Financing infrastructure - using private finance

Financing infrastructure - using private finance

How can we attract more private finance for infrastructure?

Why is private sector finance required?

392 senior public sector officials across the globe were asked this question: "How concerned are you that the following factors will inhibit your organisation's ability to provide the relevant infrastructure to support the long-term growth of the economy?"

  • "Availability of financing", 69% were "very concerned"
  • "Economic conditions", 67%
  • "Governmental effectiveness", 59%
  • "Political environment", 58%
  • "Availability of relevant skills/people", 56%

When asked about what is preventing them from delivering infrastructure more effectively, 50% of the officials chose "lack of funds" (see Figure 1).

Public funds and aid money in developing countries are far from meeting development needs, even with significant new resources from China and India.

Source of statistics and background reading: KPMG International (2010) The Changing Face of Infrastructure: Public sector perspectives.

Private sector finance can fill the "funding gap", given the political will. However, there are interacting obstacles to private sector investment, including:

  • Political, economic and commercial instability, plus
  • Exposure to opaque, corrupt or inappropriate procurement practices, so
  • Poor profitability, leading to
  • Risk of not obtaining return on investment

These obstacles must be removed or minimised to attract private investment.

Use fair risk sharing and transparent governance in procurement and contracts

Key benefits of using more private finance:

  • Scale up infrastructure investment to meet needs
  • Transfer risks from the public (tax payer's money/government borrowing) to the private sector
  • Introduce more flexibility to supply chain management and business processes, to improve efficiency throughout the project whole life cycle
  • Utilise private sector expertise and innovation to achieve local capacity building by including "learning by doing" in the contract

Source of Figure 2 and more detailed reading:
Presentation by John Walker AM (2007) Private Financing of Infrastructure Assets – The Virtuous

Figure 3 PPP contract and risk sharing options (ICA, 2008).

Further reading, for action:

Degrees of engagement of private sector and risk transfer:

  1. ICA (2008) Infrastructure Public-Private Partnerships in Africa.
  2. The Water Page – PPP Debate

What is required at government level, to enable Public Private Partnerships?

  1. ICA (2008) Infrastructure Public-Private Partnerships in Africa

Selecting the right finance and risk sharing mechanism

  1. Chiu,T.Y.C. and Bosher, C.B. (date unknown, approximately 2004/05) Risk Sharing in Various Public Private Partnership Arrangements for the Provision of Water and Wastewater Services

Lessons learnt and case studies – where has PPP been successful in providing pro-poor services?

  1. DFID (2007) Literature Review on Private Sector Infrastructure Investment