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P3s become popular

p3_involvement

PFI Issue 500 – March 13, 2013

Speaker after speaker at the recent infrastructure conference in New York kept talking about one financing alternative, public-private partnerships (P3s). With trouble in the eurozone still restricting lending in Latin America and a persistently weak global economy, government officials and developers discussed at the conference how P3s had moved from irrelevance to prominence.

Officials from Brazil, the Dominican Republic and Peru were all promoting their projects at the CG/LA Global Infrastructure Leadership Forum. To complete the projects, the various governments need funding for these multi-million dollar enterprises, and the promising alternative was P3s.

All 400 people at the conference, which included only a few bankers, were trying to do deals on railroads, seaports, airports, roadways, solar, wind, manufacturing facilities and other areas. For example, Brazil likes P3 developments for its vast infrastructure needs. While the country is more developed than, say, Indonesia, the Brazilian government can’t afford to fund every project.

Instead, the federal, state and local governments need supplemental private funding, either through project finance loans, project bonds, equity contributions, or a combination. An obvious answer is a partnership between the government and the private sector, a P3.

French and Spanish banks, which were heavy lenders into Latin America, have reduced or eliminated their lending into the region because of their financial problems. Japanese banks, which have a lot of cash, have expanded their operations into major markets such as Brazil and Mexico, but they are not going to fund 100% of all projects.

Governments have decided to take a more aggressive approach – a partnership with the private sector. The sovereign’s involvement eliminates some of the risk, but in emerging markets such as Latin America, there is a steep learning curve.

P3s could become more popular in countries such as Brazil, but these nations have to develop more expertise, said Luis Antonio Athayde Vasconcelos, undersecretary of state for strategic investment at the Minas Gerais’ state government. “We don’t have the capacity to understand them [P3s], and we don’t have enough deal flow,” he said during the forum.

“We are learning how to raise governance and confidence to be a real partner,” Vasconcelos said. “We have to discuss with the private sector how to finance a project, and how to do it step-by-step.” He said governments had to talk to the private sector because each project was different. “I am not ashamed to say we are learning,” Vasconcelos said.

Ruth McMorrow, another forum speaker, said: “We’re procurement agnostics. P3s are a tool in the tool kit. You look at what you want.” McMorrow is executive vice-president of Parsons Enterprises of New York. She leads the engineering and construction company’s efforts in P3s, project finance and project investments.

Governments look at P3 projects in a different way, she said. “Before, if you said P3, they tuned you out. Now, they engage you. They don’t see it as a substitute. Developers want to know how you can deliver debt. What’s the cost and the risk? Most prefer not to refinance. They like long-term financing because the interest rates are so low that refinancing is a risk. What will the interest rates be five years from now?”

In general, McMorrow told PFI later in a telephone interview, P3 problems often occurred because the public sector was seen as a funding source. A new greenfield project can generate revenues, but the programme is about risk transfer. “The P3s can be sold as a panacea, but when they start doing the due diligence, they see the benefits don’t suit certain projects,” she said.

To handle P3s requires resources and skills, and in the current environment resources are scarce everywhere. “This becomes a challenge when you ask people to do P3s. It’s another full-time job, and there are only so many hours in the day,” McMorrow said.

Nevertheless, “the P3 model has much to offer”, Ivan Mattei, a Debevoise & Plimpton partner and co-head of the firm’s global infrastructure and project finance group, told PFI in a telephone interview from New York.

Douglas B Buchanan, who has just joined the firm as counsel and co-head of the firm’s global infrastructure and finance group, said during the same interview that the US State Department was helping emerging countries with P3s but emerging markets lacked the capital resources to meet all of these needs. “The P3 model is attractive because it tries to find ways to get private capital for public infrastructure projects,” he said.

“However, you can’t adopt P3 programmes in a vacuum; you need to build or increase governments’ institutional capacity to manage such programmes,” Buchanan said. For emerging nations, P3s are different from developed countries. “In the US, it’s rebuilding and replenishing. These [emerging economies] are building for the first time. They have enormous needs – roads, schools, airports,” Buchanan said.

All the asset classes are built on the P3 model, he added. These countries found it difficult to get enough capital to complete these projects, and the P3 model could help solve this problem.

Along with the increased use of P3s and the reduced use of commercial lending is the expanding of project finance bonds. “The tenor for bank financing currently available is not well suited to a 30-year concession agreement,” Buchanan said. “This is partly a hangover from 2008. We’ve seen tenors drop to seven years.”

Mattei said: “There are other factors at play as well. One is the more stringent capital rules now becoming applicable to banks, like Basel III, which necessitates more capital requirements. Another is the absence of monolines, which had wrapped long-term bank loans as well as bonds before the financial crisis. Monolines played a prominent role.”

“The one group of banks that appears willing to lend long is the Japanese banks,” Buchanan said. “They were not hit as badly as other banks during the financial crisis because they were still recovering from difficult times earlier. Hence, there appears to be long-term money available in Japan for the right kinds of projects.”

Mattei said: “There is a lot of interest in local currency project bonds in Latin America. Right now, we’re representing a concession company in Brazil seeking to put together a credit-enhanced, Real-denominated, inflation-indexed project bond. If this transaction succeeds, it could set the template for many more.”

He declined to specify anything more about the proposed Brazilian bond but whatever the situation worldwide, P3s can play an important role in getting financing and getting projects completed.
Alan Gersten
Latin America Reporter
Project Finance International
http://www.pfie.com
Reuters Professional Publishing
Thomson Reuters

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