Poor credit rating can impact on PPPs

From left: HK Yong, Advisor (Public-Private Partnerships)
of the Commonwealth Secretariat, London; Veronica
Bennett-Warmington, Senior Director Public-Private Partnerships,
Ministry of Finance and Planning (Jamaica); and Carl Howell,
Economist, Caribbean Development Bank (CDB), discussing
Accounting and Fiscal Challenges, Impact of P3.

Carl Howell, Economist at the Caribbean Development Bank (CDB), has outlined that “there is a negative correlation between countries with poor credit quality and the appetite for public – private partnerships (PPP)”.

The Economist was among top brass of business persons, political and private sector agencies throughout the region that met in Trinidad and Tobago at the 2014 CIBC FirstCaribbean Infrastructure Conference themed ‘Driving Caribbean Infrastructure Forward’. The conference is aimed at fostering a greater understanding of how the PPP model can be used throughout the region.

“There is no broad international consensus on what constitutes a public-private partnership (PPP). Broadly, PPP refers to arrangements, typically medium to long term, between the public and private sectors whereby some of the services that fall under the responsibilities of the public sector are provided by the private sector, with clear agreement on shared objectives for delivery of public infrastructure and/ or public services...” according to the World Bank.

Credit Risk

Howell explained, “The PPP is asking the private sector to take on public sector risk. It is saying provide us with capital for infrastructure and services that traditionally would have been provided by the public sector, if you give us a return we could bring upfront capital build out the infrastructure and pay over time.”

“Countries that don’t have a decent credit rating, that indicates you are a credit risk, the stronger the credit quality of a country then the more appealing or bigger appetite the private sector would have to support infrastructure development.”

“Some countries have infrastructural deficit, limited financing space you need the private sector to come on board but if you don’t have good credit quality then there is no real appetite so it does affect Barbados and all the countries out there with relatively poor credit quality, thus PPP’s at this point is not the best way to go. It is not that the private sector would not do a PPP but the risk premium that they ask the countries to provide would be higher rather than a 2 or 3 per cent loan, you could be talking upwards to 6 or 7 per cent which is expensive money so now the project benefits would be eroded because the cost of funding is expensive.”

The Economist pointed out, “The countries in the region that lead in relation to having PPP related capacity would be Jamaica, Trinidad and some extent Haiti these are countries with PPP laws already in place, where PPP’s work best would be in countries that have a strong regulatory environment, strong transparent mechanism for dealing with PPP’s.”

“Barbados is not as advanced as Jamaica and Trinidad, but the good news is that CDB is seeking to put in a unit dedicated to building out capacity across the region, across the banks borrowing member countries and Barbados will be right there to benefit from that expertise. The unit is still at conception stage, we are working with IDB, IFC and Wold Bank. We believe by year end it could be up and running.”

“In the past PPPs were seen as a project modality that could keep the debt off the balance sheet of Central Government, strictly speaking that is not the case because accounting standard in particular international public accountant standards, which states that you need to recognise a contingent liability on the books. As counties migrated using accrual accounting that meant you had to bring all of these projects to book then the debt level in countries skyrocketed.”

“We are building capacity and we need to recognise that PPP’s are really on book transaction and you should look to ensure that you have got an efficiently structured project, rather than focusing on whether it is an on balance sheet or off balance sheet transaction.” (NB)