Mega PPP: Can the model adapt to deliver new cities - or even rebuild a country?

From Ukraine, through Saudi Arabia, to Indonesia, PPPs are being viewed as key to building or rebuilding cities and even a whole state. But can the model - and the industry - live up to expectations?

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There is a lot of hope being pinned on the PPP concept at the moment. Whether it’s underpinning the creation of Nusantara, Indonesia’s proposed new capital city, or securing the finance to rebuild huge swathes of Ukraine when the fighting ends, politicians and experts around the world are looking to PPPs as a way of delivering these programmes at pace.

For a model originally designed to deliver discrete projects such as a single road, hospital or school building, this seems to be asking rather a lot. Experts agree that delivering these types of projects will require a radically different approach to the project-by-project form that is traditionally the hallmark of a PPP programme: as one puts it, if that approach were used by the Indonesian government, they would still be building Nusantara in 200 years’ time.

In March this year, Jan van Schoonhoven, the head of infrastructure PPPs at Project Neom - Saudi Arabia’s ambitious plan to build a new city in the desert said that innovative approaches would be required, and that this would also need people to come up with new ways to tackle the unique problems that building a settlement from scratch will create.

He called for the “doers and thinkers in the project finance world, creative minds that look at Neom from a new perspective and help develop new models”.

It is clear the old traditional approaches of PPP, such as user payments, are unlikely to be possible in the context of such schemes, where there may be no population - and there is no guarantee of when a population might materialise. So what can be done to adapt the model to bring in the investment that is needed?

“Investors would have a problem agreeing to build, for example, a rail line, when they don’t know if or when that line will have full capacity,” points out Lian Yok Tan, partner in law firm Squire Patton Boggs’ Singapore office, when considering Nusantara. “So there is a need for the government to provide guarantees.”

Her concern, however, is that the government has often been slow to grant such guarantees in the past, with no-one wanting to be responsible for having to pay out over a long period on a project that has simply not received the anticipated footfall because people have not been attracted to the area, for example.

“Inevitably, these kinds of initiatives mean you have to think of everything from a programmatic level,” says Richard Threlfall, KPMG’s global head of infrastructure, government and healthcare. This, he says, begins with a programme to prioritise projects and what is required, including considering how various different government departments can ensure they have the capability in place to deliver their part of the plans.

“A programmatic approach also allows you to think about things like using technology,” says Threlfall, who has been speaking with the Indonesian government on its plans, as well as working with the UNECE to support its work on adapting the PPP model to help reconstruct Ukraine.

“You can use digital twin technology to map out the future, and use that to then drive the prioritisation programme.”

Once this institutional experience is embedded at the government level, then it can look at beginning procurements - and again, these will need to be high-level rather than the traditional PPP procurements for single buildings or structures. So rather than looking to procure ‘a school’ or ‘a power generator’, the procurement would need to be for ‘500 schools’ or ‘a city-wide power grid system’.

Threlfall suggests there is some benefit to this approach, in that it will create its own ecosystem of investment from the infrastructure community: for example, such a large programme would make it financially viable for a builder to invest in its own modular factory so that it can quickly and efficiently churn out new schools.

That leaves the financing element. Where there is significant global political support - such as Ukraine, a ‘reconstruction bond’ could be established that would crowd in finance from a range of public and private sources.

For Neom, Saudi Arabia's vast oil wealth is expected to underpin much of the development, meaning investors are expected to be willing to get involved. In June this year, that was underlined when a group of investors (admittedly, all Saudi-based) agreed to finance a US$5.6bn PPP for worker accommodation at Neom. 

However, not everywhere can rely on global political attention or petro-dollars. Nusantara has so far been relatively low key in terms of the Indonesian government’s detailed plans for the new city - other than its location, which has come in for criticism for being on swamp land that is far more difficult to get to from the rest of Asia than current capital Jakarta.

“PPPs are definitely required because the government doesn’t have the money to do it all,” says Yok Tan. “It’s estimated to cost US$30-40bn to develop the whole city, of which the government has said it is going to commit 20%, with the rest coming from foreign investors, multilaterals like the IFC, AIIB, ADB, and also the EXIM [export-import] banks.”

She adds that the initiative may benefit from geopolitics, with different organisations - particularly the EXIM banks and organisations based in China and Japan - seeking to retain and grow their influence in Indonesia.

Plenary Group, one of the largest infrastructure investors in the Asia-Pacific region, is one of many keeping a watching brief on Nusantara. “It’s encouraging to see Indonesia’s increased dialogue around infrastructure development, private financing and PPPs, and our Asia-based team continues to monitor for suitable PPP and PPP-like opportunities associated with Nusantara and Indonesia more broadly,” says Paul Crowe, the firm’s chief investment officer. “We support the approach being taken by the Indonesian government and the ADB [Asian Development bank] in relation to the development of Nusantara.”

Yok Tan suggests this monitoring of the situation is not uncommon. “Investors are still very cautious,” she adds.

So what can be done to encourage investors into places like Nusantara, and other potential new cities around the world that have neither the geopolitical importance of Ukraine or the underpinning financial reserves of Saudi Arabia?

If not structured correctly, a government’s determination to get a new city off the ground could be at the expense of value for money: the huge risks being assumed by the private sector to take on a programme of such magnitude will rarely come to pass, thus allowing them to make huge profits when schemes are completed. This problem is not new, of course, and was at the heart of PFI’s problems in the UK, when investors jumped on board a new initiative - with all the risks that going into the unknown entailed - only to find that those risks often did not materialise, in part because of the political imperative for the government for the projects to succeed.

As has often been the case over the years, a potential answer could come from the UK’s experience here.

Threlfall points to Transport for London (TfL), where the capital’s transport agency has introduced a programmatic approach to its building plans, building schemes in stages and only releasing a proportion of the value to the private sector at a time. That way, the agency was able to benefit from the uplift in value as the programme progressed, and at the end of a scheme TfL is able to potentially sell off the land when it is at its most valuable. This approach also allows future plans to bring in greater private sector competition because the concept has been proven.

At the end of the day, politics will often be a vital part of these mega PPP projects. For example, investors have previously been sceptical of Saudi Arabia’s commitment to PPP, with some of its earlier projects having been returned to purely public projects because the state can finance schemes on balance sheet more cheaply.

That approach has been changing over recent years, however - in part as a result of the real scare that the Covid-19 pandemic gave many Middle Eastern countries, when oil futures at one point became negative and made many realise they cannot rely solely on their oil reserves forever.

In Indonesia, Nusantara has been a critical part of President Joko Widodo’s plans for his legacy. Elections are due early next year and Widodo, having held office for two terms, is unable to stand again. Yok Tan suggests the development of Nusantara is currently too far off to be a significant part of the election campaign - but clearly whoever takes over will have some tough decisions to make.

“Everyone agrees that Jakarta is too overcrowded - it’s an old city and so there is general agreement that a new city is required,” she continues. “But Nusantara is not the favoured location by everyone: it is on a different island [ie not Java] and there are questions around access to and cost of acquiring land, and in some cases, who owns the land.”

Given that global attention is so heavily focused on Ukraine at present - and Neom is pushing ahead, with diggers already on site - Nusantara could fall behind as a destination for the rise of mega-PPPs. In the end, that could benefit the country, by allowing the Indonesian government to learn from the experiences of others.

Nonetheless, whether it’s Indonesia, Saudi Arabia or Ukraine, there is clearly a groundswell of support from industry experts and governments alike to transform the PPP model so that it can fit the need of building - or rebuilding - entire cities. It could be the start of the model entering a new phase in the global infrastructure space.