UK: An Emerging Trend

Last Updated: 25 February 2015
Article by Amir Kordvani

PPP is increasingly being used in emerging markets as a tool for funding vital investment in infrastructure – in some cases its use is even more prevalent than in developed economies. Here, we examine Iran and Tajikistan, both of which are looking to use PPP to encourage private sector participation. Many consider these countries to be the next 'emerging markets' for investment but, historically, in neither have there been opportunities for the private sector to develop, finance and operate infrastructure assets.

Compare and contrast

Iran and Tajikistan have both faced major set-backs in their economic development. The economic sanctions imposed on Iran are arguably the strictest ever imposed on a country. Tajikistan, which only became independent in 1991, plunged into a devastating civil war that lasted until 1997 and was then hit hard by the global financial crisis in 2008.

While Iran is a resource-rich country with developed consumer markets, it does not have access to private funds or support from international agencies such as the World Bank and International Finance Corporation (IFC) to fund infrastructure projects. Tajikistan, on the other hand, does have abundant hydropower resources but is at a very early stage of developing other natural resources, many of which remain unproven. Unlike Iran, most of the investment in Tajikistan's infrastructure commitment is funded by foreign aid.

The law of the land

With suggestions that political developments may allow Iran to re-enter the international trade system, the government has been creating a favourable business and regulatory environment to attract private capital to invest in infrastructure in sectors such as electricity, tourism and hospitality, information technology and transport. The Fifth Five-Year Economic Development Plan Law for 2011-16 requires the government to create various forms of PPP business models and, in 2013, a draft PPP law ("Iranian PPP Law") was prepared, which, reportedly, has been approved by the Council of Ministers and submitted to the Parliament for final approval.

This says that, in order to be eligible for development as a PPP, the goods and/or services produced by the project must benefit the public and increase public welfare. The approval of the PPP Unit (to be established under the Iranian PPP Law) is also required. In addition, the Iranian Parliament is currently considering the "Recession Exit Bill" submitted by the government which, if approved, will allow the government to use PPP models for projects in oil and gas; clean energy; power; and water and sewage projects.

A draft of the "template PPP contract" has also recently been released for public consultation. Under this, the private party will be responsible for providing the entire financing for the project. The public sector's payment obligations are to be guaranteed by the Iranian government through a sovereign guarantee issued by the Ministry of Economic Affairs and Finance.

Similarly, Tajikistan has identified the private sector as critical to deliver major investment in various sectors particularly electricity, water and sewage, healthcare, agriculture, and transport. The PPP law of Tajikistan ("Tajik PPP Law") came into force in 2012.

A PPP Unit was established in 2013 and a PPP Council, which consists of senior Tajik government officials, has also been established. The PPP Unit is responsible for an initial review of proposals and making recommendations to be approved by the PPP Council. The PPP Council has also been given broad powers to waive competitive procurement procedures if circumstances dictate that a competitive dialogue approach is preferable. So far, only a few projects have been undertaken under the Tajik PPP Law. These include a railway project in Sughd and a logistics centre in the city of Tursunzoda in western part of the country.

Building confidence in the future

In Iran, the absence of multilateral agencies (e.g. MIGA, IFC, World Bank) and the lack of any track record in successful mega projects, presents a major hurdle in providing comfort to prospective private partners and commercial lenders about the feasibility of the ventures and governance issues. The current financial sanctions present another challenge, as does a significant currency risk in long-term financing since the rial is prone to significant devaluation and has little convertible value internationally.

Implementing the PPP model in Tajikistan's low-income economy means that many projects may need to be based upon availability payments, rather than pure revenues, and therefore some form of state subsidy may need to be built into the PPP tariff.

However, the fact that PPP models are being embraced by the Islamic Republic of Iran and a post-Soviet Tajikistan highlights their importance in the successful development of an effective system for attracting private investment in infrastructure projects.

The market response to the introduction of PPPs remains to be seen. However, a critical next step for both Iran and Tajikistan is to build confidence amongst the public, as well as prospective private investors. It will be vital to ensure a fully transparent procurement policy, that is efficiently managed within well-defined legal procedures and that is not jeopardised by bureaucratic delays and a lack of experience.

First published in Partnerships Bulletin

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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