The Impact of the Financial Crisis on Public Private Partnerships Filip Drapak, Senior PPP Specialist, World Bank Public Private Partnerships have been an innovative technique to fund large government projects. How the financial crisis has changed this approach will be the subject of this discussion.

1. PPP and Financial crises 2008-2010 World Bank Institute May 20 10 Filip Drapak

6. Policy and Governance implications: introducing DFC  As one of potential policy measures to improve the financing of PPP projects UK government used so called DFC (Debt Funding Competition) What is a DFC? A DFC is an initiative that has been employed in the UK a number of times since 2000 and has been championed by the UK HM Treasury as a mechanism for government to induce competition and thereby obtain more favorable debt funding terms. When using a DFC, government selects a preferred bidder and that preferred bidder, in consultation with government, then goes to the debt market seeking the best price for the debt funding for the project. The objective for the UK government was to increase the competitiveness of the lending market with a view to reducing the overall cost of the project.1 We are now in a very different market where the primary focus of the DFC would be to source sufficient debt funders willing to lend to the project. David Lester and Chris Keane, 2009

7. How to mitigate the impact of the financial crisis on PPPs2009 The French Institute for PPP (IGD - Institute de la Gestion Déléguée) released in November its proposals to mitigate the impact of the financial crisis on PPPs in France. IGD suggests to address the issue of lack of liquidity through the delinking of the duration of contracts and the duration of loans that would allow the short-term financing of projects and its long-term refinancing when market conditions will be more favorable, and the creation of a special public vehicle that would be entitled to collect and provide long-term resources to support banks activities. IGD also proposes to reduce the impact on costs through a special state warranty on local authorities’ projects, and calls for a broader public support through investment subsidies when construction periods are important. Pierre Van de Vyver, 2009 Policy and Governance implications: introducing new institutions and guarantee support mechanisms  The solutions often suggest new institutions, from US discussion regarding the Infrastructure bank, ideas of setting up national guarantee instruments to the discussion on a new role of multilateral and development institutions.

11. Governance: the UK case There are two important policy measures stipulated by financial crises: recent establishment of TIFU and planned set up of Infrastructure UK within UK Treasury, which will consolidate regulatory and policy team, TIFU and PUK and exercise clear responsibility from developing and supporting delivery of an infrastructure strategy for the UK. Establishment of Infrastructure UK is however more result of long term development than impact of financial crises.

12. Governance: the SA case Financial crises and South Africa PPP Unit: The demerger of regulatory and advisory roles, greater independence on Treasury. SA context of financial crises did bring major change of government and while presidential support to PPPs remained strong, the government and line ministerial leadership in this field was very weak. Financial crises initiated some progress in terms of IPPs to respond to energy crises, set up of a hospital PPP program and strong support still for the transport related PPPs. Key driver at SA PPP governance is at the moment the separation of Advisory from Regulatory function when driving the deal flow, which is more natural development rather that financial crises impact. PPP Unit will move away from Treasury in to a new Government Component under the brand name of Partnerships SA, will be 100% government owned and will have mainly project development function. The regulatory function will be exercised by Director General NT.

13. Governance: the Russia case Very substantial impact had financial crises on Russia and its impact on PPP perception in Russia. Russian federal PPP Unit is located within Russian Development Bank the “Vnesheconombank” and led by Alexandr Bazhenov. The situation in Russia has changed dramatically. While prior financial crises Russia did look at PPPs as an important, but not essential tool, given rich surpluses in budgets, this has changed with financial crises and PPPs are now considered essential for the development. This is reflecting on status and role of PPP Centre within “Vnesheconombank”, giving the PPP unit mandates in capacity building, advisory of choice, and financing of PPPs.

16.  Implications for the VfM (a) Projects less likely to achieve VfM - Increased cost of equity - Increased role of equity and proportion of equity financing - Increased cost of debt (offset by lower interest rates?) (b) Fiscal space implications to VfM (c) Some governments more rigorous on VfM and can be more keen on litigation PPP economics have changed Ernst & Young’s P3 team in the UK infrastructure reports that the average margin for availability payment-based P3s, increased from 82bps to 94bps between May and August 2008. Volume based payment P3 projects had average margins of 155bps in August 2008, which is increase of 50bps since credit crunch. Ernst&Young’s UK infrastructure report

20. European PPP market in 2008-2009 (EPEC)

22. “ Greater emphasis also needs to be made towards the social economic benefits delivered to a country or region which could mean adopting a more visionary approach to PPP models to include agglomeration benefits. Failure to do so will mean that PPP projects may never get off the ground on a pure cost benefit basis.” EC Harris, Is PPP dead and buried? PPP economics have changed, but not the perception of the usefulness of PPPs

24. TIFU – the UK loan facility The UK , which has the largest PPP market so far, has decided to establish a The Infrastructure Finance Unit (TIFU) to lend to PFI/PPP projects to "ensure that infrastructure projects go forward as planned despite financial markets conditions and thereby support jobs and economy." This is generally a good idea, but at first it seemed that it would not be necessary. For a while, banks managed to form a club, or the European Investment Bank supported the project. However, margins continued to climb and banks could only deliver short-term financing in the form of mini-perms. For the time being, the bond market and credit risk insurance are dead, so finally TIFU found its first project to bail out in April 2009: "TIFU completed its first loan facility on 8 April 2009, providing a £120 million loan for the Greater Manchester Waste Disposal Authority’s PFI project alongside the European Investment Bank and a syndicate of commercial banks." This project was bailed out in the sense that the project could not secure financing without TIFU support, but it is a new development project so it's difficult to judge whether it meets the criteria I set out above. The second project to be bailed out was considered in May for the Wakefield waste treatment project. Finally, two years after the selection of a proffered bidder, the financing of £700 million was secured on a preliminary basis in June without TIFU assistance and is expected to close within several weeks. Bailing out PPPs might be controversial for taxpayers, but it remains the only practical option for the public sector. Hopefully, the financial crisis will subside soon and financial markets will come back to their traditionally aggressive and long term lending to PPPs.

25. Canada: Partnerships BC Funding contribution optimization Optimization based on balancing public funding contribution to achieve certain IRR