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Wednesday, May 19, 2010

The Impact of the Financial Crisis on Public Private Partnerships

Filip Drapak, Senior PPP Specialist at the World Bank discussed the impact of the financial crisis on Public Private Partnerships. He recognizes the affect of PPP on public accounts. The financial community has not provided effective guidance on how to account for PPP. Nevertheless, he remains an advocate for public private partnerships

The European Union has provided some guidance on how much risk must be passed to the private sector to not show PPP investments on the government balance sheets. There is always something that doesn't go well in long-term contracts, PPPs are no different, according to Mr. Drapak.

The financial crises impact on the PPP market is not over yet, however recovery and optimism is quite strong, according to Mr. Drapak.

Unexpected stress can increase risk on PPP financing and deliverables. Mr. Drapak pointed out that financial stress can originate in unexpected places like Greece. You must expect that financial markets will undergo stress of some sort. Governance of financial markets will increase according to Mr. Drapak. He sees governance as the most important aspect to PPPs.

The financial crisis affected PPPs in liquidity, capital allocation, and the "de-risking" of projects. Debt guarantees have become a new tool in use for PPPs according to Mr. Drapak. Before the financial crisis, there was considered that large projects had less risk. But, financing issues have resulted in many smaller projects. And, some of the risks that were exclusively with the private sector before the crisis is now shared with the public sector. Mr. Drapak asks how governments can show market disruption risks on financing on the books?

The financial crisis has put pressure on PPP governance. Mr. Drapak provided PPP case studies from the UK, South Africa and Russia. The UK is the largest PPP market, according to Mr. Drapak. India has emerged as the second largest world market. The UK created a special agency called "Partnership UK". There is a plan is to make an organization, within Treasury, called "Infrastructure UK." The Treasury of the Government of South Africa is creating a separate PPP organization in order to separate delivery from regulatory interests. The Government of Russia viewed that PPPs were unnecessary because of large budget surpluses. Now, the Government is developing PPPs. Russia is managing PPPs through its own development bank.

Mr. Drapak says that governments did consider the full lifecycle of PPP projects. However, there had not been any planning associated with potential financial crisis. PPP projects today suffers from the increased cost of equity. This requires higher levels of financing by governments which tends to reduce the value for money. In some projects, the government had to replace all private financing while the private sector has the equity risk.

Mr. Drapak discussed global PPP trends showing an increase in activity in BRIC countries. He showed a case study from Canada for Partnerships BC. The organization looked at the internal rate of return while looking at the public contribution to debt. Some people wonder whether government funding is a PPP. Mr. Drapak points out that banks have very little risk in PPPs, so government funding does not change the fundamentals of PPPs. This option is really only available to governments with stable revenue.

Mr. Drapak believes that the financial crisis is improving PPP governance. He also pointed out that the analysis of PPP projects tend to look at full lifecycles unlike traditional capital financing. This often results in better long-term planning for PPPs.

Developed countries tend to leverage PPPs to improve efficiency, according to Mr. Drapak. Developing countries tend to use PPPs for other reasons. The finance crisis means that developing country governments tend to have to take more financing risk than developed country governments.

Filip Drapak has over 14 years of experience in economics, public policy, and finance. Mr. Drapak has worked as assisting professor at Prague University of Economics, as a head of financial advisory services in Societe Generale Komercni banka and as assistant director in corporate finance of PricewaterhouseCoopers During the past six years, Filip was involved in the area of public-private partnerships (PPP) and was instrumental in the creation of PPP Centrum, under the Ministry of Finance to provide technical assistance and support to public entities engaged in public private partnerships. He introduced the Czech Republic's policy for public-private partnerships and was involved in training for the public sector as well as in the formulation of legislation for privatization and concessions.

Mr. Drapak served as the CEO and Chairman of the Board of Directors of the PPP Centrum, as a non executive Chairman of electric distribution company, oil transport company and on boards of airlines company and energy engineering company.

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