Page 61 - A U4SSC deliverable - Guidelines on tools and mechanisms to finance Smart Sustainable Cities projects

Risks of partnering with public entities

A private investor would usually prefer not to enter a project where control lies outside the project.
Private capital, especially when debt is involved, has financial obligations to fulfil, which could
be delayed by bureaucracy or lack of management tools within the partnering public institution.
These delays may force the private partner to incur additional costs, which would decrease
investor returns from the project. This is particularly true if the additional costs are considerable,
as is often the case in large infrastructure projects. Investors become interested in forming PPPs
when the arrangement allows them to gain certain “exceptional” working conditions for the given
development that could not be achieved without a public institution or the specific project itself.
Examples of such conditions could be: entering into a new market (by gaining ground in the
country, contacts for future developments and favourable ratings within the local financial market),
a new sector (construction companies looking for new expertise in different sectors), or when there
is potential for a framework to develop projects of the same nature to be established and therefore
create new opportunities.

Investors have limited risk tolerance and, despite risk management tools, the perception of
insufficient institutional mitigation will prevent their engagement in the project.

Recommendation: Public institutions should therefore do as much as possible to implement
mitigating measures and, similarly to the above recommendation, engage partners to manage
these types of risks. In this case – IGOs, NGOs or Embassy representatives could be most relevant
to engage.

Overall: what attracts investors?

Investors, lenders, sponsors, developers, contractors, involved parties, stakeholders and, especially,
end-users want projects to be successful and to deliver the value for the citizens they were designed
for. Success can mean different things for each stakeholder involved in a project. Most likely, the
perception of success will fall into one of three categories: “operational success”; “financial success”;
and “reputational success”.

A project is successful in its operational phase if it fulfils its purpose and provides the service that
closes the previously existing gap, for example, through the provision of previously inexistent water
and energy, more hospital beds, or bridges that reduce travel time. A project that is successful
financially provides the expected financial returns, and the repayment of the capital invested plus
the agreed interest in the agreed period of time. Financial success could also involve providing
accountable economic benefits, such as direct or indirect savings in expenditure from government
budgets, for example, reducing risks that lead to other expenses, adding value to communities
(for example, a bridge that reduce travel time and therefore pollution), decreasing expenses in
health services, and raising productivity. To this end, it is important to define the materiality of the
impacts with a series of KPIs to calculate direct and indirect returns.

U4SSC: Guidelines on tools and mechanisms to finance Smart Sustainable Cities projects 43