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Analysis

Unleashing the Power of Construction Through PPPs

Mon, 11/05/2018 - 16:34

For citizens, public-private partnerships (PPPs) are often accompanied by the words “privatization” and tend to be automatically vilified. But PPPs are a huge boost to the rate of infrastructure development that couple private sector expertise and public sector risk management. “It is important to educate people about what a PPP consists of, especially when they think that it translates to privatizing the country’s assets. In reality it is simply detonating investment,” says Carlos Redondo, Country Manager Mexico of ROADIS.
According to IDB’s Evaluation of Infrastructure Public-Private Partnerships 2017, PPPs contributed only 0.4 percent to Mexico’s GDP in the last decade. Among Latin American countries, Mexico ranks second in terms of investment through PPPs but in perspective, PPPs represented only 1 percent of the region’s GDP from 2006-2015. Meanwhile, in developing Asian economies PPPs represented 1.6 percent of GDP.
This scheme is not only beneficial for the construction sector but for the government and the entire country, since it expedites the development of infrastructure projects needed to support the growing demands of cities and their inhabitants. The key lies in selecting the right projects and the most qualified players to see them through. PPPs are being used all around the world to help bridge government funding gaps and meet vital public needs. “There needs to be close coordination between the public and private sectors to identify the projects that can be developed through PPPs. We must figure out how to transform PPPs into a business incubator,” says Sergio Ramírez, Director General of Acciona Infraestructuras México.
PPPs also increase transparency within the construction sector. In Mexico, public works can be contracted through three types of processes: direct awarding, restricted invitation and public tenders. According to Manuel Roman, Partner-in-Charge at Jones Day, the PPP mechanism became a way of professionalizing the sector and allowed both national and international private entities to play a larger role in the infrastructure industry. He says the common belief is that PPPs are essentially giving money away to the private sector; on the contrary, they actually increase transparency and reduce opportunity for corruption. “This would promote stricter guidelines for anti-corruption and transparency, which are probable reasons why international players are hesitant to enter the infrastructure industry,” says Romano.
Transparency is a crucial element to improve investor and company confidence in infrastructure projects through prequalification processes for project tenders. “For some reason, in Mexico everybody is frightened by the idea of prequalification in projects. At the end of the day, establishing prequalification requirements is an excellent way to ensure the skillset of the participants entering a bid, giving a project an added value and ensuring its quality,” says Reyes Juárez, Director General and President of FOA Consulting.
According to the 2018 WB Procuring Infrastructure Public-Private Partnerships Report, Mexico’s scoring in the preparation, procurement and contract management of PPPs is above 80 on a 100-point scale. The country’s PPP Law is modeled after successful examples in other countries and the research shows its validity. The challenges arise during the implementation and the assurance of transparency during the selection of projects in order to successfully bridge the infrastructure gap. According to Ignacio García de Presno, Lead Partner of Global Infrastructure and Projects Group of KPMG, projects must be analyzed individually to know if a PPP is actually the most suitable option. “There are a number of different PPP modalities, from concessions to service agreements,” he says. “All could work, some better than others. But there is a perception that all PPPs can fix everything and the issue is that they were not designed to do everything.”
Long-term planning is another key issue that prevents PPPs from successfully delivering the benefits they could offer. The consensus among Mexico Infrastructure & Sustainability Review interviewees is that the lack of long-term planning has been the bane of infrastructure development for the country. Juárez explains that for decades, the country has developed six-year infrastructure plans that align with the term of the administration in power even though the complex nature of the industry makes it difficult for the president who develops the plan to actually finish it. “More than anything, the country needs to establish a decentralized entity to prepare long-term projects and PPPs, which at the same time will disseminate the PPP law so that local and state authorities will know how it works completely,” says Juárez.