Vicente Feliciano
Puerto Rico Daily Sun
Monday, January 19, 2009
Public-private partnerships (PPPs) are like a romantic relationship, happiness is achieved when both sides contribute to the common good. In order for PPPs to benefit the Island it is critical that risk is transferred from the public to the private sector. Otherwise, the only thing we have is an intermediary who increases costs and adds no value.
Two examples show the difference between a PPP beneficial for the country and another that contributes nothing.
The Teodoro Moscoso bridge (1992) was an effort in which the private sector (the company APR) assumed a series of risks. The concession was for 35 years, estimated as two for construction and 33 for operation. The private sector assumed the risk that if the project was delayed, the time to operate the bridge would contract. If the cost of the bridge also exceeded budget, the private sector assumed the risk.
Estimates were performed as to the cost of operating the bridge. The private sector assumed the risk for such costs. If the cost of maintaining and operating the bridge differed from the estimate, the private sector would either benefit or lose. Traffic flow estimates were performed. The public sector assumed the risk for the first 10 years while the private sector assumed the following 23 years.
In contrast, the building rental contracts negotiated by the State Insurance Fund are completely different schemes. In this case the developer would construct a building for the SIF for which there was a long term rental contract. The public sector guaranteed 100% occupancy rate. Therefore, the developer had zero risk of vacant space for 20 or 30 years.
In this case, there was no significant transfer of risk from the public to the private sector. The private sector obtained financing thanks to the long term rental contract from the SIF. However, the SIF would have been able to perform the same thing by itself, only cheaper.
The last $1.2 billion bond issue by the Government Development Bank is proof than even under the present fiscal crisis, the government of Puerto Rico can borrow money at a lower interest rate than just about any other private company. Therefore, if the only thing that the private sector partner offers is access to capital, thanks to a commitment by the public sector, then this type of PPP is probably a bad deal for Puerto Rico.
Again, the key is to transfer risk from the public to the private sector. The PPP deal between the Puerto Rico Electric Power Authority and AES and Eco-Electrica are examples of risk transfer. The two private companies assumed the risk of building and operating its power plants, while PREPA keeps the risk for fuel costs and adjusts the price paid to them according to the cost of fuel.
One of the problems of PPPs is how complex the negotiations are. The experience in the United Kingdom is that due to the complexity of negotiating a PPP contract, these are between two and three times more expensive to negotiate than a traditional contract. For example, structuring a bid for the construction of the Teodoro Moscoso bridge and for the government to operate it was far cheaper than negotiating the agreement finally signed with APR.
Due to the fact that PPPs have higher costs of financing and negotiation than traditional agreements, it is important that they provide benefits in terms of more efficient operation and less risk to the public sector. If they have these benefits, the agreements will be a pleasure for the Island. Otherwise, it will surely end in a contentious divorce.
Two examples show the difference between a PPP beneficial for the country and another that contributes nothing.
The Teodoro Moscoso bridge (1992) was an effort in which the private sector (the company APR) assumed a series of risks. The concession was for 35 years, estimated as two for construction and 33 for operation. The private sector assumed the risk that if the project was delayed, the time to operate the bridge would contract. If the cost of the bridge also exceeded budget, the private sector assumed the risk.
Estimates were performed as to the cost of operating the bridge. The private sector assumed the risk for such costs. If the cost of maintaining and operating the bridge differed from the estimate, the private sector would either benefit or lose. Traffic flow estimates were performed. The public sector assumed the risk for the first 10 years while the private sector assumed the following 23 years.
In contrast, the building rental contracts negotiated by the State Insurance Fund are completely different schemes. In this case the developer would construct a building for the SIF for which there was a long term rental contract. The public sector guaranteed 100% occupancy rate. Therefore, the developer had zero risk of vacant space for 20 or 30 years.
In this case, there was no significant transfer of risk from the public to the private sector. The private sector obtained financing thanks to the long term rental contract from the SIF. However, the SIF would have been able to perform the same thing by itself, only cheaper.
The last $1.2 billion bond issue by the Government Development Bank is proof than even under the present fiscal crisis, the government of Puerto Rico can borrow money at a lower interest rate than just about any other private company. Therefore, if the only thing that the private sector partner offers is access to capital, thanks to a commitment by the public sector, then this type of PPP is probably a bad deal for Puerto Rico.
Again, the key is to transfer risk from the public to the private sector. The PPP deal between the Puerto Rico Electric Power Authority and AES and Eco-Electrica are examples of risk transfer. The two private companies assumed the risk of building and operating its power plants, while PREPA keeps the risk for fuel costs and adjusts the price paid to them according to the cost of fuel.
One of the problems of PPPs is how complex the negotiations are. The experience in the United Kingdom is that due to the complexity of negotiating a PPP contract, these are between two and three times more expensive to negotiate than a traditional contract. For example, structuring a bid for the construction of the Teodoro Moscoso bridge and for the government to operate it was far cheaper than negotiating the agreement finally signed with APR.
Due to the fact that PPPs have higher costs of financing and negotiation than traditional agreements, it is important that they provide benefits in terms of more efficient operation and less risk to the public sector. If they have these benefits, the agreements will be a pleasure for the Island. Otherwise, it will surely end in a contentious divorce.
