PPP

What are the constraints of governments borrowing from within or engaging more in Public-Private Partnerships?

Borrowing from within or encouraging local investment can be a viable alternative to external borrowing. However, there are several constraints to consider:

Constraints of Borrowing from Within

1. Limited liquidity: Domestic markets may not have sufficient liquidity to support large-scale infrastructure projects.

2. Higher interest rates: Borrowing from local markets might come with higher interest rates compared to external loans. But then depositors stand to gain more interest.

3. Risk aversion: Local investors might be risk-averse, preferring shorter-term investments with lower returns rather than long-term infrastructure projects.

4. Lack of infrastructure investment instruments: Domestic markets may not have the necessary investment instruments, such as infrastructure bonds, to support large-scale projects.

5. Regulatory challenges: Local regulatory frameworks might not be conducive to infrastructure investment, with issues like land acquisition, permits, and licensing.

Constraints of Asking Billionaires to Invest

1. Risk perception: Billionaires might perceive infrastructure projects as high-risk investments, especially in developing countries.

2. Return on investment: Infrastructure projects often have long gestation periods, which might not align with the investment horizon of billionaires seeking quicker returns.

3. Lack of incentives: Without attractive incentives, such as tax breaks, subsidies, or guarantees, billionaires might not be motivated to invest in infrastructure projects.

4. Bureaucratic hurdles: Billionaires might be deterred by the complex and time-consuming process of investing in infrastructure projects, involving multiple government agencies and approvals.

5. Alignment of interests: Billionaires’ investment goals might not align with the government’s development priorities or the needs of the local community.

To overcome these constraints, governments can consider strategies like:

1. Creating specialized infrastructure investment instruments.

2. Offering attractive incentives, such as tax breaks or subsidies.

3. Streamlining regulatory processes and reducing bureaucratic hurdles.

4. Providing guarantees or credit enhancements to mitigate risk.

5. Fostering public-private partnerships (PPPs) to share risks and rewards.

By addressing these challenges, governments can tap into domestic resources and encourage local investment in infrastructure projects, reducing reliance on external borrowing.

BOT schemes are a popular public-private partnership (PPP) model, where:

1. A private company (like Julius Berger) builds a project (e.g., the Lekki-Epe Expressway).
2. The company operates the project for a specified period (e.g., 10 years), recovering its costs and earning a profit through tolls, fees, or other revenue streams such as hihway billboard advertising etc
3. After the agreed-upon period, the company transfers ownership of the project to the government (in this case, Lagos State).

BOT schemes can be beneficial for both parties:

• The government gets a much-needed infrastructure project without upfront costs.
• The private company recovers its investment and earns a profit over the operating period.

And local shareholders can also benefit from the profits generated by the project.