As governments around the world start to focus on attracting international experience, capital and capabilities into their infrastructure markets, opportunities for international operators and concessionaires are growing. So, too, are the risks and challenges.
To find out more about the evolving market for international operators, Mina Sekiguchi, KPMG in Japan, and Jesús de Isidro, KPMG in Spain, sat down with Javier Pérez Fortea, CEO of Globalvia, a global leader in transportation management, and Satoru Tamiya, Head of Overseas Investment, Mitsubishi Corp’s Water Business to talk about competition, protectionism and growth in the new environment.
Mina Sekiguchi (MS): Given the need for more private sector involvement and investment in infrastructure, are attitudes towards concession agreements changing?
Javier Pérez Fortea (JPF): I think more and more governments are starting to see the value of concession agreements, not only as a way to bring private sector capital into infrastructure, but also as a way to improve efficiency and deliver better service to customers. Attitudes towards concessions are certainly not homogenous around the world, but they are changing.
Satoru Tamiya (ST): Water and transport can both be very local issues, and much depends on the attitude of the municipal governments. But it is clear that concession models are starting to become more sophisticated between the private and public sector. I think governments and concessionaires have both learned a lot from some of the challenges they have faced in the past and this has made the relationship stronger.
Jesús de Isidro (JDI): Will the rising sense of protectionism now emerging in some markets impact the business model for international operators?
JPF: I suspect we are just starting to see how these sentiments evolve. However, I would always argue that isolating yourself from international experience and best practices would be a narrow approach to delivering infrastructure and would not result in the same benefit to government or to the users.
ST: Water and wastewater are almost always a municipal issue, so we are somewhat shielded from some of these more national issues. In most markets, the decision to privatize or move towards a concession model is largely made by the municipality, so once the market for concessions is opened, we are often more focused on the local politics than the national politics.
MS: Are you seeing competition from new players, particularly from the emerging markets?
ST: There are always new players coming into the market and competition is becoming severe. But when it comes to water, governments want state-of-the-art-technology, global standards and international best practices and that is not easy for local municipalities or new competitors to deliver. If we have to compete purely on the cost of equity, however, new competitors from emerging markets certainly become a factor.
JPF: The same can be said for the road and rail sectors. And I suspect every global player is somewhat worried about having to compete against emerging market competitors based on the cost of equity. I think it’s also very difficult for many of these new competitors — particularly from traditionally closed markets — to navigate through the transparency and tendering requirements that often surround public-private partnerships (PPPs) and concession agreements.
JDI: Does that mean that new markets are opening up for international operators and concessionaires?
ST: New markets are certainly opening and that creates significant opportunities for concessionaires. But when markets are new, there is a lot of uncertainty — nobody knows the cash flow or demand for certain — and so the risk is always much higher. They can be an excellent investment if the market remains stable, but you have to be able to take the risk.
JPF: I would agree. But I think we still need to help some governments see the value of concession agreements. At the same time, I believe governments also need to do a better job at defining which projects can be financed and managed by the private sector and which cannot. Many governments want private sector involvement but do not want to lose any of the control.
MS: Do you have any advice for governments seeking to attract international operators and concessionaires?
ST: We spend a lot of time and investment working with local governments to help them develop their first concessions because we believe that these markets will expand significantly once they have built some experience. We are working in Myanmar, for example, and in a number of emerging markets. As an international player, we are able to help governments better understand what role private companies can play in the water sector.
JPF: Helping governments get experience with concessions is certainly important. I think the next challenge is to make sure they are choosing the right projects and that they are getting the risk allocation right. That means letting the technical experts decide on infrastructure priorities and — in some cases — taking on more risk in order to establish a stable reputation.
JDI: What do you see as the greatest risk facing your business today?
JPF: Honestly, I think the greatest risk is that institutional investors seeking to deploy capital will take on a project without using a proper concessionaire to run the project. Financial investors are not necessarily qualified to manage the construction and operation of a major asset; you can’t run a successful concession on financial terms alone. And when a concession agreement fails, it often has a ripple effect across other markets.
ST: I would agree. The most important thing right now is to grow the market and that will require operators and concessionaires to focus on improving their track records and reputations. If it’s a good experience for the municipality, for the government and for the users of the service, it will be an easy decision for the policy makers.