P3s in Latin America hoped for but remain elusive
October 7, 2019
Public Private Partnerships are perpetually thought of as positive structures for society, but financing or regulation hurdles scupper them.
The promise of the public private partnership model often remains just that, a promise with little to show for it in actual deals, panelists agreed at the Latin America Project & Infrastructure Finance summit, citing lagging regulatory frameworks, lack of bankable deals or lack of expertise internally to get a deal off the ground.
"We need to manage people's expectations when it comes to PPPs," said Angel Cardenas, a senior executive at CAF, Development Bank of Latin America.
Public Private Partnerships are projects governed by a long-term contract between a government and a company. The company will invest in the asset made available by the government and earn a back on its investment by providing services to the government or public.
Cardenas points out that the majority of Latin American governments have PPP units, but none have a deal in play. "Just to pass a sound law for a PPP structure has become a very difficult task," he said.
Argentina, under President Mauricio Macri, was brought up as an example of a government that tried to make a push to develop the PPP model, but has been unable to capitalize on the effort. Argentina's congress looked at it like a privatization of a state asset, rather than a shared project, the panelists agreed.
"There is a great desire to do these things, but the implementation process just is not there, even though there is a great need," said Gabriela Sakamoto, a partner at the law firm Mayer Brown in Washington, DC.
"Another big issue is the fact that there are not a lot of bankable projects for investors, especially foreign ones to get involved in," Sakamoto said, adding that the focus on trying to get capital from the outside of a country often times is missing the point that there is "already capital inside the country." While it hasn't worked so far in Argentina, she points out that Peru has had some success because the state pension plan makes investments.
But even when it comes to securing a PPP, the IMF noted in a research paper published last year that strong governance structures are needed in order to manage risks and costs.
"While in the short term, PPPs may appear cheaper than traditional public investments, over time they can turn out to be more expensive and undermine fiscal sustainability, particularly when governments ignore or are unaware of their deferred costs and associated fiscal risks," the report said.
Sergio Barros, the chief financial officer of Brazil's largest private sanitation company, BRK Ambiental, noted that there is often inadequate risk allocations defined in contracts. "Often there can be inadequate guaranteed structures in place to make sure the private side of the PPP is going to have its collection guaranteed."
The eagerness of government's to dive into PPPs is palpable but, as financial consultant and managing director at Conway MacKenzie, Rob Wagstaff, is that often times there are pet government projects that simply don't make financial sense.
"One of the conundrums, touching on bankability. A lot of countries pushing P3 agendas don’t have sound financial footing themselves. It makes the risk assessment from sponsors perspective that much more difficult," Wagstaff said.