PPP needs a boost

In spite of new regulations governing public-private partnerships, no major breakthrough in PPP has taken place in Poland. A government platform dedicated to PPP would help.

All partners in a public-private partnership (PPP) contract must have an in-depth understanding of the projects financial structure, especially when it comes to benefits and risks that the project entails, said Piotr Bednarski, director of the Corporate Banking Department at WestLB Bank Polska, at the meeting with the AmCham Infrastructure Committee in March.

According to Mr. Bednarski, it is extremely hard to estimate the demand for new infrastructure, when long-term estimations are necessary. Hence, feasibility study of the market risks that are usually performed to assess the potential of a given project to generate cash flows to service the loans have to assume much higher sensitivity. The investors need to put more equity on board to finance the project when the market risk is involved.

As an example, Bednarski emphasized that “it is difficult to assess the growth of traffic on a toll highway”: the financial projections do not prove the project is commercially repaying loans in the period of 20 years and it is difficult to rely on that revenue when developing financing for the project.

Bednarski noted that at present long-term loans, for 25-30 years, are very difficult to obtain because they involve high liquidity risks.

For private participants in PPP projects in the existing market conditions, the best financing solutions are those that provide for significant support to be delivered by the public side. Most willingly, an availability payment scheme shall be employed, additional legal regulations that direct the demand for the infra project. Such models are standard in some sectors, like social and utilities projects.

Due to the difficulty in estimating the demand for the infrastructure product/service there is a big difference between obtaining long-term financing for a new infrastructure project. In case of the deals that finance modernization revitalization of existing infrastructure, often legal constraints prevent the public party from establishing SPV necessary for proper PPP financing. “Today, the overhaul of the Warsaw-Gdańsk rail infrastructure is financed by the railway operator PKP,” Bednarski said. “But the demand for the service supported by the railway is relatively easy to assess compared to the demand for a new toll highway, hence, a long-term investment in an existing railway line is much less risky than in a new highway.”

One way of leveraging the risk would be to have proper regulations in place to safeguard the return on the investment. This lies within the public sphere. A municipality that invests in a facility should make sure that no alternative facility is going to be built nearby for the time it takes to refinance the construction of the facility currently in the pipeline. In other words, the municipality has to have a full understanding of how a given investment project fits into future plans for development of the area.

“ In recent years public infrastructure has become a very popular target for private investors. Big money has been accumulated by such investment projects,” Bednarski said. He noted, however, that when it comes to the revenue side, this phase is still far away. “We have to wait for the natural accumulation of capital to shoulder new investment projects” . For this reason, he stressed that a proper match between private equity injection, investor loans, mezzanine and preference junior loans, and pure senior commercial lending is a fundamental issue for any PPP project. The proportions depend on market conditions and project specifics.

The Public-Private Partnership Act and the Act on Concessions for Construction Works and Services, which have been in force since early 2009, initially have raised hopes among experts for speedy implementation of major PPP projects. Yet, that has not happened.

According to Bednarski, although municipalities know that they can bear market risks in financing projects, they do not necessarily offer conditions that would be agreeable to private investors. On the other hand, some regulations governing public finances prevent municipalities from entering into projects that require availability fees.

All in all, he said that the present situation with PPP should trigger the government to consider establishing a government platform to help the private sector enter PPP contracts, along the lines of Partnerships UK (www.partnershipsuk.org.uk).

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