Cross-border projects and the Public-Private Partnership model
Jakar - Autsho, Thrumshing La pass (Credit: Arian Zwegers, 'Jakar - Autsho, Thrumshing La pass'/Flickr licensed under CC BY 2.0) (via: bit.ly)

The DOC’s main areas of research relate to society, economics, and politics. The provision of infrastructure projects relates to all three in fundamental ways.

It is clear that infrastructure projects relate to economics and business. Airports, railways, ports, motorways, energy projects, and pipeline projects are attractive to a whole host of stakeholders: contractors; operators; goods and services suppliers; banks; and investors.

Infrastructure is a key prerequisite for sustainable economic development, being necessary for the movement of goods and people to facilitate trade and for the creation of opportunities throughout the communities in which they are based.

However, not only do infrastructure projects enable global trade, investment, and economic development, but they also have a strong social dimension. In very simple ways, infrastructure means quality of life for the people who use it. A motorway safely and quickly connects workers to their jobs; similarly, an airport allow us to travel to far-away cities and countries.

In this sense, it is clear that the delivery of infrastructure enables government to fulfil its social mandate towards citizens: when projects are resilient and inclusive, they improve living standards and provide quality and opportunities.

At present, infrastructure is needed in many ways. Firstly, it is needed where it does not exist. But existing infrastructure has also become obsolete and must be replaced, not only due to ‘age’ and ‘wear and tear’ but due to technological advancements and global changes such as moves towards ‘green’ energy.

Another such change is internationalisation. More than ever before, economies and countries need to be ‘connected’. The importance of connectivity can be seen where a strengthening of regional integration has a major impact on countries seeking new drivers of economic growth. For developed countries, creating links across borders can further enhance the potential of interlinked production networks and facilitate international trade, while allowing investments and ideas be further dispersed too.

Greater connectivity can be achieved through digitalisation. Developing physical connectivity between countries is a prerequisite for this: pipelines; transmission lines; roads; railways; fibre cables.

Governments globally have recognised the importance of this and have integrated the development of trans-border infrastructure into the United Nations 2030 Agenda for Sustainable Development:

“Goal 9. Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation”. 9.1 Develop quality, reliable, sustainable and resilient infrastructure, including regional and trans-border infrastructure, to support economic development and human well-being, with a focus on affordable and equitable access for all.”

Therefore, the need for and the importance of trans-border infrastructure is irrefutable. However, so are some critical challenges:

  • How do we go about developing such huge, international projects? What should we look out for?
  • How do we structure them to be attractive to various stakeholders?
  • And more importantly, how do we finance them?

These challenges become evident when a large-scale project like the Belt and Road initiative is discussed beyond the theoretical approach and political discourse. Even smaller cross-border projects encounter similar challenges. Inadequate regional cooperation, constrained public budgets, legal and regulatory obstacles – these are all issues which have prevented cross-border projects being developed to required levels.

Ways to overcome, surpass, and mitigate infrastructure obstacles can and should be found.

An opening consideration when approaching cross-border projects could be the through the Public-Private Partnership (PPP) model. Structuring projects using the PPP model, if done properly, helps address structuring and funding challenges.

The reason the PPP model is appropriate for cross-border projects is that governments do not have the necessary money or resources to either deliver projects publicly or to operate infrastructure later with the public sector. Many countries run a deficit in their state budgets, there are countries in economic crisis across the globe, and the public sector cannot possibly cover all the funding needed for closing the infrastructure gap.

Private money is needed from banks, equity and pension funds, contractors, and operators. This can be brought in through the PPP model. Investors seeking higher returns than government bonds can find them through PPP projects; banks can find reasonably structured projects to lend to, and infrastructure at national and transnational levels can benefit.

Mobilising private finance through Public-Private Partnerships (PPP) is at least one way forward.

The PPP model provides an innovative funding solution for infrastructure, as it is an important instrument for attracting private investment to enhance public funds. PPPs have had a successful record for several single-country projects, attracting private investment for companies, commercial banks, multilateral and development institutions such as the European Investment Bank, the European Bank for Reconstruction and Development, and the International Finance Corporation.

The typical profile – stable performance and long-term – is an attractive match for many classes of private investors. PPP projects, if structured properly, enjoy stable and predictable cash flows over periods of 20-30 years.

Using PPPs for cross-border projects can be a good idea but structuring a project – or parts of a project – as a PPP does not represent an easy solution that suddenly resolves all issues.

The model itself is complex so involving the multiple countries which would be part of a cross-border mega-project would add another layer of complexity.

Mathieu Verougstraete, in a paper published by the UN Economic and Social Commission for Asia and the Pacific (ESCAP), identified several challenges for the realisation of cross-border projects. Based on my personal experience, I would say six of these challenges are most critical and need to be addressed if cross-border projects are to be tendered and implemented successfully:

  1. The complexity of arrangements with numerous stakeholders and conflicting objectives;
  2. The fact that these mega projects are capital-intensive, so their appeal could be limited, resulting in little or no competition;
  3. Political risk in many countries multiplies potential disagreements between countries;
  4. Different regulatory regimes. Multi-county regulatory environments and multiple jurisdictions mean that the least-favourable regime determines the project risk;
  5. Land, environmental, and social issues crossing different countries, different land uses, with varying social impact;
  6. Achieving a cost-benefit balance between the countries concerned and distributing benefits as well as costs (government support) equitably.

 

Each of these challenges can be addressed through appropriately suggested policy actions:

  1. The complexity of arrangements: Cross-border projects have many parameters to be agreed upon in terms of scope, border arrangements, charges, tariffs, and tolls to be applied. Agreeing these between two or more countries can become very difficult but without these basic agreements there is no real business case to be presented for the project.
  • Establishing dedicated working groups within and between countries to develop inter-governmental agreements through mutually acceptable processes is the way to deal with this.
  • Regional institutions and platforms that support regional cooperation, develop best practice and common guidelines, and foster industry dialogue are also helpful. This exists at an international and regional level through the various committees of the UN, like the UN Economic Commission for Europe (UNECE) and the UN Economic and Social Commission for Asia and the Pacific (ESCAP), which are some of the institutions that are making progress in addressing challenges and fostering cooperation. But more regional platforms are needed in order to disseminate information, provide advice, and foster dialogue.
  • Transport infrastructure projects particularly rely on border-crossing facilities and procedures to operate efficiently. Both facilities and customs and border processes need to be reconfigured in order to remove bottlenecks and hurdles.
  1. The lack of interest in and competition for huge, capital-intensive projects: Measures to foster competition where possible & address monopolistic behaviours.
  • When there is insufficient competition, it is important for governments to know they are getting value-for-money. In such cases, industry benchmarks can be utilised to compare the offers received and support the awarding decision. This is not always easy, as adequately detailed information is generally lacking. More transparency in such deals is needed and a collection of relevant data is vital in order to enable sharing of best practice and lessons learned.
  • Where it is difficult to have ‘pure’ private investment due to lack of competition, then state-owned entities (SOEs) can be leveraged to invest in foreign assets. Chinese SOEs have shown a large appetite for investing abroad. The China Railway Construction Corporation and the China Communications Construction Company are examples of SOEs investing abroad with the support of the Chinese government and the China Development Bank, either by lending to the project or to the host government through a so-called concessional loan.
  • Also, appropriate risk allocation is required to encourage private investors. Investors will not take on unreasonable and unmanageable risks. There may be cases where the public sector needs to bear a project’s demand risk, either in full or in part, in order to make the project appealing to investors.
  1. Political risk:
  • Cross-border projects are complex and present huge challenges. Political support and commitment from the participating countries at the outset is absolutely critical. Without this support, these projects will not take off. Also, given the long-term nature of cross-border projects, which can take years to prepare for tender, political stability will also play a role, as will the need for favourable public opinion.
  • The availability of appropriate financial instruments and political risk insurance and guarantees by the Multilateral Investment Guarantee Agency (MIGA) of the World Bank, for example, can guarantee risk for investors.
  • Cross-border projects are, by nature, also tied to geopolitical interests. Selecting economically sound projects – with clear project benefits, confirmed by economic analysis – and not only ‘political or foreign policy projects’ will lead to these projects securing the necessary public support as well as interest from markets.
  1. Different regulatory regimes:
  • National PPP units with knowledge of national frameworks, laws, and polices can support cross-border projects. Countries can benefit from many examples and sample contracts available through the World Bank and the United Nations. The UN has recently formed a new working group to create a General Framework for Legal Conditions for PPPs, of which I am a member.
  • New regional regulatory mechanisms and bodies and arrangements are required to harmonise standards, agree and implement international transit agreements, and encourage a common approach to licensing and permitting.
  1. Land, environmental, and social issues:
  • Land should be secured early in the process; a great deal of land is normally required.
  • Engaging stakeholders which have established environmental and social standards helps to avoid controversy, as do clear lines of responsibility for monitoring.
  1. Achieving a cost-benefit balance:
  • Countries can have a direct stake in the project and be tied to its success. This way, they can be part of the special purpose vehicle with minority equity participation, receive revenues from it and share corresponding costs. Procurement which incorporates these principles as selection parameters is important.
  • Cross-border projects cannot normally receive support from financial mechanisms created for promoting national projects. As such, dedicated financial instruments may be needed specifically for regional and transnational projects. Such support may be in the form of technical assistance for conducting feasibility studies to support project preparation and structuring, or it can be in the form of financial instruments for project financing. The European Investment Bank and the European Bank for Reconstruction and Development are known to finance feasibility studies in their respective countries of operation. Another long-standing example of a financing instrument is the Loan Guarantee Instrument for Trans-European Transport Network Projects (LGTT) which is basically a loan guarantee for the inception phase of a project. Obviously, such instruments need to be developed within the constraints and abilities of public finances.

Our world is more connected than ever before and needs to become more so – not only through the exchange of ideas and information but also physically, through projects in transport, telecommunications, energy, and other sectors.

The PPP model can be a solution for realising cross-border projects, although significant challenges exist, but these can be mitigated through supportive policies from participating states, increased regional cooperation, and strong commitment from governments.

The six challenges discussed today – including large capital costs; political risk; the multiplicity of regulatory regimes; complex contractual and tendering arrangements; land, environmental, and social impact issues; and the equitable allocation of costs and benefits amongst countries – highlight some of the key challenges that cross-border projects have faced and are expected to face, combined with their implementation through PPP.

However, the fact remains that the PPP model is widely recognised as an effective structure to attract private funds in order to deliver projects necessary for sustainable economic development. It lends itself to being harnessed for the realisation of cross-border projects.

When structured properly, PPP projects are attractive to banks, investors, contractors, operators and at the same time they help governments fulfil their social mandate by delivering airports, ports, motorways, logistics hubs, railways, and pipelines that offer quality of life, business prospects, and economic growth.

 

 

References

Verougstraete, M. (2018). Public-Private Partnership for Cross-border Infrastructure Development. Macroeconomic Policy and Financing for Development Working Paper series, May 2018. United Nations Economic and Social Commission for Asia and the Pacific. Retrieved from https://www.unescap.org/sites/default/files/publications/WP-18-05_PPPs%20for%20Cross-border%20Infrastructure%20Dev_MV_formatted.pdf.

European Investment Bank (2008). The Loan Guarantee Instrument for Trans-European Transport Network Projects. Fact sheet. Retrieved from  http://www.eib.org/attachments/press/2008-005-fact_sheet_en.pdf.

Kwame Sundaram, J., Chowdhury, A., Sharma, K., and Platz, D. (2016). Public-Private Partnerships and the 2030 Agenda for Sustainable Development: Fit for purpose? UN DESA Working Paper, 148. Retrieved from http://www.un.org/esa/desa/papers/2016/wp148_2016.pdf.