Infrastructure projects help nations build a better future. Emerging economies need upgrades to roads, railways, energy grids and broadband networks in order to sustain domestic growth. But these countries face a particular conundrum: how to build highways, power plants and ports that will stimulate economic development when public funds are in short supply.
BY SARAH FISTER GALE
ILLUSTRATION BY PETER AND MARIA HOEY
Infrastructure projects help nations build a better future. Emerging economies need upgrades to roads, railways, energy grids and broadband networks in order to sustain domestic growth. But these countries face a particular conundrum: how to build highways, power plants and ports that will stimulate economic development when public funds are in short supply.
To make ends meet, many governments are turning to public-private partnerships (PPPs). PPPs allow the public sector to leverage private funding and expertise to more rapidly plan, launch and deliver infrastructure projects. In exchange, private-sector partners are given long-term maintenance and operation contracts that turn a profit.
“On the face of it, PPPs are a great project model to fill in the funding gaps these countries face,” says Andy North, a former senior vice president of strategic development and management in Kuala Lumpur, Malaysia, for AECOM, a global design, engineering and construction firm.
The global gaps are staggering. According to McKinsey & Co., an estimated US$57 trillion will be needed to finance infrastructure development around the world through 2030, with much of that investment needed in developing countries. Latin America and the Caribbean, for example, will need more than US$700 billion to double power-generation capacity by 2030, according to the U.S. Energy Information Administration. And sub-Saharan Africa needs US$93 billion per year to address its infrastructure shortfall, according to The World Bank.
Given these urgent needs, PPP projects hold huge potential. But governments must clarify project roles, risks and ROI before private organizations will be prepared to foot the bill.
US$57 trillion
Amount that will be needed to finance infrastructure development around the world through 2030, with much of that investment needed in developing countries
Source: McKinsey & Co.
US$93 billion per year
Amount sub-Saharan Africa needs to address its infrastructure shortfall
Source: The World Bank
More than US$700 billion
Amount Latin America and the Caribbean will need to double power-generation capacity by 2030
Source: U.S. Energy Information Administration
“In a lot of cases, the private investors cannot see how they will get the full cost recovery,” Mr. North says.
PAVING THE WAY
To attract private-sector investments, governments must paint a clear picture of what they bring to the table. But this will be easier for some projects than others. While energy and toll road initiatives may offer a distinct ROI, projects to generate clean drinking water or treat wastewater have less obvious revenue streams once construction is complete.
Indeed, power projects are among the most common types of PPPs, says Alexander Nicholas Jett, public-private partnership specialist, PPP office, Asian Development Bank, Manila, the Philippines. He notes that Pakistan recently closed several wind power PPP project deals, thanks to proper risk allocation.
“One of the key reasons these projects were attractive to the private sector is that the government addressed many of the risks in their project agreements,” Mr. Jett says. Planning documents factored in how currency fluctuations would impact budgeting, how much power must be reliably delivered to the grid and who will buy the power at what rate to solidify the project's long-term value to investors.
A rendering of a proposed new international airport in Manila, the Philippines
“Good risk allocation is critical to attracting the private sector to these projects,” he says. “Once the first deal closes, the next ones are easier.” For projects with a murkier ROI, such as rail infrastructure initiatives, governments may need to find additional sources of revenue to attract private partners. Offering perks like real estate rights along rail lines or commercial space at rail stations can help sweeten the pot, Mr. Jett says.
“That can change the financial picture considerably. The government gets a connected country and it doesn't have to spend as much money to incentivize private investors.”
Beyond offering incentives, governments must build confidence that projects will deliver their projected value, says Mohammad Abu Rashed, PPP advisor, PPP office, prime minister's office, Dhaka, Bangladesh.
“Selecting a pipeline of projects that have a clear payoff is one of the biggest challenges with promoting a sustainable PPP environment.”
—Mohammad Abu Rashed, PPP office, prime minister's office, Dhaka, Bangladesh
“Selecting a pipeline of projects that have a clear payoff is one of the biggest challenges with promoting a sustainable PPP environment,” he says.
PAYLOAD CAPACITY
Private-sector partners are also hesitant to invest in infrastructure in countries with a short PPP project résumé. They worry governments won't hold team members accountable for implementing new rules and that PPP laws are stronger on paper than in practice.
The Philippines has worked to change that perception. Since launching its PPP program in 2010, the national government has awarded 10 PPP projects collectively worth PHP189 billion. The program aims to overhaul the country's transportation infrastructure and includes road, airport and building projects.
To take these projects from conception to reality, the government created the PPP Center, which acts as the central coordinating and monitoring agency for all PPP projects, providing project advisory and facilitation services. The country has also set up formal rules for financing, risk sharing and project management. All of this has helped spur the success of the country's first PPP project: the Muntinlupa-Cavite Expressway, which was completed successfully in July 2015.
Tollbooths on the Muntinlupa-Cavite Expressway in the Philippines
That project was delivered in partnership with Ayala Corporation Infrastructure Holdings, an infrastructure development group that invested PHP2.2 billion to support the project, including a PHP902 million up-front cash payment to the government. In exchange, Ayala will operate and maintain the new road for 30 years, generating a return on the investment through tolls.
The government is now bidding out 13 more projects, including airport terminal, rail, highway, prison and water infrastructure projects.
“The Philippines is taking the lead in Southeast Asia in developing successful PPP projects,” Mr. North says. “We are optimistic that more will come out of this country.”
FROM DEAL TO DELIVERABLES
Once projects are funded, project and program managers must carefully navigate varying requests coming from a range of public and private stakeholders, says Wachira Gervasio, PMP, project superintendent for Kenya Power in Nairobi, Kenya.
“Good risk allocation is critical to attracting the private sector to these projects. Once the first deal closes, the next ones are easier.”
—Alexander Nicholas Jett, Asian Development Bank, Manila, the Philippines
Conflicting pressures from key stakeholders can tempt project managers to make promises they can't deliver, like agreeing to overly aggressive timelines or unrealistic return scenarios. That may be a short-term solution, but it spells disaster in the end. “Don't rush the planning process,” Mr. Gervasio advises.
To create a plan that will deliver a viable ROI, project and program managers should identify past PPP projects that can serve as a roadmap. Reviewing lessons learned can help confirm whether the team has the skill and experience needed to identify and mitigate risks.
“You have to know what you are going to measure and how it will be measured as part of the project plan.”
—Jonathan Stevens, The World Bank, Washington, D.C., USA
Practitioners also should identify key performance indicators (KPIs) that will allow them to measure things like performance, quality and environmental impact, says Jonathan Stevens, senior technical advisor, infrastructure and environment, The World Bank, Washington, D.C., USA. “You have to know what you are going to measure and how it will be measured as part of the project plan,” he says.
And measuring success shouldn't stop at the ribbon-cutting ceremony, Mr. Jett adds. A PPP project technically continues as long as the private sector owns the concession rights, which can stretch to as many as 30 years. “A good PPP will define expectations for how the concessionaire will maintain the asset, and penalties if KPIs aren't met,” he says. “A government may need training to effectively measure KPIs and apply penalties if it is its first PPP project in a particular sector.”
Governments new to PPP projects may need outside help to ensure a comprehensive project plan is in place. That might mean bringing in experts from academia and global organizations like The World Bank or the African Development Bank to offer training and guidance on the implementation of early PPP projects. But showcasing initial successes will help emerging economies attract more private-sector partners—and make PPP projects a linchpin of future infrastructure portfolios, says Mtchera Johannes Chirwa, chief infrastructure and PPP specialist for the African Development Bank in Pretoria, South Africa.
“If we take the time to plan and manage these projects, I have no doubt they will play an important role in filling the infrastructure gap.”
4 PPPs Paving the Way
HYDERABAD METRO RAIL PROJECT
Location: Hyderabad, India
Budget: INR147 billion
PPP duration: 2012-2047 (construction phase 2012-2017)
Partners: Government of Andhra Pradesh, India and L&T Metro Rail
Description: Construction, maintenance and operation of 72-kilometer (45-mile) train system
GALEÃO–ANTONIO CARLOS JOBIM INTERNATIONAL AIRPORT EXPANSION
Location: Rio de Janeiro, Brazil
Budget: BRL2 billion
PPP duration: 2014-2039 (construction phase 2014-2016)
Partners: Brazil's National Civil Aviation Agency, Odebrecht Transport, Changi Airports International
Description: Construction of a third terminal and renovations to two existing terminals; maintenance and operation of entire airport through 2039
IMAGE COURTESY OF RIOGALEÃO
DESIGN BUILD FINANCE OPERATE (DBFO) ROADS PACKAGE 2
Location: Northern Ireland
Budget: GBP250 million
PPP duration: 2007-2041 (construction phase 2007-2011)
Partners: Northern Ireland's Department for Regional Development Roads Service and Amey Lagan Roads
Description: Construction and maintenance of 125-kilometer (78-mile) highway
SOUTH WHARF CONTAINER TERMINAL
Location: Port of Cotonou, Benin
Budget: US$610 million
PPP duration: 2009-2034 (construction phase 2009-2013)
Partners: Benin's federal government and Groupement Bollore
Description: Construction and operation of a new terminal at the port
PHOTO BY WOLFGANG KAEHLER/LIGHTROCKET VIA GETTY IMAGES
As part of the Lake Turkana Wind Project in northern Kenya, the team built a mast measuring wind direction and speed.
PHOTOS COURTESY OF LAKE TURKANA WIND POWER
The village, relocated for the wind farm project, under construction in August 2015
Kenya's PPP Power
One of the world's largest wind power projects is also a test case for a new way of building sorely needed infrastructure.
Last July, Kenya began construction on one of Africa's most promising PPP projects to date: the Lake Turkana Wind Project (LTWP). In 2013, the government secured KSH76 billion in loans to fund the €625 million project. The wind farm is slated to increase the country's electricity generation capacity by about 20 percent, adding up to 310 megawatts of clean power to the national grid. Under the PPP agreement, Kenya's largest to date, private-sector project backers will profit by selling power back to the government. It's also building 428 kilometers (266 miles) of transmission lines to link the turbine facility to the grid.
“It's the largest wind power project in Africa and the fifth largest in the world,” says Mtchera Johannes Chirwa, chief infrastructure and PPP specialist, African Development Bank, Pretoria, South Africa. “Robust project planning included studies to show its viability and benefit to the community,” Mr. Chirwa says.
Private contractors are managing construction of the wind farm, while a government agency is overseeing construction of the transmission lines. Since the project launch, the LTWP, through its subcontractors, has managed the process of hiring and training people from local communities, and offered support and feedback to project leaders on the government side. The effort has run smoothly from the start, says Rafael Jabba, chief portfolio officer for the African Development Bank in Nairobi, Kenya, who is a project leader on the private sector side.
“We have a close working relationship with the LTWP management team. As a result, you have very strong oversight of all the activities on the project site, to the point that we can quantify the level of interventions taking place on the critical path on any given day,” he says. “We are tracking the progress of the subcontractors very closely.”
A LONG AND WINDING ROAD
The Lake Turkana project involves more than putting wind turbines in the ground and linking them to the grid. It also requires relocating a village and building a road through Marsabit, one of the poorest counties in Kenya. To navigate stakeholder concerns, contractors have worked to engage local community leaders and secure their buy-in.
But the project team also built support for the wind farm through less traditional methods. It incorporated extra resources into the project budget to build medical dispensaries and schools, and dig bore holes along the road to bring up fresh water, which the locals use for livestock. “Lake Turkana is highly alkaline, so clean water from the bore holes is a real benefit to the community,” Mr. Jabba says.
The road phase of the project began in July and was slated to be completed in December. The turbines are scheduled to be assembled in January and installed in March.
Of course, any project can fail—a fact investors are keenly aware of. So the project has a partial risk guarantee that covers the investors. For example, if the Kenya Electricity Transmission Company Ltd. (KETRACO), a government-owned corporation created for the transmission line portion of the project, fails to meet its contractual obligations, investors can recoup a portion of their money. But everyone would rather see both sides of the project—the wind farm and transmission lines—successfully delivered. To that end, Mr. Jabba tracks progress with the government team managing the transmission line project for KETRACO. He only offers project management advice if asked.
“The president of Kenya has been to the project site, and he's made it clear how important this project is to the country. That support has filtered down to the community and has helped the project to progress.”
—Rafael Jabba, African Development Bank, Nairobi, Kenya
“They have retained strong project management expertise,” he says, “so we are confident in their ability to succeed.”
There is a significant obstacle to success, however: The people who own the land in the village that needs to be relocated are not accepting the purchase price offered to them. Because KETRACO couldn't purchase the land until after the PPP deal was signed, the project team is in a difficult position. “Some villagers in the town believe that if they protest, they will get more money.”
Mr. Jabba is concerned about the situation but must tread carefully. “If we push too hard and the deal falls through, the Kenyan government could say we interfered,” Mr. Jabba says. On the flip side, if nothing gets resolved, the military could be brought in to intimidate landowners, which could destroy community support for the project, he says. “It would be much better to pay a few dollars more to keep the project going without conflict.”
Mr. Jabba believes local leaders will eventually get the dissidents on board and that both projects will remain on track, thanks to the unwavering support of the government.
“The president of Kenya has been to the project site, and he's made it clear how important this project is to the country,” he says. “That support has filtered down to the community and has helped the project to progress.” PM
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