Myth or Magic? Developing a PPP finance strategy tool

PPPLab’s Sjef Ernes & Astrid van Agthoven (Aqua for All) discuss the under-development Finance Strategy Tool. To get involved in developing the tool, read on and see contact information at the end.

In order to achieve the development results formulated by the Sustainable Development Goals, PPPs are more and more broadly acknowledged as structural pathways. Yet PPPs are still struggling with issues such as the definition of roles (working with public partners), with procurement versus partnership arrangements and finance constructions for bridging the viability gaps as well as a scaling perspective.

At the same time, there is a feeling of a large availability of money from donors/grantors, philanthropy and impact investors, while we observe reluctance from private capital markets to chip in. Can financial return on investments be combined with a parallel finance stream that monetises social return on investment? Can we become more innovative and better in blending finance streams, in making more patient capital available and in using outcome payment models that add extra revenue streams to the financial return (ROI)? In such models the Social Return on Investments (SROI) is validated and monetised by all kind of ‘outcome payers’ that provide additional, results-based finance.

PPP approaches require facilitators (aggregators, mediators, PPP experts) who are capable of bringing these different financiers (public-private-donor) together, using tools that help communicating in the same language, opening up options and possibilities, avoiding the bias for a search for grants and providing a structural framework that helps addressing all issues that matter, in terms of risks, trust, impact identification and scaling barriers.

The PPPLab has worked to develop such tools, helpful for those who wish to understand the complexity of PPPs, to orient themselves on pitfalls and options, opportunities and threats. The PPP finance strategy tool is one of them. But it is not a magic stick, nor a menu for success or a fairy tale.

It assists in developing, reviewing or sharpening a finance strategy that helps partners in analysing financing needs and gaps, and in reviewing a range of financing options. It aims at broadening the view of the users, helping to be more creative and to open opportunities for smart combinations of financing streams.  In the graphic you see the four steps that the tool takes you through, the arrows reflecting the iterative process.

If you would like to know more details about the content of the tool, please click here  for a preliminary version.

The tool certainly will not work as a stand-alone ‘ check the box’  menu. It links with the Partnering tool, the PPPcanvas tool and the Scaling Scan that have been developed in parallel.

The proof is in the eating of the pudding. So far, we have tried out this tool on several test cases, mainly in Kenya. It is found that the combination of the PPPCanvas with the exploration of financing opportunities (the core of the PPP Finance Strategy tool) works very well, as they mutually strengthen each other: e.g. within the PPPCanvas the costs structure is more closely analysed while the financing opportunities matrices helped to become more clear on essential (and/ or redundant!) partners within the PPP.

But; entrepreneurs and governments mostly have their own starting point, political frameworks, strategy plans and ‘sense of urgency-sense of business opportunities’ that are difficult to squeeze into a prescriptive tool approach.  Flexibility is the key word for successful application of the tool(s).

The Finance Strategy tool helped in offering financing opportunities that were earlier overlooked. Not that these type of financial instruments were new for the participants in the session, but some options were simply never considered seriously. In the facilitated sessions, it became clear that e.g. micro-finance and equity investment could open interesting opportunities.

It was proven that starting to think of ‘how to finance the PPP’ should be done from the beginning, although many financiers have an ‘await for proposal-attitude’. This pushes parties into the search for grant-modus, often in a competitive challenge, call or any other beauty contest! While finance is often considered a touchy or confidential issue, it does help to brainstorm with a group consisting of the consortium partners and some persons knowledgeable about the context of the project. Although the insights this provides may be confrontational (e.g. details on a competing initiative came at the table), it does help to make the PPP proposition and its financing opportunities more grounded in reality.

The finance strategy tool also proved to be useful in enhancing awareness on more strategic use of result based finance options. Upfront grantors, willing to blend with free work-capital and de-risking first-loss capital require long decision tracks while outcome payers, impact buyers, result based subsidies or credit-awards are overlooked. While these options might comfort pre-investors in providing the loans as these outcome payments provide contingent finances, parallel to financial returns on long term.  In one of the cases, a private partner wanted to invest and (some) grant money was available, but that still left a financial gap. The tool helped to think more out-of-the box and to search further for additional parties that may have a stake in the success of the project.  The identified outcome deliverables showed both the effect of avoiding negative externalities (when doing nothing), a more cost effective use of governmental contributions as result based subsidy and the option of carbon credits. Social impact on other SDGs (than only water  as in our case, such as food security, peace, migration mitigation, gender empowerment, health, employability, resilience, climate adaptation, ….) is still to be explored.

Clearly, the finance strategy tool still needs improvements, e.g.: Could it help further/ better in making choices for certain financing instruments? And ‘What’s next’ ,  once you have identified options? And for us as PPPLab, we also need to deal better with managing expectations around the tool, which will never become a magic wand.

Would you like to know more or – even better – would you like to be the next guinea pig to test the tool? Please contact us at info@ppplab.org,  preferably before 24 April 2018, as we would like to organise an event around PPPLab tools on May 17th.