Now more than ever, developing countries looking to build up their infrastructure need the management capacity, innovation and money the private sector can bring.
At least this was the view expressed by Laurence Carter, senior director of the World Bank Group’s PPP unit, in an interview with Infrastructure Investor this month. The issue is that this attitude has yet to permeate multilateral institutions at large, he explained.
“The main challenge for multilateral development banks is to change the mindset from the traditional, post-World War II approach of building infrastructure using public funds. The traditional model has been making public sector loans, with staff being incentivised to set targets on balance sheet lending. It is indeed a challenge to reset the target to leveraging,” Carter said.
Carter noted that institutions like the International Finance Corporation and the European Bank for Reconstruction and Development, which are targeting the private sector, were advanced in this process. “Both institutions have had mobilisation targets for some years and this has worked well.”
“At the World Bank, it is just coming,” he added. “We’ve started to set a corporate mobilisation target, where we give credit to staff for the amount of private sector funding they bring in. It’s a matter of changing incentives.”
He detailed what he calls the World Bank’s “cascade approach”, where the institution first evaluates whether a project can be financed by the private sector on its own, then assesses if improving regulation or else can help attract private funding, before looking at whether credit enhancement platforms can do the trick. Only once this process is complete does it start looking at sourcing public funding.
Carter cited the first Global Infrastructure Forum, co-hosted by all multilateral development banks in partnership with the UN last April, as proof that development institutions are keen to work together to engineer this shift. He also mentioned the International Infrastructure Support System, an online PPP project preparation platform now supporting 63 projects from 24 countries, and the recent launch of the PPP Certification Program, a qualification aimed at making PPP practitioners learn more about their subject matter.
“It’s a bit like the CFA. Our goal is that thousands of people around the world take this exam, contributing to better preparation and capacity building. My team and I sat for the first segment of the exam about three months ago.”
DOING THE MATHS
All of these initiatives aim to address a bigger hurdle: the lack of structuring and supervision skills among recipients of DFI funding. “The bigger challenge is on the client side,” Carter said. “Our role is to help authorities manage the complex process of bringing in the private sector to provide public infrastructure services.”
He compared the state of the infrastructure sector in developing countries to where the medical industry stood 30 or 40 years ago, emphasising that the latter has gone through a process of “protocolisation”, allowing it to raise standards. “Until recently infrastructure didn’t have those simple protocols.”
Yet he called on the industry to remain realistic in what it hoped to achieve, at least in the short run. “Sometimes expectations can be too high. We’re not in the business of selling or promoting PPPs, we help governments and others make good judgement about infrastructure services.”
Carter did not expect a PPP boom in the coming years, largely because the total volume would likely rely on a small number of large markets, like China, India or Brazil. The World Bank’s measure of success, rather, has more to do with the number of countries which have PPP programmes, he said.
He agreed the definition of PPPs varied across regions, with the acronym sometimes meaning “different things to different people”. In instances where the concept is kept too loose – allowing state-owned entities to act as the private partner, as is the case in China – he said governments “don’t get the advantage that you get from full private management”.
Carter also noted that the framework perhaps does not go as far as it should in India, where state-owned banks are responsible for a large chunk of the lending and land acquisition is not a straightforward process.
He was optimistic about institutional involvement in infrastructure projects, and said credit enhancement could help. But he also sounded a note of caution. “In 2015, institutional investors provided about 1 percent of infrastructure financing in emerging markets. The majority came from MDBs, DFIs and banks. So even if you multiply that 10 times, that would only be 10 percent – still a great achievement, but it needs to be considered in perspective.”