By Martin Finnigan and Michael Walker, Caledonian Economics Ltd
With rapidly growing populations, the demand for good infrastructure and social services in many Latin America and Caribbean countries outstrips the financial and human capacity that governments can bring to bear. Yet growing stability and improving governance are creating the conditions where PPP is a viable tool for delivering infrastructure projects, large and small, across the region.
Working in the infrastructure development sector, we are often frustrated that some projects just don’t quite ‘fit the bill’. Perhaps a project looks promising for PPP but it is slightly too small to be economically viable. Perhaps there is no natural single public sector counterparty, or perhaps the location creates supply chain problems. What happens to these projects? They are below the radar of international megaproject investors and out of the reach of the multilateral lending agencies. Scotland faced such challenges with social infrastructure in the late 2000s.
Scotland is a country of around 6 million people with an autonomous government within the United Kingdom. Public sector services are decentralized too, with 32 local authorities (responsible for education, social care and municipal services). Health services, further education and emergency services are independently managed within the public sector. Around half the population is in a compact central area, with the remainder spread increasingly thinly in smaller towns and rural communities towards the Highlands, the long complex coastline and some 90 inhabited islands.
A round of large PPPs in the early 2000s had replaced major hospitals and many large city high schools, but smaller urban social infrastructure projects and others in less populous areas met challenges. When debt finance dried up in 2008 the hiatus coincided with a change in government and gave time to think afresh about how PPP could be used to reach deeper into all our communities, at the same time as countering some of the political resistance to conventional PPP models.
Three central questions emerged:
•how to simplify procurement;
•how to demonstrate value for money on relatively small projects especially those in thin markets; and
•how to either restrict or share in investor returns?
Thus the ‘hub’ (compact PPP) model emerged. This features five regional ‘hub’ joint venture companies; collaborative PPP management companies where ownership is shared between a private sector partner, public sector bodies with an interest in the region, and national government. Their objectives are to identify and deliver infrastructure projects and services.
Appointed after a formal tendering process, each hub company has right to develop projects within its geographic territory for an initial ten year period.
The contract between the hub company and its public sector partners prescribes:
•processes for demonstrating value for money in the supply chain;
•capped returns to investors with sharing of surpluses beyond the cap;
•KPIs including social benefits such as apprenticeships, graduate placements, and workforce development;
•mechanisms that enable technical, economic and strategic studies to be funded;
•highly transparent governance and reporting arrangements.
Individual development projects are implemented directly under conventional Design-Build-Transfer contracts, or on a Design-Build-Finance-Maintain basis in which case a separate PPP Special Purpose Company is set up to allow non-recourse project finance to be used.
Has hub been a success? In short, yes.
•It has delivered projects worth at least $2.5 billion, mainly schools and primary health care facilities. Roughly a third of these are operational, half in construction, and the balance in development;
•There is evidence that project quality and delivery times have improved;
•It has delivered in remote locations that would previously have been an obstacle to including them in grouped facility PPPs; and
•It has delivered smaller projects – individual DBFMs with a capital value under $15 million are now routinely procured this way in urban and rural locations.
Is this a valid model to use beyond our shores? We think so. It could be considered when any of these conditions are present:
•The public sector is highly devolved, fragmented, or where the responsibility for delivering public services fall to different organisations, with different regional coverage, or different governance arrangements;
•Where distance or population density are obstacles to creating DBFM PPPs of sufficient scale;
•Where the investment requirement is for numerous, dispersed, smaller facilities, not a few larger ones.
We have implemented the structure with new social infrastructure in mind, and the PPPs are Availability Payment based. For political reasons our focus has been on sub- $50 million projects, but the same approach could be used at a larger scale. Similarly, there is no reason why it cannot be applied where investment needs are of a different kind, say water treatment, renewable energy, roads, or housing.
In the search for solutions to accelerate sustainable development, we have here a structure that could help development finance and PPP to penetrate deeper into places and sectors that would otherwise be out of reach. Furthermore, since the nature of risks are similar to any other PPP, the opportunity to use multilateral development bank credit enhancement products to leverage private sector capital is plainly present.