PPP’S FOR INFRASTRUCTURE FINANCING IN THE MENA REGION Istanbul, 8 November 2006 Jón 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 Cost of Capital Risk Transfer Budget Treatment

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

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 outweighing higher cost of capital

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

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 ! –

Budget Treatment How to assess PPP’s vs. traditional procurement –Up-front funding vs. annual –“Locking-in” annual payments for 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 –

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