Public-private pains

As public private partnerships roll across the globe, lawmakers should know that successful PPP rules include one key risk control - a guarantee that the private investor gets paid if the government changes its mind.

Public private partnerships come in many flavours depending on countries’ cultural, procedural and business norms. But at the end of the day, in order to be considered true partnerships, they need to contain one key element: transfer of risk between the public and private sectors.

As legislators in Guatemala sit down to iron out the Central American nation’s PPP legislation, they would do well to keep this in mind.

Traditional risks such as operational and financial factors aren’t necessarily the biggest worries for investors in developing markets. After winning a sealed bid tender process to bring Guatemala’s defunct railroad back to life, railroad developer Henry Posner III anticipated that normal risks like traffic and financing would be his greatest challenge. Instead, the greatest risk came from the public sector, which in 2006 effectively revoked the concession and forced him out of business.

Cezary Podkul

If the government transfers project development risk to the private sector but then takes over the fruits of its labor without any reward or compensation, the promised risk transfer never occurs. Small wonder, then, that investors feel lukewarm about putting money towards Guatemala’s estimated $3.2 billion infrastructure spending needs under its forthcoming PPP programme.

Brazil – which recently unveiled plans to bring 24 highway projects to market as PPPs or concessions in the next nine months – may provide a solution.

Brazil recognises breach of contract by the public sector as a legitimate risk for private investors. To mitigate it, the country’s 2004 PPP law gives investors the ability to settle their disputes via arbitration instead of through the Brazilian judicial system, which can be a nightmare due to its bureaucracy, according to Isabel Franco, a partner at Demarest e Almeida Avogaddos in Sao Paulo.

More importantly, it provides for a Guaranteeing Fund of approximately $6 billion to secure the public sectors’ obligations. That way, if the government puts you out of business, you still get compensated: much unlike Posner’s experience in Guatemala.

“It remains to be seen if this will be done in practice and whether $6 billion will be enough,” Franco says, noting that while Brazil has awarded 13 highway concessions under the country’s 1996 concession programme, federally mandated PPPs under 2004 law have yet to come to market.

Fair enough. But it's definitely a move in the right direction and one that countries drafting PPP legislation should keep in mind as they try to attract private capital.