On building bankable, green PPPs
Ferdinand A. Pecson
In his opening statement delivered during the session “Public-Private Collaboration to Pivot into a Greener World”, Undersecretary Ferdinand A. Pecson shares the initiatives the PPP Center has spearheaded to mainstream environmental and sustainability considerations in PPP infrastructure projects.
The session forms part of the BusinessWorld Insights online forum series “Green Finance for a More Sustainable Future” that was held on February 9 & 16, 2022.
Thank you for this opportunity to share what the PPP Center is doing to facilitate bankable yet green and sustainable PPP projects.
This facilitation has three aspects:
First is the assistance that the PPP Center provides to implementing agencies in project development. To this end we are fortunate to have the support of the Asian Development Bank which provided funds to the Center’s Project Development and Monitoring Facility. Qualified agencies can use the facility to procure transaction advisors for the conduct of feasibility studies, the preparation of project documents required by the approving bodies, and the drafting of the PPP contract. Among the key issues that these advisors cover are risk identification, risk allocation, and risk mitigation. And among the plans advisors prepare are those for the mitigation of the project’s environmental impacts.
Second is the formulation of enabling policies. In 2018, the PPP Center drafted and obtained approval from the PPP Governing Board, a policy entitled, “Safeguards in PPPs – Mainstreaming Environmental, Displacement, Social and Gender Concerns.” This facilitates and provides guidance in incorporating environmental and social safeguards in the PPP delivery process from project preparation to contract implementation.
Third is the appraisal of projects for bankability and sustainability. The PPP Center is one of several agencies comprising the ICC Technical Board, whose tasks are to evaluate projects and to decide whether a project merits elevation to the ICC-CC, the body that approves infrastructure projects. For its part, the PPP Center looks at whether the project’s cash flows are sufficient to service debts, at whether the project’s financial model includes the cost of risk mitigation and whether the terms of the contract include measures to mitigate the identified risks. This assures that risk mitigation, a key driver of sustainability, is integrated into the project.
However, there remains more to be done in terms of enabling green and sustainable infrastructure. Implementing agencies must strive for “greenness” and sustainability of the projects that they develop. The so-called output specifications1 for PPPs must be expanded to include green and sustainability-linked key performance indicators that the project must achieve. To this end, the government must set the minimum standards for greenness and sustainability not just for the construction phase but also for the operation and maintenance phases. In this respect, private partners will have a higher chance of success if they are responsible for all phases of the project. On the other hand, incentives must be formulated to improve the viability of green and sustainable projects. The mainstreaming of safeguards talked about in the above-mentioned document, “Safeguards in PPPs – Mainstreaming Environmental, Displacement, Social and Gender Concerns,” could be a requirement to be imposed by the approving body.
The appraisal of projects could also stand improvement. Given that green and sustainable projects typically require higher investments, but lower operating and maintenance costs compared with conventionally designed projects, the appraisal of project costs should shift to the appraisal of full life-cycle costs, particularly when comparing alternatives (e.g., choice of diesel-powered vs electricity powered trains or the choice of a project site or the choice of a mobility solution – toll road vs LRT). Furthermore, the economic benefits of greening or of making infrastructure sustainable should be included in conducting an economic analysis. Finally, contract terms and conditions set by the approving body must include achieving green and sustainability linked KPIs.
Three sectors that have tremendous impact on the country’s sustainability development goals are water, energy and solid-waste management. Making these sectors more attractive to investors require policies that would enhance competition. We also need policies that set clearer rules to guide investors such as the pending Waste to Energy bill. We also need stronger regulation to level the playing field between green and sustainable projects and less sustainable and less environmentally sound projects (e.g., investment in costly solid waste management projects would be unattractive in the absence of the enforcement of regulations on proper solid waste disposal).
In summary, what we need on the government side is a whole of government approach involving policy makers who set the rules for greenness and sustainability, project implementors who develop projects according to those rules, oversight bodies and regulators who ensure that the private partners in a PPP follow those rules.
1Output specifications for PPP projects are specifications which describe the performance requirements that the infrastructure asset must meet, but do not define how they must be met – “A new GI Hub guidance note on output specifications for PPP projects”