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%)”. www.civilsonline.co.za