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The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.
By Michael Oyakojo
March 17, 2015
Reliable and effective infrastructure is essential for job-led economic growth and sustainable development. In economics, the demand for infrastructure is an example of derived demand, as economic agents (households and businesses) consume the services of and utilize infrastructure projects for the satisfaction of other economic needs. As an intermediate good, the condition of infrastructure projects (either good or bad) have direct impacts on other economic activities with multiplier effects (either positive or negative) on the overall economy.
Infrastructure investments are capital intensive in nature. Infrastructure projects are long-term assets, with future economic benefits over a long time period. The demands for efficient infrastructure continue to rise with upsurge in population and economic activities. Before the 1990s, government was primarily responsible for the design, construction, finance and maintenance of infrastructure (as a public good). However, public sector inefficiency, poor maintenance culture, weak planning and poor analysis led to the overall decline in the quality of infrastructure. Also, the increasing construction costs, the 2008 global financial crisis and the dwindling government revenue, which is grossly inadequate to maintain existing and fund or finance the expansion of new projects, necessitated the rationale for alternative and innovative strategies for infrastructure development.
The involvement of the private sectors through the public private partnerships (P3s) is one alternative and innovative strategy to fixing infrastructural gaps and reducing the risk of government failure. Private sectors players have professional expertise, superior technology, robust management skills, finance and innovation to improve the efficiency and quality of infrastructure.
In the publication: World Bank Group Support Public-Private Partnerships – Lessons from Experience in Client Countries, FY02–12, P3s “may refer to informal and short-term engagements of nongovernmental organizations, the private sector and / or government agencies that join forces for a shared objective; to more formal, but still short-term private sector engagements for the provision of specific services, for example, annual outsourcing arrangements for janitorial services for a school or operations of the school cafeteria; to more complex contractual arrangements, such as build, operate, transfer regimes, where the private sector takes on considerable risk and remains engaged long term; or to full privatizations.”
The use of P3s has increased considerably since the mid 1990s. The World Bank expatiated that P3s are in operation in over 134 countries, which represents between 15 – 20 percent of total investments in infrastructure. Annually, $79 billion were invested on infrastructure projects during 2007 – 2011. Variant P3s models are applicable depending on the nature of assets either existing (brownfield) or new (greenfield) infrastructure. In the case of existing infrastructure, the long-term lease agreement and the operation & maintenance (O&M) concession are the two common models. For new infrastructure, the following models are identified in the increasing order to complexity and responsibility to the private sector:
Presently, the class of assets under P3s arrangements include but are not limited to:
In 2014, the United States Department of Transportation reiterated that up to 2,200 private sectors managed and tolled highways and bridges were in operation in 41 states across the United States. Prominent examples of P3s arrangements include:
Similarly, infrastructure trust is another innovative strategy to attract private sector institutional investments from pension funds, insurers, private equity and other financial institutions for public infrastructure projects. In April 2012, the City of Chicago set up the Chicago Infrastructure Trust (CIT) to facilitate infrastructure development in the areas of transportation, communication and energy. Potential projects are selected through proposals initiated by the CIT and the private sector, unsolicited bids and requests generated by CIT. The private sector partner is picked through an open bid process for fairness and transparency.
The first project by the CIT was the energy retrofit of city buildings. The energy efficiency investment will reduce energy consumption by at least 10 percent. The project is financed through a 15-year energy service agreement with a private contractor with no impact on Chicago’s overall credit capacity (off-credit and off-balance sheet transaction). Similar projects include the retrofitting of Chicago’s public pools and streetlights.
In conclusion, the demand for new and efficient infrastructure will continue to grow in line with the rise in population and commercial activities. Developing innovative funding and financing strategies is highly imperative to coping with the future infrastructure demands and challenges.
Author: Michael Oyakojo is an economist, chartered accountant, structured finance, and policy analyst with cognate experience in private and public sectors on three continents. He can be reached at: [email protected].