Dual purpose: public-private partnerships

Since emerging as a new funding model in the 1980s, public-private partnerships have proved successful for strengthening infrastructure in cities everywhere. Vision examines the positive social impact and the real value that PPPs can have on economies around the world

Public-private partnerships (PPP) might be a relatively new investment model, but it is one that has been embraced every-where from Pakistan to Peru in recent years. Such is their success that PPP arrangements running to trillions of dollars are currently in progress all over the world.

The basic concept, involving joint investment by both government and private companies, is not only to construct assets but also to manage and maintain them over a set term. The idea was first introduced in the UK in the 1980s when public investment in infrastructure projects, schools and hospitals – among others – were put out to tender with private-sector companies.

Governments have limited access to resources; PPPs offer the possibility of augmenting public resources

Edgar Saravia, Manager for PPPs in East Asia, IFC

Today’s prospect held out by PPPs combines the energy, entrepreneurialism and emphasis on quality that private industry at its best can deliver, together with the secure source of funding and the guaranteed demand that the public sector offers. PPPs are also a valuable method of addressing the economic slowdown and the global jobs crisis caused by a rapidly growing global population, by stimulating SME growth to support large-scale infrastructure projects.

Useful tool

But it is in the developing world that the most remarkable growth in PPPs is currently underway. In Brazil, schools, hospitals, transport and social infra-structure developments are often built and managed under PPP. As Henrique Pinto at the Brazilian Development Bank explains: “In many cases, it is better to have private companies running these assets, because government procurement is very difficult.” He judges that the quality of product is better from private companies but that there are always limits to the level of PPP involvement. “We need to have benchmarks, so that not everything is one way or another. PPP is a very useful tool,” he adds.

Edgar Saravia, Manager for PPPs in East Asia at the International Finance Corporation (IFC), says there is no question that PPPs are becoming more popular. He cites the benefits they bring to emerging economies as a key factor behind the rapid growth, adding that: “Governments have limited access to resources. PPPs offer the possibility of augmenting public resources, if transacted well.”

India – with a population in excess of 1.2 billion – is a prime example of a nation seeking new means of achieving rapid and sustained infrastructure development. Its exceptionally large PPP plans currently total more than US$1tn, according to the Asian Development Bank. These agreements could help to unlock vast amounts of trade and improve prospects enormously, as there is a great willingness to facilitate investment, both on the part of international companies and from the Indian government, but too few means to achieve it.

The Indian healthcare sector already has numerous instances of PPPs being employed to influence the growth of the private sector but with public goals in mind. The Yeshasvini Cooperative Farmer’s Healthcare Scheme is an insurance initiative targeted to benefit the poor, in which the Government of Karnataka pays half of the members’ insurance premiums for medical treatment at Bangalore’s private heart hospital, Narayana Hrudayalaya. Used judiciously, tailored to local circumstances, and when interests of all stakeholders are taken into account, PPPs have the potential to drastically change the country’s healthcare landscape.

Collaborative success

In the Middle East, meanwhile, there is increasing discussion of how PPPs can yield positive results, along with the urgent need for infrastructure investment. “The World Bank estimates that the Arab region already requires US$100bn of infrastructure investments annually,” writes Majid Jafar, Chief Executive of Crescent Petroleum and author of The Arab Stabilisation Plan. His initiative calls for private and public collaboration to spur infrastructure investment, addressing the triple issues of economic stimulation, improving sectors such as transport, telecoms and energy, and providing employment for the region’s youth.

In the UAE, a high-profile PPP has been agreed between intergovernmental organisation Global Green Growth Institute (GGGI), the Masdar Institute (MI), the Research Institute for Industrial Science and Technology (RIST) and POSCO, one of the world’s largest steel producers with a headquarters in Pohang, South Korea. This project expects to combine solar PV, wind power and biofuel production from waste and algae, linking to seawater-desalination plants and providing electrical energy.

The tie-up has proved beneficial to all parties involved, harnessing the expertise of Masdar Institute in the design and simulation of micro-grids with renewable energy, and the RIST team’s established expertise in making new technologies commercially viable.

Dr Fred Moavenzadeh, President of the Masdar Institute, believes the partnership reflects both the UAE’s and South Korea’s interest in furthering clean energy ventures. “The partnership will benefit from the synergy between Masdar Institute and RIST, which already has a track record in implementing a similar project in Korea. The micro-grid project will bear testimony to our expertise in furthering research and innovation in sustainability while developing the UAE’s human capital,” he said at the launch.

Egypt is another nation working to address the issues outlined by Jafar, and the first PPP agreement in 2009 between the country’s Orascom Construction Industries, Spain’s Aqualia and the Egyptian Ministry of Housing holds great significance. The deal encompasses building and operating a wastewater treatment plant in New Cairo City, close to the country’s capital.

In a city that is expected to grow from a current population of half a million to around three million by 2029, this partnership will have a major impact on the quality of basic public services, while the private investment part of the deal is estimated to involve up to US$200m. In addition, if the project proves workable and effective – it will create a strong demonstration effect, attracting future regional and international investors to Egypt’s PPP market.