Never Forget

1 April 2017 PPPs often unfairly get the blame when projects are failures. Marina Formoso asks what more can be done to prevent such instances in the future

Highways without cars, airports without planes or stadiums without players. This is the reality of many infrastructure projects all over the world that have been left abandoned because they couldn’t generate enough (or in some cases any) profit.

Perhaps the most vulnerable to ending up as so-called white elephants are those projects that were built for specific events, such as the stadiums for the football World Cup and the Olympic Games in Brazil.

One of the most recent examples of this is the Maracaná stadium (below) in Brazil, which remains closed just three years since it hosted the 2014 football World Cup – and less than a year since it was involved in the 2016 Olympic Games.

The same fortune has also befallen other World Cup stadiums such as the Arena das Dunas, Arena Pantanal and Mané Garrincha, which is currently serving as bus park for a local firm.

Meanwhile, the Olympic Village is currently waiting to be sold as a luxury complex – but with only 10% sold so far, the firms involved are now trying to negotiate with Río, so that the city would buy the Village.

While cities are used to cultural and sporting events resulting in a frenzy of building activity before a significant fall in the use of those buildings, Brazil is experiencing something exceptional. Having hosted the World Cup and the Olympic Games in the space of just two years, more than $18bn has been invested in construction projects that now remain half abandoned. Although experts still believe that these kind of events can be beneficial for cities, they warn that a good plan is needed not only for the construction and event period, but for the years after the event has left town.

“The benefits from ‘ephemeral’ infrastructure made for certain events are often not very tangible and measurable since they refer to the image of the country,” explains Ramon Espelt, infrastructure director in Deloitte Spain. “It should be incumbent upon public managers to develop these projects with a view to their future usefulness, and generate profitability that justifies the investment made, or at least minimises the total cost for the project.”

Manuel Protásio, partner at Vieira de Almeida, agrees that there may be reasonable grounds, from a public policy perspective, to build large infrastructure for one-off events.

However, he questions whether a PPP is the best approach. “PPPs are in essence financing and operation models directed at developing public infrastructure and services that are capable of generating revenue during their lifecycle so as to provide a return on investment. It seems reasonable to argue that infrastructure built for one-off sports events will not be adequate to be set up as a PPP, since usage after the event is often questionable.”

Major event venues are not alone in creating white elephants, however. Projects approved without rigorous studies to support them or which were not prepared for major changes in the economy – such as the bankrupt toll roads in Spain and Australia – and projects whose sole motivation is political, also feature heavily in the list.

“Unfortunately some projects are the result of bad political decisions that are far from a basic business analysis,” explains Xavier Junquera, partner at law firm Baker McKenzie.

Spain is also the graveyard of many major construction projects. Probably the most famous is Ciudad Real’s airport, which cost €1.1bn but hasn’t been able to hold any passengers or planes. But the list also includes hotels, luxury housing such as Intempo in Benidorm (above), roads such as the MP-203, stadiums like Madrid’s Magic Box, the Handball Arena and Valencia’s new stadium, convention centres like Galicia’s City of Culture, and experts even point Metro Line 9 in Barcelona or the Seville metro.

PPP structures are often blamed – usually unfairly – when schemes fail to make any money or attract the number of public participants originally envisaged. And while this may not be a fair criticism, there are efforts in places like Spain to try to avoid a repeat of the problems of the past. The country is currently reforming its PPP law, with a bill that seeks to remove the PPP concept and replace it with a more straightforward concession model.

The reform is highly welcomed as it has been postponed many times; however, experts believe the reform will not be able to stop ‘white elephants’.

“The regulation on public procurement under the European law has been pending since 2014, a situation that has generated great uncertainty for the economic operators,” explains Junquera. “Therefore, it was eagerly awaited, especially by the infrastructure and energy sectors.”

While the law can never guard against the public sector failing to properly manage a project, or failing to foresee major economic or demographic changes that result in a project such as a motorway suddenly no longer being required, Junquera is hopeful that Spain’s efforts will have a positive impact.

“It could facilitate entrepreneurs with new approaches to provide solutions to make these infrastructures profitable and serve the public interest for which they were built,” he says.

So what other options exist to stop white elephants? Again, planning is key. Studies such as evaluation of social profitability – rather than just the ability to make money out of them – should be an essential tool to support the selection of projects.

In Spain, though, the reality is that the choice of projects has often been the result of poorly reasoned political decisions.

“In Spain this exercise of evaluation of social profitability, and cost benefit analysis, is almost always a mere step and is not usually deep and solid and does not have to be validated by any agency independent of the state,” says Espelt.

“Experience shows that only adequate planning may prevent or minimise disuse and failure of these projects,” adds Protásio. “A positive example was the international exhibition in Lisbon in 1998 (Expo 98). It was designed to be set up in a derelict part of the city, and the government agency (and afterwards public sector company) entrusted with the organisation of the exhibition was under the obligation by law to design and get approval for new urban planning for the site, and to supervise development and marketing of the area.

“Less than 10 years later, the new neighbourhood was up and running and is now an upmarket part of the city. People generally agree that, irrespective of the specific financial return of the Expo project, the tangible as well as the diffuse benefits are unquestionable.”

Much of this, however, comes back to the abilities and skills of the public sector organisation that is procuring the project in the first place. Making sure they have the right advisers in place will not only be important for them, it can also offer an indication for a private partner that this is a project whose long-term nature has been properly considered and well thought-through.

However, it should not simply be up to the public sector. Fernando Bernard, partner at law firm Cuatrecasas, argues that the private sector should be much more critical and take more responsibility when evaluating schemes. “The private sector has played a key role in the creation of this problem, but it must be an important part of the solution.

“Sharing risk with the public sector can be the key for the private sector to support truly valid and sound projects.”

This page was last updated on:
2 May 2017.

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