city.
- A number of macro-economic conditions will influence the development of an enabling environment: a stable fiscal policy, predictable inflation and exchange rates, political and electoral stability, and a commitment to decentralisation. Important micro-economic factors include predictability, feasibility, revenue streams, cost centres, the existence and predictability of local markets (the extent to which local users can pay for services), and reliable pricing policies.
- Deregulation of relevant service sectors will provide the right policy framework for increasing competition.
- Countries and municipalities with a proven track record of PPPs will be more attractive to investors than cities that have little to no experience with substantive partnerships with the private sector.
- Stakeholder participation in the PPP process will increase political acceptability by increasing local ownership and will ensure that levels-of-service standards match local demands.
- Donors and developed countries can assist developing countries in establishing enabling environments by recommending guidelines for PPPs.
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