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Monday, May 18, 2009

How has the Financial Crisis Changed the PPP Market

Filip Drapak of the World Bank says that there have always been financial crisis. The current crisis is wider reaching than those in the past. Mr. Drapak spoke about the impact on infrastructure project public private partnerships with the financial crisis at the ICGFM Spring Conference.

Infrastructure programs provide significant investment opportunities even in the financial crisis. Mr. Drapak suggests that PPP economics have changed. In particular, emerging countries are seeing a lack of funding on both the equity and debt side. There is a general lack of interest of investors and operators in PPP for infrastructure projects.

Before the financial crisis most experts did not make provisions for economic cycles. Equity bubbles are present every 13 years and last 2 1/2 years on average. Housing bubbles have larger impacts.

New debt calculations and risk management concerns can mean that many cost-benefit analysis do not show a positive value for money. Equity financing has increased as an overall percentage, creating high costs. Governments need to look at broader factors in order to better evaluate PPP projects.

The rule had been that larger projects were more attractive to the private sector. Risk and equity factors mean that projects need to be of a more modest size to gain financing.

The government of the United Kingdom has created a method to improve PPP projects called DFC (Direct Funding Competition). The French Institute for PPP is advocating flexible financing rates.

Mr. Drapak concludes that PPP economics are only temporarily jeopardized by the financial crises. He recommends that PPP is not solution in time of financial crises, and should not be leveraged to stimulate the economy.

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