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PPP’S FOR INFRASTRUCTURE FINANCING IN THE MENA REGION

PPP’S FOR INFRASTRUCTURE FINANCING IN THE MENA REGION. Istanbul, 8 November 2006 J ón Ragnar Blöndal. To begin…. “[I’m the one who] takes away the punch bowl when the party is warming up." William Martin, former Chairman U.S. Federal Reserve System. Agenda. Rationale for PPP’s

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PPP’S FOR INFRASTRUCTURE FINANCING IN THE MENA REGION

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  1. PPP’S FORINFRASTRUCTURE FINANCINGIN THE MENA REGION Istanbul, 8 November 2006 Jón Ragnar Blöndal

  2. To begin… “[I’m the one who] takes away the punch bowl when the party is warming up." William Martin, former Chairman U.S. Federal Reserve System

  3. Agenda Rationale for PPP’s Cost of Capital Risk Transfer Budget Treatment

  4. Rationale Increase efficiency Whole-of-life perspective (design-build-maintain) Escape from public sector “dysfunctional” behaviour But not necessarily more efficient Ease fiscal constraints But can bypass spending controls But can move public investment off-budget while government continues to bear most of the risks

  5. Cost of Capital Governments enjoy “risk-free” cost of capital It is not related to the underlying risk in individual projects but their sovereign power to tax Private sector borrowing costs will be higher By definition But it should reflect the risk of the individual project Difficult to demonstrate efficiency gains / risk transfer as outweighinghigher cost of capital

  6. Types of Risks Construction risk Late delivery, additional costs, and technical deficiency Performance risk Asset is not delivered Fails to meet specified quality, safety or certification standards Demand risk Higher or lower demand than originally expected Due to business cycle, new market trends, direct competition or technological obsolescence Financial risk Variability in interest rates and exchange rates

  7. Assessing Risk Transfer Very Difficult Legal complexity of PPP contracts Implications of re-negotiations Guarantees, explicit & implicit Providers of essential services & others “too big to fail” Very Important Determines whether PPP’s are more efficient !

  8. Budget Treatment How to assess PPP’s vs. traditional procurement Up-front funding vs. annual “Locking-in” annual payments for 20-40 years Less future flexibility re. infrastructure No agreed mechanism at present Financial reporting An analytical tool, not a decision-making vehicle Joint IASB/FASB-IPSASB work underway

  9. Conclusion • Adequate risk transfer to private sector • Ensuring value-for-money • Public Sector Capacity • Special PPP Units • Budget Implications • Transparency • Efficiency first, budget scoring second • Prevalence of PPP’s • 10% in the United Kingdom

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