This uncertainty has added new urgency to the old question of how to maximise the value of crude reserves. Subject firms to political pressures or keep them independent? Invite foreign investment or shun it? Maximise efficiency or create jobs? Subsidise petrol or let prices move with the market? Their responses have, for the most part, been discouraging. They do so in different ways, as Latin America illustrates. Pemex, by contrast, was founded as a state-owned monopoly in Mexico in Other countries have both state companies and foreign ones, often in an uneasy partnership.
Its Argentine and Colombian counterparts also have private minority shareholders. The first is mismanagement of cash in good times. That included pouring too much money into government coffers and too little into investment for future growth. Despite rising crude prices, Petrobras saw its share price decline, as it loaded up on debt and invested in too many marginal projects. Petrobras accounted for nearly half the total.
Some politicians and executives also used the companies as personal piggy banks—the second common problem. Petrobras took a particular nosedive when it emerged that construction firms paid Brazilian politicians billions of dollars in bribes in exchange for padded contracts to build refineries and other infrastructure. This, combined with the mountain of debt, led credit-rating agencies to downgrade Petrobras to junk in There are signs the sleaze is being cleaned up in Brazil and elsewhere.
On July 5th Mexican authorities said they had issued an arrest warrant for Emilio Lozoya, who led Pemex from to and has fled the country. However, companies remain susceptible to political whims—the third and most vexing shared challenge. Start with Petrobras. Pedro Parente, who became chief executive in , cut costs, began selling less profitable assets, reformed pricing policy and set about boosting production from vast resources tucked under thousands of metres of salt beneath the seabed.
Still, Petrobras remains vulnerable to political undulations. Last year the government reintroduced petrol subsidies to appease angry lorry drivers. Mr Parente resigned and Petrobras shares took a knock. But faced with the risk of another strike in April, Mr Bolsonaro asked him to scrap plans for a 5.
The government rushed to calm the market, announcing the auction of several oil refineries and a price increase only slightly lower than planned. But investors are shaken.
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Today public-private partnerships PPPs have their attractions. McMillan believes pension fund managers will resume the journey but the road is not easy.
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The lack of common definitions is one problem. Infrastructure is a difficult asset class to create categories, and pension fund managers like clear definitions. He gives some examples: whether a water project is high risk or low risk depends on the project; how do you compare a European water treatment facility with a toll road in India? The most robust sector for PPP investment now is transport. At the moment, most infrastructure development and redevelopment is funded through municipal bonds, otherwise known as the muni market.
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Municipalities, states and agencies tend to finance infrastructure and other projects by issuing tax-exempt municipal bonds. Interest income for munis backing public capital projects is tax-exempt for most bondholders. There are also private-activity bonds, which are similarly tax-exempt, but the proceeds of the issuance can go to a private company, which is responsible for paying the bondholders.
This funding structure is one reason why US infrastructure tends to be poorly maintained. A PPP contract, on the other hand, tends to cover design, build, finance, and maintenance over the long term. The West Coast Infrastructure Exchange is a not-for-profit advocacy group created in by the governors and treasurers of California, Oregon, Washington, and the premier of British Columbia.
The group is a clearing house of information for state agencies and local governments. They want to start creating investment opportunities for them.
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And institutional investors need to see a pipeline before they are going to engage with a new asset class. This bundling is already occurring in the US: in , Pennsylvania bundled several small-scale bridge projects to attract financing and it received four bids. McMillan mentions wind farms.
Certain wind farms can be relatively low-risk and offer an attractive cash flow. The bigger the municipality, the more stakeholders, the easier it is for someone to shoot it down.
Dismantling Progress and Protection
We went in with our eyes wide open. From the perspective of municipalities, it is not always easy to make the case that PPP is the way to go. Private-sector financing is undoubtedly more expensive, according to a report from the Center for American Progress. Long-term PPP contracts, however, generally include regular and major maintenance requirements, which transfers responsibility and life-cycle risk to the private-sector partner. And pension funds are unlikely to take the majority interest in the deal.
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A key initiative of the West Coast Infrastructure Exchange, therefore, is education. PPPs can be an effective means to reach that end. Allison gives an example. In , the state of Texas planned its first PPP toll concession project.
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