Public – private partnerships could be the region’s future

For some the partnership between the public and the private sector is the tool to kick start growth in a sluggish economy. For others it is the only option available to fund large infrastructure projects in the face of depleted government funds. An infrastructure summit, hosted by KPMG in Miami last year, assembled political and business leaders from the Caribbean and beyond to debate the pros and cons of PPPs.

Public private partnerships, or the use by governments of the private sector to fund and execute large infrastructure projects, in areas as diverse healthcare, housing, water, energy, manufacturing and tourism has climbed to the top of the agenda of many Caribbean countries as a result of increasingly strained government finances, according to the KPMG report ‘Perspective on KPMG’s Infrastructure Summit: An Island Perspective of a Global Challenge’.

“While varying strategies have emerged, such as increasing taxes on the local population, for some, there is little room for future debt. With some island jurisdictions having a debt to GDP ratio over 50 per cent, the question remains how much additional debt can be sustained by these islands? Taking these facts into consideration, island governments will therefore have to consider alternative means of financing infrastructure requirements and more importantly better managing the risk associated with the implementation of such large projects,” KPMG wrote.

Although Cayman’s debt to GDP ratio is below 25 per cent, as a result of massive spending on school construction, now expected to cost more than $200 million or nearly 40 per cent of government’s annual revenue, any large infrastructure project has become impossible without significant private sector involvement.

The new cruise ship pier and facilities are only one of the examples for infrastructure projects that have become too large for the government by itself to finance.

It is thus no surprise that the new Framework for Fiscal Responsibility makes explicit reference to PPPs and prescribes that for such projects government needs to “retain independent accounting, legal, financial, economic, environmental and other technical advice as appropriate to ensure robust investment appraisals are produced”.

The framework adds that PPPs, like any other form of alternative financing, can only be considered if it is underpinned by a sound appraisal of the proposed project, if the financial appraisal shows better value for money than conventionally financed alternatives, if the long term affordability case has been confirmed by independent technical experts and if an independent opinion has been obtained from a qualified accountant on the accounting treatment of the project in the Cayman Islands government accounts.

Given the high transaction costs of public private partnerships the framework limits such projects in Cayman to those that have a lifetime value of at least $15 million.

Cayman Islands Premier McKeeva Bush insisted at the KPMG Infrastructure Summit in Miami in September that PPPs can be a “win-win” for both public and private sectors, including investors, developers, service providers and other stakeholders.

Both sides in PPP have rights and responsibilities, he noted. Governments have to ensure the necessary investment into transportation infrastructure such as port facilities and road networks that can support large scale construction projects. Private investors should be able to expect a reasonable return on their investment and ongoing support from government as projects evolve, Bush said.

At the same time governments have the right to expect PPPs that create jobs locally, improve quality of life and protect the environment, Bush argued. Crucially private sector partners need to be conscious of the fiscal constraints that government operates under and deliver the desired result within the projected cost targets to government.

Bush was confident that with the right approach PPPs can contribute to the success and well-being of Cayman’s community.

Bermuda’s Premier Paula Cox was equally optimistic and encouraged island government to spur economic growth by addressing critical infrastructure needs through PPPs. These needs will only grow in the future, she said.

But critically, she said, governments will need to balance the risk and reward inherent in such projects by using funds wisely and developing strategies to address medium and long term needs.

Cox argued that governments can ensure the success of PPPs by informing the private sector of the risks, educating the community about the risks and benefits and actively involve the local community in the decision making process for all PPP projects.

As far as the execution of a PPP project is concerned the devil is in the detail. Continuity of project management staff is essential to support projects well beyond the design and construction phase, noted Mike Lloyd of Balfour Beatty Capital Inc.

Dart Realty’s Managing Director Jim Lammers emphasised the importance of “bridge builders”, participants who are able to work together through problems and issues, in the process.

A major emphasis made by panellists was that governments should focus on goals and objectives, and detailed and explicit project specifications rather than micromanage the design, development and operations.

KPMG’s James Stewart called for an overall infrastructure development plan that divides projects into three categories including must-do projects required by regulations, social infrastructure such as schools and projects that support economic growth such as roads.

Given the complexity and cost of PPPs Jamaican Minister Horace Chang said plans for individual projects will then need to be based on a detailed business plan developed by all parties.

Such a master plan will also address clear definitions of requirements, political sponsorship and an accurate assessment of the ability to pay for the development, Stewart added.

Successful planning in turn should be based on proven practices including “involving stakeholders as soon as possible, managing costs by breaking large complex tasks into smaller, more manageable activities and operating according to a well-defined master plan”, KPMG wrote.