2. Global projected infrastructure investment needs are massive Canada: closing infrastructure gap requires investment 6-10x the level of current annual government spending. Investment needs for urban roads and bridges are $66B over 10 years United States: infrastructure deficit total $40bn a year in roads sector alone. ASCE estimates total investment needs over next 5 years to be $1.6 trillion Australia and New Zealand’s infrastructure deficits are estimated at $19B and $4B, respectively Canada: $125B US: $1.6T by 2010 California: $500B by 2026 Latin America & Caribbean: $71B MENA: $28B Ireland:$127B Germany: $843B by 2010 Sub-Saharan Africa: $26B India: $250B by 2010 East Asia/Pacific: $178B Russia: $1T by 2020 Australia: $18B NZ: $3.6B Europe: Infrastructure needs for EU run into trillions of dollars. Energy sector alone requires $1.2T over next 20 years. $90B needed in Germany each year India: spends just 6% of GDP on infrastructure compared to China’s 20%. Developing economies in E. Asia need to invest $165B per years over next 5 years for electricity, telecom, inter-urban roads, rail, water, and sanitation. This amounts to nearly 6.2% of the GDP for the region. China will account for 80% of regional infrastructure expenditures Source: Deloitte Research, 2008
3. In developing countries, the private sector has long contributed to public infrastructure investment 2008 US$ billions New projects Source: World Bank and PPIAF, PPI Project Database.
4. This has occurred across a diverse range of sectors and geographies Total: US$797.3 billion (2008 US$) Total: US$843.3 billion (2008 US$) 1990–2000 2001–08 Source: World Bank and PPIAF, PPI Project Database.
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7. Various procurement models are employed for PPPs to allocate specific risks NEW PROJECTS EXISTING SERVICES & FACILITIES Design-Build Design-Build- Maintain Design-Build-Operate Design-Build-Operate-Maintain Build-Own-Operate-Transfer Build-Own-Operate Service Contracts Management Contracts Lease Concession Divestiture The government contracts with a private partner to design and build a facility in accordance with set forth requirements. The government assumes responsibility for operations and maintenance after completion. Also known as Build-Transfer-Operate. The private sector designs and builds a facility. Once completed, the title is transferred to the public sector, while the private sector operates the facility for a specified period. The government transfers an asset, either in part or in full, to the private sector. Generally the government will include certain conditions with the sale of the asset to ensure that improvements are made and citizens continue to be served. The government contracts with a private entity to provide services the government previously performed The government grants a private entity exclusive rights to provide, operate, and maintain an asset over a long period in accordance with performance requirements. The public sector retains ownership of the asset, while the operator owns any improvements to the asset. The government grants the right to finance, design, build, operate, and maintain a project to a private entity, which retains ownership. The private entity is not required to transfer the facility back to the government Source: Deloitte Research; National Council for PPPs Public responsibility Private responsibility
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10. In developing markets, private investment in transport infrastructure has been at historically high levels, driven by India and China Source: World Bank and PPIAF, PPI Project Database. 2008 US$ billions New projects 2008 US$ billions Investment commitments to transport projects with private participation, by country income group, 1990–2008 Investment commitments to transport projects with private participation in developing countries, by subsector, 1990–2008
11. Russia has been a leading destination for PPI in the developing world Top 10 by investment in infrastructure projects with private participation in 2001‒08 * Includes investment in projects reaching financial closure in 1990‒2008. Top 10 by new infrastructure projects with private participation in 2001‒08 Note: China and India are classified as lower-middle-income countries by the World Bank, and Brazil and the Russian Federation as upper-middle-income countries. Source: World Bank and PPIAF, PPI Project Database. Country Investment* (2008 US$ billions) Share of total (%) Brazil 111.9 13.3 India 110.2 13.1 Russian Federation 74.7 8.9 China 57.2 6.8 Mexico 49.3 5.9 Turkey 32.0 3.8 Poland 24.8 2.9 Indonesia 22.9 2.7 Nigeria 22.2 2.6 South Africa 21.4 2.5 Total 526.7 62.5 Country New projects Share of total (%) China 602 30.6 India 232 11.8 Brazil 141 7.2 Russian Federation 56 2.8 Mexico 54 2.7 Nigeria 45 2.3 Colombia 43 2.2 Chile 35 1.8 Indonesia 32 1.6 Malaysia 32 1.6 Total 1,272 64.6
12. But there has been a lack of PPI in Russia’s transport sector relative to other countries and to other sectors within Russia Source: Primary analysis based on data from World Bank and PPIAF, PPI Project Database.
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18. The barriers to PPP implementation are numerous Source: World Bank, 2007
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Notas del editor
I am focusing my paper on Russia, and the potential for PPPs in the transport sector Why Russia? In the context of broader issues of privatization, Russia has an interesting track record I admit, the concept of partnerships between the private and public sector seems a little oxymoronic in a place like Russia, where the state has played such a heavy hand in the economy, and where the public would have good reason to be distrustful of the private sector Why the transport sector? Well, I didn’t want to write about energy or sewage plants. Also, Russia is the largest country on Earth, and so the potential for investment in transportation is considerable
Russia is not unique in the fact that it faces a huge infrastructure gap Evidence of the need for additional resources is widespread, from congested roads, collapsing bridges, deteriorating and overcrowded hospitals and schools Governments in developed and developing countries alike need to invest trillions of dollars to maintain existing infrastructure and invest in new projects as their long-term economic growth depends on it
As this World Bank data shows, the private sector has long been instrumental in investing in public infrastructure, even in developing countries
This has occurred across a range of sectors and geographies Telecoms and electricity have been the heavyweights for private investment in developing markets, mirroring the waves of privatization and deregulation that occurred in those industries beginning in the 1990s, and reflecting the state’s heavy initial involvement Latin America was an early adopter of private investment in infrastructure, although the European and Central Asian region – including Russia – has been among the fastest growing
So, what are PPPs exactly? Essentially, they’re arrangements in which the private sector supplies infrastructure assets and services that is traditionally provided by public authorities A key component of them is the notion of the efficient allocation of risks between parties that have comparative advantages in their ability to bear those risks
Governments have some basic reasons to allow for private sector investment in infrastructure: to serve as a catalyst for reforming public services, to save money, and to create additional financing capacity outside the constraints of public budgets Some other specific benefits are worth mentioning: - PPPs allow the cost of investments to be spread over the life of the asset versus more conventional procurement methods, which require significant upfront capital costs and which require pay-as-you-go financing. Private sector involvement allows for projects to be constructed more quickly, and private sponsors have incentive to complete the project as quickly as possible The public sector provision of infrastructure is vulnerable to politics and budgetary pressures, which can result in deferred maintenance. California for example has deferred transportation maintenance of $23B in state and local-level. Governments can ameliorate these problems by transferring certain construction and maintenance risks to a private partner cost savings materialize in different forms, such as more efficient construction processes. Also, by shifting the responsibility of operation and maintenance to the private sector, it creates incentives to ensure longer-term construction quality
Similar to the continuum of different forms of privatization on the front of the syllabus, there are multiple forms of PPPs with varying levels of public or private responsibility The specific PPP model chosen depends on a number of factors related to the sector, the legal and regulatory environment, and the private and public sector participants’ specific economic objectives
This chart from a Deloitte study shows the various sectors that PPPs can be applied to and the varying project forms Unsurprisingly, leading practitioners are pretty much all developed markets with deep financial markets and dynamic private sectors
The transportation sector alone accounts for a significant share of total infrastructure needs, which McKinsey estimated at $3 trillion from 2005-2010, while the opportunities for private participation were estimated at $330 B These opportunities have become more attractive for institutional investors seeking sources of predictable revenue streams
In developing markets, rapid economic growth in India and China in particular has necessitated huge investment in transportation, with commensurate private sector participation
When we consider overall private investment in infrastructure, Russia has been a leader in the past decade
Curiously, however, this hasn’t been true for the transportation sector Even when we look at private transport investment per capita or relative to GDP, it pales in comparison to other emerging economies and within Russia to other sectors
As you might expect, therefore, transportation infrastructure in Russia is in a pretty dismal state
Government officials have at least acknowledged this deficiency and have announced big plans for upgrades The number put forth is $1 trillion by 2020, with significant private sector involvement This is good as estimated annual needs in infrastructure investment for middle-income countries averages at 5% of GDP
Russia has made some progress in recent years to facilitate PPPs coming to market In 2005, they passed a concession law creating a legal foundation for projects But some problems remain, such as project assets not being allowed to be pledge by the contractor to raise bank lending, and the conflict between the need for approvals annual budgetary expenditure and long-term govt commitments St. Petersburg as well, has passed its own law for non-concession based projects. It is considered to be more flexible than the federal law, which is why most of the pipelines in the project have taken place there Also, the state has diverted some of its petrodollars to create an infrastructure investment fund to attract private investment, which reached $3B in late 2008. the fund is being used to finance equity investments in up to 75% of total capital project costs or as guarantees of up to 60% of the borrowings for a particular project In 2007, the government merged 3 state-owned banks and ECAs and seeded $7.4 bn to form a new state development bank Mandate is to operate on a non-competitive basis with commercial banks to co-finance projects in ruble-denominated loans Its also supposed to act as the central PPP unit for Russia, coordinating interagency efforts to regulate PPPs and harmonize laws and practices
Russia has a long way to go despite the fanfare in recent years Most of the deals have been large one-offs before the financial crisis hit In general, PPP “readiness” as characterized by McKinsey is quite low. This reflects relatively immature market conditions for PPPs, which carry higher risks to international investors than other countries
The challenges are many I wont go through these all, but will highlight the lack of an effective, centralized PPP unit, the lack of a developed financial sector, the restrictiveness of the federal concession law, the lack of experience of govt institutions in project finance, and the perceived risks of dealing with the Russian govt are pretty key
So what can Russia do? It needs to emulate the market leaders. This means nothing short of reforming the entire institutional and legal environment It has taken some steps but it’s not enough
Part of the problem is that the economic crisis has impacted PPPs everywhere. Private investors have become more risk-averse and risky places like Russia are the first markets to be abandoned Interest rates increases have increased cost of borrowing Trade credit and access to finance has dried up due to the liquidity crises A survey by the World Bank earlier this year highlights the impact on new projects. Of the 316 projects surveyed between July 2008 and February 2009, 95% reported delays
