Is public guarantee for private debt solving the problem on PPP market?

Financial crises and following credit crunch have substantially reduced options of governments in using PPPs. The reason is very simple; there is no longer enough money available for long term private infrastructure investment. However this situation is temporary as fundamentals of PPPs and reasons for PPPs remain stronger than ever.

Governments in many countries are in the process of procurement of large PPPs and therefore in need to solve this problem. More and more, the solution is, to deliver the public sector guarantee to private sector loans on the PPP projects. The question is: is this solving the problem? There are voices that say this is no longer rational, why does public sector guarantee a loan in private sector? Is not the rational for PPPs to actually let private sector provide the financing?

Actually, and for many people surprisingly, it is rational and it makes sense. First of all public sector is not doing PPPs primarily to secure financing. If public sector is doing PPPs for the right reason than it is for the expertise, innovation and motivation that private sector can deliver. Private financing is never cheaper and was never source of the value in PPP projects.

But than when we talk about moving some key risks to private sector do we cheat? Are no risks are being moved to private sector? How will private sector pay for the failure? The answer is "priovate sector invests equity, which is at stake, private sector is always risking just equity and the debt is the risk of banks, which finance the project.

Well, during financial crises, these banks do not want to do this at all, or they require additional security in form of guarantees of their loans. The only party, which can provide such guarantee on the market today is government or credit enhancement institution. And credit enhancement institutions are no longer available as their ratings have dropped due to financial crises.

To face all these issues French government has been “allowed to guarantee loans on priority projects implemented through PPPs entered into before 31 December 2010, up to a global ceiling of €10bn.”

UK, which is the largest PPP markets so far, has decided to establish Treasury 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 scheme found first project to bail out in April 2009, when “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 “.

Spanish ministry of infrastructure initiated special financial guarantees for PPP projects (mainly for high speed train) for an estimated amount of 15.000 M€ In Australia, the main problem is the unavailability of long tenor debt, with recent projects being financed using 5-year mini-perm structures. Governments have proved willing to share in the refinancing risk at the maturity of these financings. The State Government of Victoria has underwritten the senior debt syndication of its A$5 billion desalination project, in the expectation, that the bank club supporting the winning bidder will be able to sell down to members of the bank club that supported the losing bidder.

Portuguese government is reportedly providing Euro 800 mil. guarantee to Litoral Centro highway concession and will also guarantee Pinhol Interior concession project.

Kazakhstan had used debt instruments guaranteed by government to finance PPPs already prior financial cruises for the reasons to “encourage participation of pension funds in the system”. Currently the law enables the government to provide to the concessionaire guarantees for infrastructural bonds within the limits of concession agreements, guarantees for loans attracted to finance concession projects; the transfer of exclusive rights related to running a concession object; and the provision of grants in kind in line with Republic of Kazakhstan legislation. According to the professionals participating in the PPP process, they mentioned that the government’s accounting process in the fiscal budget will include subsidies or co-funding as state investments, whereas the guarantee will be considered as public debt.

There has also been a lot of countries having or considering Guarantee funds to support PPPs. The most successful has been Korea. Korea lunched Infrastructure Credit Guarantee Fund (KICGF) to facilitate private participation in infrastructure in 1994. In response to Asian financial crises in 1998 Korea supported even further the PPP policy and one of world largest and quite successful PPP programs has been lunched as result.

According to IMF “Korean government announced a fiscal stimulus package in response to the financial crisis with more than 15 percent of the envisaged investment to be carried out through PPPs. The package is accompanied by measures to reduce financial burdens on PPPs, smooth interest rate changes, and shorten project implementation. The measures introduce: (i) lower equity capital requirements on concessionaires (5–10 percent); (ii) for large-scale projects, higher ceilings on guarantees provided by the Infrastructure Credit Guarantee Fund (50 percent); (iii) help in changing equity investors for some projects; (iv) compensation for the preparation of proposals to encourage more vigorous competition during bidding; (v) sharing of interest rate risks with concessionaires; (vi) compensation for the excess changes in base interest rates through grading of risks at the time of the concession agreement; and (vi) shorter periods for readjusting benchmark bond yields.”

As it seems Korea has been quite happy about using this type of instrument in the financially critical times.