The Civil Engineering Contractor February 2019 | Page 37

THOUGHT LEADERS
In response, an action plan has been
developed by the Blended Finance
Taskforce, a group of leaders from
the private sector, governments,
multilateral institutions, and NGOs.
It was formed at a meeting of the
International Finance Corporation
(IFC) last year, where task force
members and others discussed barriers
to scaling blended finance and how to
address some of those challenges. In
a media release, the task force states,
“It has now developed a coordinated
plan of action to increase mainstream
private investment for the SDGs”.
The Programme contains eight
initiatives which aim to unlock trillions of
dollars of private capital for the SDGs by
2030. It is championed by leaders from
across the investment and development
finance community, including HSBC,
Credit Suisse, Aviva, Investec, Allianz, the
IFC, and EBRD. Its blended finance action
plan calls on multilateral development
banks to step up their efforts to leverage
private capital.
The Blended Finance press release goes
on to state: “Investment in economic,
social, and natural infrastructure (which
is climate resilient and sustainable) is
arguably the single best way to achieve the
SDGs. The lion’s share of this investment
is needed in developing countries. The
good news is that investing in resilient
infrastructure also makes business sense
for investors, who can benefit from
greater diversification and higher yields
relative to other asset classes. Estimates
suggest that the SDGs could translate into
a USD12-trillion economic opportunity
for the private sector.”
However, the European Network on
Debt and Development claims that the
World Bank Group, which provides loans
around the world for capital projects, is not
addressing concerns over PPPs. It published
an open letter, with 84 signatories from
across three continents, addressed to World
Bank executive directors, suggesting that
the bank has continued to “ignore evidence
of [PPP] failures globally”.
Eurodad, a network of 49 NGOs from
19 European countries, released a letter
ahead of the World Bank meetings that
states: “Our combined evidence shows that
the experience of PPPs has been negative,
www.civilsonline.co.za
If the model is improved, PPPs could unleash Africa’s infrastructure roll-out.
and few PPPs have delivered results in the
public interest. Proponents of PPPs argue
that the private sector can deliver high-
quality investments in infrastructure and
reduce the need for the state to raise funds
upfront. However, the evidence shows that
PPPs can often be expensive and risky for
the public purse.”
That risk includes higher costs
associated with PPPs. For instance,
the Bretton Woods Project cites that
“development, bidding, and ongoing
costs in PPP projects are likely
to be greater than for traditional
government procurement processes”
and that the “private sector will do
what it is paid to do and no more than
that”, thereby putting into question
the extent to which governments
could count on the willingness of
its private sector partners to look
beyond its profit motive to act in
support of developmental outcomes.
Pros and cons of PPPs
Notwithstanding all these concerns,
Subramoney says a well-structured PPP
has a place in the mix of capital required
to build South Africa’s infrastructure.
Well-designed PPP transactions
have delivered quality infrastructure
and services, often at lower cost, by
employing private sector financing,
technical know-how, and management
expertise — but only provided there is
increased assurance that the choice of
the PPP option is the one that provides
most value for money.
Reasons infrastructure development
typically becomes problematic:
• 
Poor construction quality —
through contractors trying to deliver
infrastructure at the lowest cost
without consideration for future
liabilities such as maintenance.
• 
Costly and inefficient services —
following weak or inappropriate
accountability that fails to incentivise
quality improvement and cost control.
• Deteriorating assets — resulting from
short-sighted cuts in maintenance
budgets that have no immediate
visible effects, but exponentially
increase costs down the line.
Involving the private sector through PPPs
can address some of these problems by
incentivising long-term planning:
• 
Private investors are generally well
placed to manage operational and
construction risks and to attract more
users and generate additional cash
flows by improving service quality.
• 
By bundling the construction
and operation components of an
infrastructure project, PPPs can
allocate sufficient resources to
construction and maintenance,
reflecting the fact that their
remuneration is tied to asset
performance over its lifetime.
There are reasons why PPPs raise
concerns:
• Complexity — PPP projects are
typically complex and require skills
for negotiating and monitoring
contracts that may not be readily
available to governments.
• 
Rigidity — PPP contracts
necessarily involve long-term
obligations that government has
to commit to over many years.
• To make PPPs viable, governments
may have to make long-term
budgetary commitments and
provide guarantees that generate
substantial contingent liabilities.
• 
In user-pays PPP contracts,
especially roads, the poor may
be excluded from basic services
because of unaffordable tariffs.
• Without sufficient competition,
private involvement is unlikely
to achieve the expected value
for money. nn
CEC February 2019 | 35
Blended Finance Taskforce