Though PPPs can be quite complex, they can be useful in assisting governments to develop community projects which by themselves may not be financially viable. As detailed in Box 1 -1, a local government body, using a PPP structure, was able to rebuild a public market which they did not have the funds to finance.
Box 1 - 1 After a fire destroyed the public market in Mandaluyong, the Mandaluyong City Government (MCG) lacking the resources to build a new one, decided on a public private partnership to help finance and build a new market place. The private sponsor, under a Build-Transfer-Operate scheme and a 40-year concession contract, agreed to develop, finance and construct a new public market with a shopping mall above it. At a construction cost of Php 500 million the revenues from the shopping mall would service the debt that was borrowed to finance both projects. The financing structure was based on fifty percent debt and fifty percent equity. Short-term project financing was provided by local commercial banks while longer term financing was provided by the Asian Financing and Investment Corporation, a subsidiary of the Asian Development Bank. Twenty-Five percent of the equity was provided by the private sponsors, while the other twenty-five percent was made up of advances by shop keepers and stall holders. Upon completion the ownership of both the shopping mall and public market was transferred back to the MCG. Though management of the public market became the responsibility of the MCG, management of the shopping mall was left to the private sponsor, as per the concession agreement. The building of a new public market and shopping mall has benefited the community as a whole by providing long-term employment opportunities to locals, as well as improved living standards in this and neighbouring communities due to new sewage facilities. |
In the case of some countries, it is not the size of the project that is limiting, but the economical and political situation. The following project in Tajikistan (Box 1 -2) demonstrates how a PPP structure facilitated the involvement of a multilateral institution thus lowering the cost of capital and improving the risk profile of a project.
Box 1 -2 Tajikistan gained its independence from the Soviet Union in 1991. However, with a per capita income of $160, Tajikistan is the poorest country in the former Soviet Union. Due to its economic situation and a civil war, Tajikistan has been unable to meet the demand for power and has suffered from significant power shortages. Pamir Energy, a special purpose vehicle formed to undertake the project, has a 25-year concession agreement and is responsible for all existing electricity generation, transmission, and distribution facilities. As the physical assets are to remain with the government, Pamir Energy's only asset is the concession agreement. The agreement set out the legal, regulatory, technical, operational, environmental and financial framework for the project. The total cost of the project was $26 million, with 45% equity financing provided by the International Finance Corporation ($3.5 million) and the Aga Khan Fund for Economic Development ($8.2 million), the private sector sponsor. The remaining 55% was financed using debt provided by the International Finance Corporation (IFC) and the International Development Association (IDA). With the assistance, guarantees, and funding by the IDA and IFC, the project was able to secure the private sector sponsor and improve the risk profile which in turn helped lower the cost of capital. |
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7 See Appendix for a detailed profile of the project.