Reimagining the future: Navigating PPPs in an age of disruption

Emerging technologies have the potential to “disrupt” infrastructure public-private partnerships (PPPs) as technological change is expanding with ever-increasing speed across the globe. As a result, governments have to rethink how they plan, design, procure, and implement PPP infrastructure projects.

Disruptive technology, or disruptive innovation, describes technological advancements that lead to transformative change characterized by rapidly advancing technology, a broad potential scope of impact, possibility to affect economic value, and the potential to dramatically change the status quo.

While this offers unprecedented opportunities for infrastructure development and delivery, these fast-paced advances are progressing alongside the risk that long-term PPP infrastructure projects become outdated or inadequate before public or private investors can fully recover the costs of the infrastructure. This new reality is simultaneously a threat for one infrastructure sector or project type—and an opportunity for another.

For instance, the cost of solar photovoltaic (PV) energy has dropped dramatically in recent years due to technological breakthroughs in solar cell technology and economies of scale, making utility-scale solar PV the least costly option for new electricity generation in many countries. On the flipside, this development makes fossil fuel projects less attractive and off takers may not be able to renegotiate contracted tariffs of long-term power purchase agreements (PPAs)—including renewable energy contracts—that may seem overly expensive in the light of these developments.

In reaction, governments worldwide attempt to reopen pricing of renewable energy PPAs by law, order of regulatory bodies, or through renegotiation in response to collapsing prices for renewable energy. For example, state-owned distribution utilities in several states in India tried to revise tariffs for signed PPAs with the wind and solar power developers, whereas the French government decided to reconsider high feed-in tariffs for PPAs entered into prior to regulatory changes that were made in 2011 and lowered the tariffs for future PPAs, arguing that projects benefiting from the former tariff scheme were excessively profitable.

Disruptive technology has also impacted other parts of the energy sector resulting in business for some and a threat to others. Decentralized renewable energy solutions like solar rooftop and mini grid systems have been growing worldwide at rapid speed. Recent case studies from Nigeria and India show these fast-changing market dynamics can create new business opportunities for private mini grid operators and result in win-win situations for all market players who embrace the technological change and quickly adopt new business models. However, they also point out that privately financed isolated mini grids that enter the market and serve industrial and commercial centers exclusively under long-term PPAs may slash revenue from existing distribution companies, threatening their financial sustainability. 

In the transport sector also, some will adapt and prosper and others risk becoming obsolete. Future mobility options based on a combination of different types of connected vehicles and digital infrastructure technology are bound to revolutionize passenger and freight transportation. The use of self-driving/autonomous vehicles (AVs), for example, coordinating with each other and with a traffic controller algorithm, has the potential to make traffic more efficient, safer, and minimize air pollution.

Due to their specific operating requirement, AVs will, however, need an entirely different transport infrastructure than conventional vehicles. While upgrading infrastructure to the needs of rapidly changing technology will likely open up new business models and attractive finance options it may also put existing long-term PPP transport projects at the risk of technological obsolescence. ”Future proofing” existing projects by integrating disruptive technology, such as the Internet of Things, AI, or sensing technology may, however, lead to high upfront and adaptation costs that were not initially anticipated and can potentially risk changing the risk allocation and economics underlying a PPP contract. 

The report PPP Contracts in an Age of Disruption aims to provide guidance for developing country governments to navigate this dynamic environment. Based on case studies, examples, and current publications related to disruptive technology and disruptive events, it attempts to create a framework for thinking how to enhance resilience and flexibility of PPP contracts in the face of disruptive innovations.

The report proposes several strategies that governments could consider in order to make contracts of both existing and future PPPs fit for the Fourth Industrial Revolution. It also highlights how better partnerships can be created ones that are more resilient to changes, as well as flexible enough to encourage collaboration between public and private sectors to allow the implementation of innovative technologies.

This report is a starting point. While disruptive innovation will continue to change infrastructure markets during the next years, we hope to expand the evidence base to make the analysis and guidance increasingly robust. Your feedback will help, please leave us your comments below.

Source: blogs.worldbank.org