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Istanbul, Turkey 8 November 2006

PUBLIC-PRIVATE-PARTNERSHIPS FOR INFRASTRUCTURE FINANCING IN THE MENA REGION “The Political Economy of PPP’s” by Charles Kovacs, Vice Chairman Committee on Non-Member Economies BIAC – Business and Industry Advisory Committee to the OECD. Istanbul, Turkey 8 November 2006.

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Istanbul, Turkey 8 November 2006

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  1. PUBLIC-PRIVATE-PARTNERSHIPS FOR INFRASTRUCTURE FINANCINGIN THE MENA REGION“The Political Economy of PPP’s”byCharles Kovacs, Vice ChairmanCommittee on Non-Member EconomiesBIAC – Business and Industry Advisory Committee to the OECD Istanbul, Turkey 8 November 2006

  2. The Political Economy of PPP’s – The Background EUROPE’S AND AMERICA’S INFRASTRUCTURE WAS BUILT MAINLY BY PRIVATE CAPITAL • 18th CENTURY: POSTAL NETWORKS, TURNPIKES, CANALS • 19th CENTURY: RAILWAYS(PPP), UTILITIES • 20th CENTURY: TOLL ROADS, PIPELINES, • RECENTLY:PRIVATIZATION OF INFRASTRUCTURE, PRIVATE CAPITAL FOR GOVERNMENT FACILITIES OF ALL TYPES

  3. The Dynamics of PPP’s – Public Sector Issues THE NEED FOR INFRASTRUCTURE: • OBJECTIVE FACTORS: COMMUNICATIONS, ECONOMIC GROWTH, PUBLIC HEALTH • SUBJECTIVE FACTORS: PRESTIGE, POLITICS, AND PATRONAGE • PPP FOR RISK REDUCTION AND OFF BALANCE SHEET FINANCING • INABILITY TO INCREASE TAXES • CHANGES IN IDEOLOGY • POLITICIANS DESIRE TO AVOID HARD CHOICES AND/OR RESPONSIBILITY

  4. The Dynamics of PPP’s – Private Sector Issues THE PROFIT MOTIVE: • LARGE BANKS ARE NOW FOCUSED ON RETAIL RATHER THAN WHOLESALE, CORPORATE, INTERNATIONAL FINANCE • LENDERS RECEIVE A LOWER RETURN THAN BUILDERS AND/OR OPERATORS FOR ESSENTIALLY THE SAME RISK • PROJECT/INFRASTRUCTURE FINANCELESS ATTRACTIVE THAN BEFORE, ESPECIALLY IN DEVELOPING COUNTRIES

  5. The Dynamics of PPP’s – Private Sector Issues THE PROFIT MOTIVE: • INTERNAL STRUGGLES IN BANKS OVER CREDIT APPROVALS FOR PPP FINANCE • PREFERENCE FOR ADVISING AND RAISING FINANCE FROM THIRD PARTIES • CONSTRUCTION COMPANIES NEED LARGE INFRASTRUCTURE WORK ABROAD • OPERATORS (SOME GOV’T OWNED) LIKE OVERSEAS PROJECTS FOR PROFITS, VARIETY, AND AS POTENTIALPOISON PILLSAGAINST PRIVATIZATION • RISK ALLOCATION IS A MAJOR ISSUE

  6. Risks for the Public Sector • LOSS OF CONTROL (EMPLOYMENT, PATRONAGE) • LOCAL HOSTILITY TO FOREIGN PRESENCE, PRACTICIES, AND/OROWNERSHIP • HIGHER COST OF FINANCING • LACK OF REGULATORY CAPABILITY • POPULAR HOSTILITY TO PAYMENT FOR PREVIOUSLY FREE OR CHEAP INFRASTRUCTURE

  7. Advantages for the Public Sector • CERTANITY OF CONSTRUCTION AND ITS COSTS • EFFICIENT OPERATION • INCREASED AND POSITIVE ATTENTION FROM ABROAD • POSITIVE BUDGETARY IMPACT

  8. Risks for the Private Sector • CONSTRUCTION • PERFORMANCE • COMMERCIAL • POLITICAL • LEGAL • ENVIRONMENTAL

  9. Striking a Balance = Mitigating Risks • BOT TO MITIGATE NATIONALISTIC OBJECTIONS • USE OF FOREIGN LAW AND ARBITRATION • EXTENSIVE AND DETAILED CONTRACTS • INSURANCE • AVOID POLITICS OR POLITICISATION • INCLUDE INTERNATIONAL FINANCIAL INSTITUTIONS

  10. Conclusions • PPP HAS A GOOD TRACK RECORD • PPP IS A DILEMMA FOR MANY GOVERNMENTS DUE TO POLITICS AND/OR IDEOLOGY • GOVERNMENTS NEED TO UNDERSTAND PPP AND THEN DECIDE WHETHER OR NOT TO PROCEED • APPROACH/REQUIREMENTS FOR ATTRACTING CAPITAL ARE SAME AS FOR FOREIGN DIRECT INVESTMENT • IMPORTANCE OF DOCUMENTATION AND LEGAL ISSUES

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