Private-Public Partnership (PPP) Model
For enhancing the stability, profitability and public good of national projects, the PPP model approach is proposed by a government official. Dr. Rhee Sung-woo, Director of Promotion and Investments Division at Korea National Food Cluster Support Center of Ministry for Food Agriculture, Forestry and Fisheries, contributed an article to BusinessKorea on the PPP model as an effective tool for attracting foreign investment.
In the wake of the subprime mortgage crisis, new private-public partnership (PPP) model is emerging, reflecting the changing economic environments.
The model is applied to natural resources development, infrastructure establishment and regional development projects of high risk and high return, requiring a large sum of capital for an extended period of time.
Previously, PPP was limited rather to social overhead capital. These days, however, it is combined with other investment areas for the sake of development undertakings’ stability, profitability and public good. Its utility and effectiveness have been already proven in Australia and other resource-rich nations as well as those with relatively weaker finance are getting more and more interested in it.
Korea is also moving ahead with some projects of that kind, led mainly by its central and local governments and free economic zone authorities. What is important at this point is that it needs to ask itself whether a system is built properly to predict capital market participants’ demands and link them adequately to public projects.
It is recommended to think twice about a real investment-centered portfolio and blanket investor attraction. Instead, there should be a variety of customized investment “products,” which makes project-specific platforms necessary. Of course, those platforms must be formed on the understanding of the capital market. Examples of such platforms include special-purpose companies (SPC), special-purpose vehicles (SPV), project financing vehicles (PFV) and funds. In particular, investment “structuring” by means of funds is a good case in point of tailored investment products mentioned above. If a fund product suggests diverse options like common and preferred shares, convertible bonds, bonds with warrant and so forth, investors’ decision can be made easier.
Often, investors are divided into strategic and financial ones. At present, when projects tend to bigger and investment recovery takes more time than before, it is not easy for strategic investors to raise the entire funds they need on their own. Currently in China, many development projects are underway with the government's aggressive supporting and land is supplied at a competitive price, which makes it tougher for Korea to attract international investment.
In winning over strategic investors, anchor investors need to be a main target. At the same time, methods to attract financial investors, who are more deeply interested in profitability and return on investment, should be mulled over, too. To meet market players’ various needs, products and customer bases have to be diversified and “structured.” Commodities need to be made into funds for financial investment through the process while prominent anchor investors and master developers are invited so that investment platforms can be run on the global level jointly by the governments and relevant agencies.
In the past, it was not infrequent that large-sized project financing became less lucrative owing to excessive debts. Also common it was that cash flow mismatching led to liquidity stress. The setbacks can be addressed appropriately by “structuring” investment and securing sufficient equity capital, the best bet to guarantee the continuity of outsize national projects. Certainly, it is no cakewalk. International projects demanding professionalism and expertise have to be carried out while interested parties are mediated. Reward systems for specialists are called for and the private sector should step in, too. Expert groups in various fields, e.g., real economy, project development, finance, accounting and law, should gather together for the same cause.
There is no doubt that attraction of investors to the “structured” PPP is a much better approach to tackler previous problems. Transformed PPP is the best choice to enhance national projects’ stability, profitability and public good. The investment strategy is definitely viable for those with expertise, zeal and tenacity.