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Public-private partnerships have potential to be key investment tool in Commonwealth

28 May 2012
Projects must be bankable to attract private sector funding

Public-private partnerships (PPPs) have taken greater prominence in Commonwealth developing countries as the search for capital to finance infrastructure and other projects increases. The aim is to tap private sector capital to boost sustainable development while reducing exposure to financial risks, said Dr Joan Nwasike, Head of Thematic Programmes at the Governance and Institutional Development Division (GIDD) of the Commonwealth Secretariat.

She was speaking at the opening of a three-day Public-Private Partnership Roundtable on 28 May 2012 focused on the topic, 'Are PPPs workable in contexts of low institutional capacity?' The event was held at the Commonwealth Secretariat in London, UK.

In her speech, Dr Nwasike noted that some countries such as Australia, Canada, India, Malaysia and Singapore have been successful at PPPs. She stated that the foremost challenge faced by developing countries is the weak capacity of the public sector to effectively engage with the private sector in building PPPs due to limited specialised knowledge, skills and weak institutional capacity.

She underlined the need for public sector reform to develop institutional frameworks, which will strengthen service delivery. This includes the introduction of an effective tax system to increase revenue base, which will in turn allow governments to finance more socio-economic projects to reduce poverty and increase employment.

Dr Nwasike said the Secretariat has set up the Commonwealth Public-Private Partnership Network (C3PN) to encourage South-South learning, dialogue and peer reviews. She said the Secretariat encourages increased co-ordination among institutions to enhance PPPs, working in tandem with development partners.

Max Everest-Phillips, Director of GIDD, pointed out that the key governance capacities that are critical for maximising the pace of growth in developing countries include improving market efficiency by reducing transaction costs, securing property rights, the ability to enforce contracts and the existence of an efficient bureaucracy.

The role of PPPs is to create an enabling environment which allows the private sector to bring in their finance and capabilities to develop public infrastructure projects, said the Secretartiat's PPP Adviser Yong Hee Kong.

“This can be done through the development of five frameworks – policy, legal, operational, investment and capital market. Underpinning these are strong institutions; the development and strengthening of these institutions are challenges faced by governments,” said Mr Yong.

PPPs have the potential to be a key tool of investment promotion for Commonwealth countries, said Sir Alan Collins, Director-General of the Commonwealth Business Council (CBC). However, he stressed that governments must focus only on projects that have the potential to be bankable as only the most commercially attractive projects are suitable for PPPs.

“Too often there is a disconnect between government and the private sector,” said Sir Alan. “Governments need to consult far more often with the private sector on their requirements for funding projects and their expectations of how projects should be presented, structured and the returns on investments. There is still too often a lack of trust between the private sector and government, which is hindering the development of PPPs in many countries. It is ultimately the markets that decide whether a PPP is viable and not the PPP experts, politicians, academics or developmental institutions.”

He emphasised the importance of a conducive environment for PPPs at all stages of the development pipeline. This extends from the initial identification of bankable PPP projects at the beginning to the ability of debt financiers to pass on their investments to long-term investors such as pension funds at the end.

“Governments in many developing Commonwealth countries must do more to ensure there is an adequate supply of long-term finance and we believe governments should do more to incentivise long-term investments in infrastructure. There is a role for governments to establish national infrastructure banks to catalyse the availability of long-term financing,” said Sir Alan.

Sir Alan stressed governments must ensure that they bring PPP projects to market with the help of reputable international banking houses which are well connected in the major financing centres such as London and New York. He stated that the CBC is keen to partner Commonwealth governments to help identify bankable projects, with the help of private sector practitioners, and help bring them to market. He said this approach is relevant in countries which are starting PPP programmes but have not yet developed the necessary institutional expertise.