Honing skills in emerging markets

Overcoming the huge infrastructure deficit in emerging markets is no easy task, but many people believe that if the public-private partnership (PPP) model can be effectively utilised, it could go a long way to help solve the problem. And yet, with infrastructure spending in emerging markets actually declining last year, it is clear that so far the potential is not being realised.

One of the key issues long identified by those with working knowledge of emerging market PPPs is that, for all the good intentions that local public officials have, the ability to effectively design, implement and regulate PPP programmes is often lacking – causing what would have been good and effective schemes to fail.

In response, the World Bank Group, Asian Development Bank and Inter-American Development Bank recently joined forces to launch a Global Certification Programme (GCP) for PPPs as a way of “fostering a common minimum level of knowledge and understanding amongst practitioners working on PPPs,” according to a statement released to announce the GCP’s launch.

“We believe this certification program can fill an important gap in current approaches to capacity building by developing a global standard of knowledge, helping to facilitate the development of a common language on PPPs and harmonise expectations and understanding between practitioners involved at different stages and on different sides of the PPP process,” said Laurence Carter, senior director for PPPs in the World Bank Group.

The certification initiative, which will be supported by a grant from the Public-Private Infrastructure Advisory Facility (a multi-donor trust fund), is set to be launched in the middle of next year.

‘LIMITED EXPERIENCE’

Peter Kasanda, head of the Dar es Salaam, Tanzania, office of law firm Clyde & Co, takes encouragement from the proposed scheme. “The certification would be great for this region,” he says. “Countries’ PPP units are at the core of the knowledge base in Africa but the people staffing them have a mixed level of skills, which is understandable given the limited experience.”

Kasanda has more experience than most in an African context, having closed projects in the infrastructure, telecoms, mining, energy and power sectors across the region. But many PPP frameworks are still at a fledgling stage. He notes that unsolicited bids are common in the region as public bodies often do not have the capacity to go through a process of soliciting bids.

Once a PPP is going through procurement, other weaknesses can become apparent. “There are sometimes procurement short-cuts which lead to awards that can later be challenged,” he says. “Occasionally, these short-cuts are made in an attempt to keep bid costs down. You need to ensure competitive bid costs but when there are subsequently challenges, the real cost escalates. We need proper international procurement standards.”

He continues: “Tanzania has a pipeline of 15 PPPs but the problem is rolling them out, as we don’t have enough skilled public sector staff to manage the process. The laws are often well drafted in countries like Tanzania because they often mirror those of countries with a longer track record in PPPs; however they find the various approval stages under the legislation difficult to enforce. It comes down to lack of capacity.”

All this explains why the GCP has a likely supporter in Kasanda. However, he is keen to know more about precisely how the scheme will work before getting too excited.

“From a practical perspective, I’m not sure how the programme will operate. It’s not clear to me that it has the funding to put people on the ground to assist with the lack of capacity in the public sector. Having worked in the City of London and also for the African Development Bank in Africa, it is clear to me that being on the ground is the only way to understand what the issues are.”

MISSING INGREDIENT

This sentiment is concurred with by Nigel Brindley and Bob Shekleton, who launched London-based Stratus Infrastructure in August this year to help address the skills gap in emerging market PPPs. The two men, who have a combined 50 years’ experience of PPP deals, believe appropriate structuring is the key missing ingredient in emerging markets.

“International investors are deterred from developing country PPP deals because they provide inadequate incentives,” says Brindley. “Vanilla PPP structures from the UK and Europe are adopted but not sufficiently modified to address contrasting risk profiles. Very different sovereign, currency and legislative risks are exacerbated by the tendency to introduce additional risks such as land purchase and planning consents.”

He adds: “The irony is that record levels of liquidity will fail to flow to the growing infrastructure deficit in developing countries until procuring authorities source the skills necessary to formulate equitable risk structures and incentives. Until then, the private sector will continue to turn its back.”

There is another problem in emerging markets, which is ironic given the other hurdles that are placed in the way of private investment – a tendency towards over-ambition. “We break down big projects in the UK, such as motorway upgrades, and, in doing so, make them more deliverable,” says Shekleton.

“In emerging markets,” he adds, “you get these city-to-city projects such as the $3 billion Mafraq-Al-Ghweifat highway from Abu Dhabi to the Saudi Arabian border which, at ten times the size of similar schemes in the UK, proved to be undeliverable.”

BANKABLE

Stratus’ focus will be on helping to structure bankable and deliverable deals, which will ultimately be viewed as viable by credit committees. The two men acknowledge that they are not fighting a lone battle in this respect – they are quick to acknowledge, for example, the work of the Asian Development Bank in providing credit enhancement for infrastructure projects and the determination of Singapore to help with the development of infrastructure in neighbouring countries.

Interestingly, Stratus is also focused on the US market – far from being an emerging market but where PPPs are still a relatively under-used method of delivering infrastructure. Stratus is not alone in seeking to position itself for when the US market takes off.

“In the last few years, there has been new PPP legislation in 30 or more US states following the successful example set by states such as Florida,” says Brindley. “This will create a bow wave of P3 projects coming to market that will create an accelerating demand for procurement skills.”

As institutional investors increasingly turn their thoughts to emerging markets infrastructure, the likes of Brindley and Shekleton – as well as Clyde & Co’s Kasanda and the World Bank – know that plenty of groundwork needs to be done before the capital poised to be committed can find a home. But at least that work is now well underway.