Approaches to selecting infrastructure financing options

The World Bank
Ferdinand Pecson

Photo: GotCredit| Flickr Creative Commons

Whether an infrastructure project should be pursued through government funding, official development assistance (ODA), a Public-Private Partnership (PPP), or a hybrid, is a matter of finding the solution that best meets a government’s objective given a set of constraints and the risks presented by each option.

If the objective is to build quickly, then the choice would weigh heavily on public funds. However, if the capability of a government agency to implement the project is constrained, then a PPP or ODA would be the next best options. PPPs bring in the private sector’s expertise, while ODAs harness a particular donor’s capabilities.

Another constraint could be the government’s ability to raise funds through taxes or borrowing. If this constraint exists, then a PPP could be a better option. But this has to be weighed against the government further taking on contingent liabilities.

The current hybrid model refers to construction of infrastructure using public funds or cheaper financing (local borrowings and ODA) and the subsequent operations and maintenance using a PPP.
If the objective is to deliver a public service of the required quality and lowest cost, then either the hybrid model or integrated PPP (build-operate-maintain) would be better options. The hybrid model works if the infrastructure is built and equipped to enable the delivery of the services expected from the operations and maintenance (O&M) provider. Bidding a project on the basis of lowest construction cost, without consideration for O&M, will not naturally result in such infrastructure. With airports, for example, if passenger congestion in queues at check-in counters or security checks are to be avoided, the number and arrangement of service counters have to be designed and built accordingly. Poor airport service could result in the O&M provider being replaced.

Thus, the active management of this conflict between builder and O&M provider in a hybrid model has to be planned, as soon as a decision to go hybrid is made. Conflict management, if done post-construction, could potentially entangle the government, the builder and the O&M provider in costly finger-pointing should problems in the infrastructure or in service delivery later arise. This is, in fact, already happening in some hybrid projects.

Compared with the integrated build-operate-maintain PPP model, the private partner manages this kind of conflict and assumes responsibility for the performance from construction all the way to operation and maintenance. The government only has to deal with one party. These are important considerations when choosing between hybrid and integrated PPP.

In summary, there is no default best option to selecting infrastructure financing options and the choice has to be evaluated on a case by case basis. The PPP Center had requested the National Economic and Development Authority (NEDA) to have an inter-agency group establish a methodology for choosing the best financing option. This inter-agency group has been formed and the work is ongoing.