Three Examples of Public-Private Partnerships in Health Care for Latin America and the Caribbean
Public-Private Partnerships (PPPs) are a suitable option for increasing private contribution to improving health care in Latin America and the Caribbean. Three notable cases implemented in Spain and Uruguay demonstrate this.
Better PPPs: Are today’s PPP models more sustainable?
There is a renewed interest for Public Private Partnerships (PPPs) in the water and sanitation (W&S) sector in the Latin American and Caribbean Region, proof being their increased number.
Solar energy: The revolution spurring development in Honduras
When Invema plant, the main plastic recycler in Honduras starts operating, a success formula resonates. It is one of the commercial companies that took advantage of the photovoltaic energy boom in the country. Its case demonstrates how the private sector’s investment in solar energy can facilitate greater economic and sustainable development for the country. Six years ago, the executives of the firm decided to install solar panels in the company, so it could generate its own power. This initiative promised a 20% reduction in energy consumption as well as a significant reduction in greenhouse gases emissions of polluting gases. And so it was. Today, Invema obtains energy savings up to 30% in electricity and reinvests in the focus of its business, recycling, so much so that it is now manufacturing the bottles that Coca-Cola uses in Central America. “We are very proud, because thanks to the solar panels, IDB Invest’s doors/channels opened up and allowed us to make the investments we dreamed,” says George Gatlin, the manager of Invema, which is located in the northern city of San Pedro Sula. Invema is part of many companies and private consortia that have opted for photovoltaic energy since Honduras decided to reform its electricity subsector to revert its electricity matrix from thermal to renewable. The reforms began in 2012, when generation using fossil fuels accounted for 70% compared to 30% for renewables. This thermal hegemony was reflected in increasing oil billing, carbon dioxide emissions, high tariffs up to US$0.30 per kilowatt (KW) produced, and frequent rationing. Following the reforms, led by the government with the advisory services of the Inter-American Development Bank (IDB), there was an upsurge in renewable energy until the energy matrix was completely reversed compared to 2012. The latest report from the Central Bank of Honduras (BCH) in 2018 records a 75% electricity generation based on renewable sources, and an 11% share of photovoltaic energy. This percentage translated into 433 megawatts (MW) of installed capacity at the end of 2016, placing Honduras in the lead of solar generation in Central America and third in Latin America, after Chile and Mexico. “We are witnessing a revolution in the electricity sector, not just in Honduras, but worldwide, because energy storage is changing the concept, points out Carlos Jácome, IDB energy specialist who has participated in the reforms process in Honduras. “The Bank support comprises studies and soft financing. Later, the savings make it possible to improve the productivity of these companies because they can use what they no longer pay in energy to expand their businesses,” comments Jácome. Since 2012, the IDB and IDB Invest have provided technical assistance to Honduran commercial, industrial, and institutional sectors to investigate the technical and financial feasibility of photovoltaic projects. To date, 22 studies have been completed for projects ranging from 40 kilowatts (kW) to nearly 3 MW of installed capacity. Official reports indicate that interest in photovoltaic projects have increased due to a reduction in about 40% of the installation costs over the last five years. Behind this innovation there are three combined components that have resulted in a successful formula: i) the impetus of government that created favorable conditions for investment; ii) the decisions made by entrepreneurial companies; and iii) the IDB’s ability to evaluate and finance the projects. The initial investments in photovoltaic development in Honduras involved a shared risk for IDB Invest and its clients. Nonetheless, what made the difference is the technical capabilities of the Bank for evaluating and support for this type of investments. The Honduran experience encourages entrepreneurship and new markets while demonstrating that IDB Invest is the partner of choice for innovative markets. Experiences of this kind should be replicated in the region. The first photovoltaic investments began in 2015, when 388 MW were installed, followed by 45 MV more in 2016, according to reports from the National Electrical Energy Company (ENEE). According to the ENEE, the Honduran commercial and industrial solar energy market is quite different from what it was in 2012, starting with changes in electricity billing (between 11 and 18 cents per kW per hour), installation costs for panels, legal regulations, and the availability of photovoltaic manpower in the region. In addition to this, national capacities have developed with the installation and administration of photovoltaic projects. “Before, if a Canadian, Spaniard or a Costa Rican person did not show up to supervise the project it didn’t move forward. Now the Hondurans themselves have been strengthening all these positions. There is a friendly environment for investment,” notes Elsia Paz, President of the Honduran Renewable Energy Association (EHER), one of the entities that emerged in the context of these reforms. Download the full story here: “Solar Energy: The Revolution Spurring Development in Honduras” Subscribe to receive more content like this! [mc4wp_form]
Brazil: Infrastructure Challenges and Opportunities
Within weeks of the Brazil Investment Forum, the development of the economy of South America’s colossus presents numerous challenges and opportunities. A major one is how to continue providing incentives for private sector investment in infrastructure to bridge the country’s funding gap. Synergies among development entities open up new and interesting opportunities for this market.
What have we learned after a decade of public-private partnerships in Latin America and the Caribbean?
Until the end of 1990, Latin America and the Caribbean was the region with the greatest proliferation of public-private partnerships (PPPs). At that point, investments plummeted, partly due to negative reactions caused by its deficient implementation. In 2005, thanks to the joint efforts of public, private sector, and multilaterals, PPPs became again a widely used tool. Driven by the fall in commodities prices, the increase of fiscal deficits, and the improved conditions for implementing PPPs, many countries established specific institutions and strengthened their regulations. As a result, investments through PPPs grew almost five times, from US$8 billion in 2005 to US$39 billion in 2015. In barely one decade, Latin America and the Caribbean has registered US$361.3 billion in investments for almost 1,000 infrastructure projects through PPPs, primarily in the energy and transport sectors. PPPs potentially can help to overcome some of the public-sector limitations but they also raise concerns. Large-scale projects involve many technical, financial, environmental, and social risks. PPPs demand greater attention to risks assignment, conflict resolution, and the analysis of “value for money.” They also require institutional development that takes time to consolidate and, when it is poorly done, can even increase costs and reduce services or its quality. Transparency is also key to mitigate the risk of corruption, which has become more visible in Latin America and the Caribbean in recent years. In this context, multilateral development banks can play a key role supporting the development of proper environments for attracting private investment, supporting independent projects preparation, and helping to bridge financing gaps. These banks, also have a potential comparative advantage: their ability to be directly involved with the public and private sectors. 10 keys for strengthening the multilaterals’ support for PPPs The Office of Evaluation and Oversight has reviewed IDB Group support for PPPs in infrastructure projects at three levels: favorable environment, project preparation and financing, besides other development banks’ experience. These banks financed a small (3%) but considerable proportion of PPP’s investment in Latin America and the Caribbean. The IDB Group provided the most financing (35%), among these entities, with 145 approved operations for US$5.8 billion between 2006 and 2015. Based on our conclusions, the Evaluation of Public-Private Partnerships in Infrastructure, published last March presents 10 recommendations: Specific diagnostics: identify and evaluate potential demand for PPPs by country, including analysis of infrastructure needs in the sector, PPPs environment, fiscal limitations and risks, and type of support needed by the governments. Priorities: include a general framework to determine which countries and sectors need support, type of support needed, and define priorities. Focal point: establish a PPP focal point with sufficient authority and resources to promote collaboration among all parties involved in the institution. Capacities: do an inventory of existing capabilities, identify what is missing, and try to attract and maintain the necessary capabilities. Incentives: reform the incentives, granting rewards when private investors’ funds are mobilized and creating incentives for collaboration. Advisory services: Analyze infrastructure projects in the pipeline, and advise countries regarding the most suitable delivery model, regardless of the sector that will originate the operation. New products: Explore the use and development of new financial and advisory products tailored to the countries’ specific needs, such as local currency financing, advisory services, specific instruments supporting subnational governments, and project preparation mechanisms. Results framework: examine the value for money of PPPs operations, the quantity and quality of the services provided, costs to the taxpayer and the user and its sustainability, in addition to evaluating whether critical environmental and social objectives have been met. Knowledge: Design a specific knowledge strategy on PPPs to systematically capture and file the results of operations and lessons learned. Lessons learned:Systematically incorporate lessons learned by your own organization and other banks on the design and implementation of new PPP operations. Many Latin American and Caribbean countries with solid capacity for implementing PPPs have an extensive list of potential projects, and practically all the larger countries have an infrastructure investment program in which PPPs play a fundamental role. Moreover, since in some of the region’s most important economies the ratio between private investment and gross domestic product (GDP) continues to be low, there is a considerable margin for new projects. The development banks are well positioned to play a fundamental role in these future PPPs, providing support to ensure their suitability in economic, environmental, and social terms, to generate favorable environments that attract private investments, and to close the financing gaps. Only if these recommendations are implemented will we be able to contribute to a wave of successful PPPs and avoid the negative reactions we have seen in the past. The IDB Group has accepted the recommendations and is ready to put them into practice. Subscribe to receive more content like this! [mc4wp_form]
New ways to increase infrastructure investment
Historically, Latin America has invested 2% to 3% of regional gross domestic product (GDP) per year in infrastructure, even though it should reach at least 5% to meet the region’s needs. This difference creates a gap so large that can only be reduced with both private and public investments participation. What progress has been made to close this gap? Colombia and Chile are the countries with the highest capacity to carry out sustainable Public Private Partnerships (PPPs) in infrastructure in the region, according to the Infrascope. Chile has a long tradition of private participation in infrastructure projects that goes back 25 years. Also, it has a sound regulatory framework supporting PPPs, a solid investment and business climate, and has developed financing instruments. Colombia also enjoys a strong regulatory framework, supported particularly by the 2012 PPP law, and the strength of the institutions in charge of developing and maintaining PPP contracts. In the past five years, Chile and Colombia have awarded 70 and 30 PPP projects, respectively. What can we learn from these countries’ experiences? Colombia and Chile are two examples for the rest of region, especially regarding its regulations and PPPs' maturity, where both countries scored first in the ranking for these two Infrascope’s assessment categories. Colombia, for example, has incorporated the lessons learned from preceding toll road concession programs in the current 4G framework, particularly in the areas of: 1) risk allocation; 2) contracts financial structuring; 3) standardization of technical studies, financial models and methodologies to value risk; 4) streamlining and standardization of contracts; and 5) improvement of bankability, through the inclusion of lenders’ step-in rights and dispute resolution provisions; among others, according to a recent report from the Inter-American Development Bank (IDB). [clickToTweet tweet="Latin America needs to invest 5% of its GDP in infrastructure per year" quote="Latin America needs to invest 5% of its gross domestic product (GDP) in infrastructure per year" theme="style1"] However, while the progress is important, there are challenges that remain, particularly, in mobilizing financing for the already awarded projects. Until now only eight projects have achieved financial closings for approximately $4 billion and there are still $10 billion remaining to finance. The lessons and challenges from the 4G road concession program in Colombia are not unique to this sector, other infrastructure areas face similar constraints when it comes to accessing financing. It is no coincidence that the Infrascope’s Financing category yields the lowest score of the five assessment criteria for the 23 countries analyzed, with an average of 45 over 100. Moreover, when it comes to developing innovative financing solutions, such as mobilizing institutional investors to close the infrastructure investment gap, even countries like Chile, still faces some challenges. In this country, the local regulations do not allow private pension funds to directly finance infrastructure projects. How to help the region bridge the infrastructure financing gap? To bridge this gap there are common features in place that are working. For example, countries like Brazil, Chile and Peru, that are ranked the highest in the Infrascope’s financing category, share the common feature of having some of the most developed capital markets in the region, with freely traded local-currency bonds from public and private issuers, as well as low sovereign risk. Another example is Colombia and its work to address this gap through institutions like the Financiera de Desarrollo Nacional (FDN). This entity develops innovative financial products to reduce the financing costs for the projects and to facilitate access to finance and to capital markets, through credit guarantees and senior and subordinated debt with long tenors. Recently, the FDN launched a new product consisting of local currency loans to attract international investors that can provide guarantees and take the credit risk in the exposures but prefer to avoid the exchange rate risk. [clickToTweet tweet="Issuing impact development bonds and green bonds is key to increase infrastructure investments" quote="Issuing impact development bonds and green bonds is key to increase infrastructure investments" theme="style1"] The lessons learned so far highlight areas that need to advance such as: 1) opening up the markets to local institutional lenders (i.e. private pension funds and insurance companies); 2) issuing impact development bonds and green bonds; 3) promoting access to project development funds; and 4) facilitating innovation with more sophisticated products in the financial sector and capital markets. The debentures guarantee of Santa Vittoria do Palmar in Brazil and the B-bond for Campo Palomas in Uruguay, both structured by IDB Invest (formerly known as Inter-American Investment Corporation) show that the role of the private sector arms of multilateral development banks continues to be very relevant. These projects underscore the value of delivering innovative financing solutions and partnering with key public and private stakeholders to close the infrastructure financing gap in the region. Subscribe to receive more content like this! [mc4wp_form]