The Civil Engineering Contractor February 2019 | Page 36

Blended finance
preferred to PPPs
THOUGHT LEADERS
Stanley Subramoney,
CEO of private equity
firm Menston Holdings.
By Eamonn Ryan
Public Private Partnerships (PPPs) are globally a controversial source of funding for
government projects, though they are still widely seen as the only way to fund the global
USD2.5-trillion a year needed to achieve progress towards the Sustainable Development
Goals (SDGs) set forth by the United Nations. PPPs need a better design.
T
he South African government
is frequently accused of being
hesitant in entering into PPPs
at a time when the country is crying
out for infrastructure, the economy
is desperate for investment, and civil
engineering contractors in particular
are feeling immense pain, resulting in
job losses. At the recent Infrastructure
Africa conference in October, the
almost constant refrain was that there
is no shortage of money — just a
shortage of bankable projects.
Financial firms are actively promoting
expansion of the PPP programme.
What’s in it for them is a steady stream
of payments backed by governments
or user fees, such as freeway tolls.
However, according to Stanley
Subramoney, CEO of private equity
firm Menston Holdings, there are some
34 | CEC February 2019
problems with the current model of
PPPs, and he rather promotes the idea
of smart partnerships employing the
concept of ‘blended finance’.
“The problem with PPPs is that they
are skewed too much in favour of the
private sector. The private sector takes
on negligible risk, leaving the public
sector to take it all. Considering
the low-risk profile adopted by the
private sector, it nonetheless earns
the same return on investment as if it
were taking on the risk. The concept
of blended finance is the inclusion
of development finance institutions
(DFIs)
and
non-government
organisations (NGOs), which
themselves are prepared to take on the
‘first risk’ as they are developmental
in nature, leaving financial institutions
to put up the finance at a rate of
return which reflects the mitigated
risk,” says Subramoney.
The concept of blended finance is on
the agenda of recent World Bank IMF
meetings in Washington. It stems from
the fact that the negotiation of PPPs is
typically lopsided in favour of the private
sector, who are almost always more
experienced at it than the government
officials who are signing the contracts.
The latter often lack the expertise
to evaluate a complex PPP contract,
which may call for subsidies from the
host country.
PPPs are also more expensive. A
2015 review by the UK’s National
Audit office found that “the effective
interest rate of all private finance
deals (7–8%) is double that of all
government borrowing (3–4%)”.
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