Q&A With David Baxter, PPP Navigator and Infrastructure Specialist

ppp-infrastructureI chatted recently with David Baxter, an infrastructure specialist with significant experience in public-private partnerships. He shared some of his insights with me.

He gave me some meaningful comments regarding challenges facing governments in providing public infrastructure and how commercial interest can be created, risks shared and benefits for communities achieved.

So how would you characterise recent PPP activity in the Pacific?

Much of the activity seems to be focused on small island nations or be tied into China’s Belt and Road Initiative. Although there is great merit in building up these island nation trade capabilities through the improvement of port and airport facilities, the following questions need to be asked:

  • Are these facilities being constructed in the interest of the host nations or are they being built for geopolitical leverage?
  • Can these small island nations and even bigger nations afford these projects?
  • Are adequate feasibility studies being done on the financial and commercial viability of the projects?
  • Are full and competitive procurements being pursued?
  • Is the long-term sustainability and resilience of PPP projects being considered?

Many countries have PPP policies in place and a PPP unit located in their Treasury or Finance departments. What are some of the biggest mistakes you have seen in implementing PPP policy?

The following are the most common that I see:

  • In many instances, the PPP Units are the initiators of PPP projects when they are imposed upon unwilling line ministries which have not always been consulted on the viability or desirability of projects.
  • Often the laws and best practices that are introduced, get ahead of institutional ability to implement the laws accordingly and so delays occur as everyone tries to meet requirements imposed by regulators.
  • In some instances, the PPP Units try to be autonomous of the Treasury or the Finance Ministry (for political reasons) and this then leads to conflict between the institutions that is not healthy in the long run.
  • Often the PPP Units do not have well define mandates and this leads to confusion on whether they should provide technical support to government institutions or whether they should be the initiator of PPPs. It is important that they realize that their activates should subject to national procurement laws and they are not a law unto themselves.

What characteristics do you think differentiate infrastructure PPPs from other types of PPPs?

Primarily the greater level of due diligence that needs to be completed on private sector partners due to the long-term commitments that are required and their ability to manage risk for 30 + years. Most typical contracts rely on the design-build element. PPPs require financing and O&M on top of this which requires that the public sector must monitor the performance of its long-term partner and the performance-based parameters.

What are the most significant conditions necessary to ensure an infrastructure PPPs is successful?

Appropriate allocation of risk during the feasibility, procurement, and contract award stages and monitoring and immediate mitigation of risk when it occurs.

PPPs are often seen as a panacea for difficult national budget circumstances. What are the risks around developing PPPs with this as the prime consideration?

In many instances, PPPs should not be implemented because they do not pass the litmus tests required such as Value for Money, commercial and financial feasibility, etc. They cannot be seen as an automatic panacea, it needs to be proven that proposed projects are viable and feasible as well as sustainable to be a panacea.

What governance arrangements are more effective for infrastructure PPPs?

Governments need to be fully engaged in the management of PPP contracts. They cannot step away and only engage the private sector partner when the close-out phase is reached. Many government employees do not understand the level of commitment required from their side and the need to have a technical understanding of PPPs to ensure that they are implemented correctly.

Is a rigorous public sector comparator really that important for an infrastructure PPP?

Most certainly in countries that are still developing or which are launching their first PPP projects. As PPP national markets mature, the private sector can become a more competent partner and this leads to a more trusting and professional collaboration.

PPPs often address a particular infrastructure service or need. How effective are they in addressing asset maintenance and preservation of benefit streams from existing infrastructure?

Brownfield PPP projects can be a minefield due to many unknowns. However, experience gleaned from existing projects and infrastructure can be beneficial – so it depends. However, I believe that every PPP project is unique and thus a certain amount of innovation is necessary to improve asset preservation and to do it better than it was done in the past. The goal should always be simple – do it better each time.

PPPs are inherently commercial in nature, as risk along with return is transferred to the private sector. How can social benefits and returns be properly incorporated in the development of PPPs?

I believe that this has to do with a mature and well-defined understanding of Value for Money: adherence to people first PPPs is an option as well as incorporating the SDGs into project goals and objectives. This can help project proponents determine the non-commercial elements of risk transfer in socially beneficial projects and the possible subsidies that might need to be introduced to offset non-commercial vitality pertaining to certain risks.

If every PPP had to contain one mandated element, what would that be?

By answering the following questions –

  • Why are we doing this as a PPPs?
  • Are we confident that this should be a PPP?

Good answers require completion of due diligence, gaining political support, full stakeholder engagement and full disclosure of all information to all private sector parties equally, so that they all understand the merits of the project.

If these answers cannot be motivated and supported fully – do not do it as a PPP.

David, thanks so much for making the time available to talk with us and share these insights.

 

Payment Terms Improvement

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BHP has announced it will be reducing the amount of time it takes to pay its suppliers to thirty (30) days:

https://www.linkedin.com/pulse/resource-industry-network-welcomes-bhp-announcement-30-day-network/

This has a number of significant, positive impacts on its supply chain in the Mackay region.  The effects will be felt across hundreds of firms in the region.

Earlier this year Lytton Advisory did analysis on the impacts of extended payment terms for the Resource Industry Network, which included some modelling of different effects.  Details of the report are publicly available:

http://www.resourceindustrynetwork.org.au/announcements/report-shows-big-opportunity-being-missed-in-regional-economy-when-adopting-extended-payment-terms

 

More Infrastructure Spending Required in PNG

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Last month I introduced day two of the 2018 PNG Investment Conference in Brisbane.  This included an overview of some key PNG infrastructure sectors and an observation that the country needed to increase its infrastructure spending.

https://www.businessadvantagepng.com/six-per-cent-of-gdp-required-to-maintain-papua-new-guineas-infrastructure/

Season’s Greetings

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Wishing our clients and colleagues all the very best for Christmas.  Also, every happiness and success in the New Year.

Charles Dickens once said that there is nothing in the world so irresistibly contagious as laughter and good humour.

During this holiday season, we hope this contagion is as strong at your place as it is at ours.

PNG Snapshots

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The Lowy Institute has provided a preview of PNG through seven snapshots.  Each can be found here:

http://interactives.lowyinstitute.org/publications/PNGin2017/png-in-2017-home.html

I was pleased to make a small contribution to the overall effort.

What Do You Do?

People often ask me what do I do?  The kind of work Lytton Advisory engages in is varied, contextual and driven solely by client needs.  However, a few broad themes have emerged over the past four years.  I recently ran my CV through wordle.net to make a word picture in thirty words or less.  In this case thirty words says a thousand.

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More Infrastructure Debt Now? Yes but …

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The Economic Society of Australia recently polled a number of senior economists on its National Economic Panel, posing the following question:

“As interest rates are at low levels by historical standards, federal and state governments, despite their public debt levels, should be borrowing more than they currently are to invest in infrastructure”.

Just over 70% of respondents either agree or strongly agree, and on a confidence-weighted basis, 75% agree or strongly agree. This is a rare consensus.

But …

It is worth reading the individual responses. This strong consensus is backed by a requirement for solid cost-benefit analysis, case-by-case consideration of projects and a recognition that any infrastructure spending is not automatically a ‘good thing’.

See: http://www.monash.edu/business/economics-forum/polls/public-borrowing-for-infrastructure-investment

Do you think we should increase public debt now to invest in infrastructure?