One of the primary reasons for the infrastructure deficit in so many emerging countries is not a lack of capital (billions of dollars are available in private funds seeking bankable projects) but rather a lack of capacity and expertise on the part of public sector to "prepare" projects for private sector developers.

If project preparation is done poorly, host governments can quickly spoil their reputations as seekers of investment. Atanu Chakraborty, who is now the head of the ports sector in Gujarat, articulated this problem in a short paper back in 2001. He had witnessed the failure of dozens of projects in India due to a lack of public sector capacity to "prepare" projects, or, as is sometimes said in India, to "cook" projects so that they are ready for private sector bidders.

During the 1990s, the emphasis of the World Bank and other multilateral institutions was primarily focused on setting-up regulatory bodies in emerging economies and the fundamentals of good project preparation were to a large part ignored.

But the lessons of experience have shown that project preparation should not be ignored, as it turns out to be a lot of hard work and is difficult to do well. It can take hundreds of hours and millions of dollars to develop a bankable project that is ready for private sector bidders. It is necesary to priortize between a host of alternative projects, define a feasible project concept, articulate project output targets, hire technical, financial, environmental and other advisors to prepare project documents, pull together the various studies into a project information memorandum, draft a request for proposals, determine the proper bid variable(s), manage the bidding process (including chairing the bidders meeting), sign the applicable PPP agreement... and the list of tasks goes on and on!

Historically, a hodge-podge of organizations have sought to fill this void in the market, including investment banks (like UBS, Morgan Stanley, etc), advisory teams at accounting firms (like KPMG, PWC, etc), management consultants (like McKinsey, Bain, etc), technical advisory groups within multilateral institutions (like IDB, ADB, etc), project finance advisory practices within commercial banks (like Mizuho, Dexia, etc), business development groups at contractors (like Bechtel, PB, etc), and deal-flow sourcing teams at infrastructure funds (such as Macquarie, Babcock, Actis, etc).

However, a host government should not entirely abrogate its responsibility of project preparation to private sector advisors, due to the fact that only the public sector can truly understand the long-term needs of pubic citizens and the wider programmatic objectives for development in their specific city, county, or state.

Fortunately, many states have recognized that project preparation is an important and yet difficult and complex task that requires a unique blend of engineering, legal, finance, accounting, tax, environmental, social, and public policy skills and that the availability and integration of these skills is fundamental to preparing successful PPP projects! An exciting global development is that governments are now establishing PPP Agencies (or PPP Units) at record pace to harness and harmonize the many diverse skills necessary for good project preparation and to ensure that lessons learned are captured in the design of new projects!

Unpublished research now underway at the Collaboratory identifies more than 45 PPP agencies that have been formed since year 2000. The Chief of the UN Cooperation and Partnerships Section estimates that the number is probably much higher, given large numbers of PPP units "popping up like mushrooms at sub-sovereign levels".

India is one of the countries that is setting-up PPP Units (there they call them Nodal Agencies). India has also taken one additional step. The Planning Commission is attempting to streamline and standardize the project preparation services provided by the "hodge podge" of private sector organizations mentioned above. Firm's that successfully pass a pre-qualification exam are dubbed "transaction advisors" and compete for project preparation mandates. More than 10 firms are now listed on the panel of prequalified transaction advisors. This approach provides state and local urban bodies nationwide in India a consistent method for involving private sector organizations in the project preparation process. The advantages are clear: shortened negotiation time frames, clarified roles and responsibilities between public and private sector actors, and reduced transaction costs of project procurement.

Recently, the PPIAF at the World Bank published two reports that should prove useful to host governments seeking to build project preparation skills, establish PPP procurement processes, and set-up PPP coordinating agencies. The first is a study of PPP Units, released last fall, and the second is a PPP Preparation Guidebook, just released this week! Congratulations to all at PPIAF and partner institutions who were involved in producing these excellent reports! They are an important contribution!

Posted by rjorr at October 9, 2008 12:31 PM