Ideas about how to improve the financing, transparency, and efficiency in infrastructure projects implementation and management are needed. It is essential to attract investors to help to leverage the much-needed growth in this sector at good rates of returns and well-managed risks.

1. DANIEL VICTOR MELO
Infrastructure Finance & P3 Specialist
Out 2018 Daniel Melo
Is P3 the cause of the Private Investment
decline in Public Infrastructure?
Last week The Wharton School of the University of Pennsylvania edited a transcript of
Knowledge@Wharton radio show on SiriusXM, called “Why Private Investment in
Public Infrastructure Is Declining”.
(link:http://knowledge.wharton.upenn.edu/article/private-investment-in-public-
infrastructure/)
This transcript criticizes the role of P3s with tenuous arguments and little foundation
and tries to show a decline in infrastructure investment without a deeper analysis of
causes. Below are my considerations and counterarguments.
 Saying that “The basic reason you do a public-private partnership is that the
government doesn’t have the resources to build whatever it is you want to build”
it is an extremely simplistic and derogatory statement. The basic reason why a
project is procured as P3 is due to its ability to deliver greater Value for Money
(VfM) than other procurement methods. The P3 involves a) risks transfer to the
party that best knows how to manage them (mostly the private partner), b)
private equity participation and c) private companies responsibles for the
operation and maintenance with performance requieres. If a project is bad, that
is, it does not deliver value for money, it will be bad in any form of procurement.
P3 is a procurement method, and cannot be condemned for its misuse. It is like
saying that a tool does not work, when in fact it is the user who does not know
what this tool is for.

2. DANIEL VICTOR MELO
Infrastructure Finance & P3 Specialist
 “People who believe in public infrastructure should really take a close look at
Southern Europe and why they got into trouble.” As in all orders of life, there
are cases of success and failure. What happened in Southern Europe (not in all
the projects how is suggested here) is the opposed to what happens in Australia,
New Zealand, Canada, and Great Britain, where there are P3 projects that work
very well. In South America, Chile's road concessions are another example that
works well. In the US, HOT lines in Virginia
(http://www.p3virginia.org/categories/completed-p3-projects/) are also a
solution that today work fine for both the public and the private sector.
 “Private companies are increasingly less interested in investing in these types of
ventures”. I would say that private companies that invest in Infrastructure are
extremely limited in their capacity to invest. Those who do not understand why
private companies invest less in infrastructure despite the available capital,
citing the lack of attractiveness, do not understand the industry and who invests
in Infrastructure.
Private participation in infrastructure projects is materialized through the figure
of P3. For greenfield and brownfield projects with a certain degree of investment
in updating / increasing infrastructure facilities, the only players that accept to
invest in these projects are those who understand the risks in the construction
phase, that is, the Sponsors, mostly (almost exclusively) construction companies.
If we consider the security package total amount represented by guarantees and
equities that the Sponsors must place to materialize the universe of potential
good infrastructure projects during the construction phase, and we take only
construction companies Corporate Balances to back this total amount, we will
see that there is no capacity for backing the whole amount needed in working
capital loans, bridge loans, insurances and equity for this universe of projects.
There are not non-recourse Project Finance for the construction phase, on the
contrary, we see heavy security packages for infrastructure projects backed
mostly by Construction Companies.
The investors’ money is managed by Investment Funds. Very few investment
funds understand the construction risks, and worse, most of them put in very
little effort to understand them. The majority of Investment Funds are interested
in cash flow after completion, leaving to the Sponsors the heavy burden of

3. DANIEL VICTOR MELO
Infrastructure Finance & P3 Specialist
covering all the security packages with their Corporate Balances, decreasing their
leverage capacity for new projects.
Let's see this example: “Bridging North America (BNA), a consortium comprised
of Fluor, Aecon, and ACS Group, through its affiliates ACS Infrastructure
(Iridium) and Dragados, has closed financing for the Gordie Howe International
Bridge project, valued at over CAD3.8 billion (US$2.94 billion). The consortium
has secured short-term financing to cover the construction period including a
bank loan syndicated by five institutions: RBC, Desjardins du Quebec, TD Bank,
Mizuho, and HSBC. The financial close also entails the injection of CAD93
million (US$72 million) of private equity by the consortium members at the end
of the construction period. Until then, this finance is guaranteed through letters
of credit. Fluor, Aecon, and ACS each hold 40%-20%-40% equity interests in the
consortium.” (http://www.infrapppworld.com/news/megaproject-1341-us-3-
billion-canada-usa-bridge-ppp-reaches-financial-close )
As we can see, the burden of Sponsor’s Corporate Guarantees (all construction
companies) is extremely high, and no Investment Funds are participating in this
phase of the project.
But Investments Funds are not the only ones that do not understand
construction phase risks, Banks are in the same position. Everything has to be
backed with Sponsors Corporate Guarantees (Corporate Balance Sheet)
decreasing leverage capacity for new projects.
FIRST PROPOSAL: I perfectly know that risks have to be managed by the part
that knows them better, but what would happen if the Investment Funds and the
Banks incorporated professional construction risk specialists? Engineering areas
acting in the Funds and the Banks, analyzing and quantifying risks during the
construction phase in order to revisit the amount to be backed with Corporate
Guarantees. I personally worked on some projects where the Bank agreed to
reduce its Corporate Guarantees demands after understanding that certain risks
were limited and easily manageable due to the very nature of the project.
 In addition to trying to find a solution increasing the Investment Funds
participation and reducing the Project Sponsors Corporate Guarantees burden
required by Banks, through a better understanding of construction risks
(incorporating work teams staff who understand and know how to quantify

4. DANIEL VICTOR MELO
Infrastructure Finance & P3 Specialist
construction risks), we can look for a solution trying to introduce new funding
providers.
SECOND PROPOSAL: The concept of crowdfunding could be incorporated,
making it an additional Equity provider for Infrastructure Projects
(“Crowdfunding is the practice of funding a project or venture by raising
amounts of money from a large number of people”). There are numerous articles
on the internet that deal with this topic in greater depth
(https://research.arup.com/projects/crowdfunding-platforms-as-alternative-
source-of-finance-for-urban-infrastructure/). As well as small investors can
access to finance infrastructure projects through the Municipal Bonds, they
could also participate as Equity providers (obtaining better returns) through a
platform specifically created for this purpose. They would be able to buy SPV
shares (with no voting rights) using the same MuniBonds fundamentals.
It does not seem positive to attack Infrastructure and trying to discredit its role by citing
cases of failure and debunking one of the best procurement mechanisms that introduce
private participation in the development, implementation, and management of
infrastructure projects, without seeking alternative solutions to improve the sector
attractiveness.
A good P3 project starts with a viable cost-benefit analysis (CBA), which after a deeper
Value For Money (VfM) analysis, goes ahead only if it is corroborated that it will deliver
good value. Next, after defining the financial structure and the payment mechanism,
risks are allocated and mostly transferred to the private partner (contract structure),
procurement strategy is defined (Request for Qualifications and Request for Proposal),
Tender process is launched, Proposals are evaluated, the contract is awarded, and after
previous commercial and financial conditions (financial close) are fulfilled, the contract
begins to be managed by the private partner under defined performance requirements.
There is an orderly procedure that helps to take control of deviations and allows making
adjustments much more effectively than the traditional procurement method.
The fact of renegotiating 30 or 50 years tenor great magnitude projects due to not
contemplated changes that occur after 10 or 20 years of project implementation does
not seem to me to be an outrageous thing. Besides, in P3 cases there is a business model
(the one presented in the offer) that is validated by the Grantor when the contract is

5. DANIEL VICTOR MELO
Infrastructure Finance & P3 Specialist
awarded. This business model, not used in projects implemented under the traditional
method, allows us to monitor and detect the cause (s) of the difference (s) in a quick and
accurate way. In this manner, we know what needs to be adjusted, and we can develop
an action plan that allows us to know the origin, impact on the budget and adjustments
to be implemented. Additionally, we can discover if changes obey current conjectural
causes or if it is a private partner failure. (See the following article:
https://irei.com/news/p3s-high-cost-transparency/).
The debate is open, ideas about how to improve the financing, transparency, and
efficiency in infrastructure projects implementation and management are needed. It is
essential to attract investors to help to leverage the much-needed growth in this sector
at good rates of returns and well-managed risks.