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Khidoyatov Davron Abdulpattaxovich, First deputy khokim (governor) of Tashkent E-mail: dkhidoyatov@inbox.ru
FEATURES OF PUBLIC-PRIVATE PARTNERSHIP PROJECTS FINANCING
Abstract. The article deals with the features of public-private partnership proj ects financing based on innovative tools, which include infrastructure bonds and mezzanine loan. The article provides the characteristic of each type of innovative tools.
Keywords: public-private partnership, financing, infrastructure bonds, mezzanine loan.
Introduction
2017-2021 Action Strategy on five priority areas of Republic of Uzbekistan development is aimed at continuing institutional and structural reforms in order to reduce the state's presence in the economy, further strengthen the protection of rights and the priority role of private property, and stimulate the development of small business and private entrepreneurship.
Nowadays, the participation of the private sector in projects based on public-private partnership (PPP) is the priority direction of the development of the private sector. PPP may be defined as a type of joint activity of government agencies and business organizations in the form of integration of public and private interests and competencies. On the one hand, such integration allows for more effective realization of entrepreneurial potential, considering expansion of the investment process and profit increase. On the other hand, by means of the above integration, the government may solve general economic and social problems, considering the successful development and operation of production facilities and social infrastructure.
Global experience shows that PPP is the most effective form of realization of investment projects related to infrastructure development, design, reconstruction, construction of highways or operation of capital construction facilities, as well as the construction of socially significant facilities [2]. However, the formation and development of a public-private partnership require the adoption of PPT Law Republic of Uzbekistan, which will allow the development of the regulatory framework for the implementation of PPP projects.
Currently, there is no methodology for PPP projects implementation in Uzbekistan. In addition, mechanisms of financial planning and structuring of PPP projects are underdeveloped. These factors, in addition to the absence of a special regulatory framework, hinder the development of PPP in Uzbekistan. Due to insufficient project quality analysis, a large number of projects may result in situations involving high financial risk and the ineffective commercial value of investments, as well as complicated legal consequences. In this regard, the main purpose of this article is to develop new innovative instruments for financing PPP partnership projects,
taking into account the peculiarities of their implementation in the Republic of Uzbekistan.
Literature review
Some basics of the PPP concept were laid in "the General Theory of Employment, Interest and Money" by J. M. Keynes, where the focus is on the problems of the state's economic policy, which should contribute to the fastest growth of national income through monetary policy and budget policy, the promotion of private investment and consumer expenses [6].
The government in the framework of PPP not only invests considerable sums in new projects, but also accepts part of the risk. The main purpose of the government is to create general economic conditions that determine the development of innovative activity. The government should eliminate systemic deficiencies that hinder the development of innovations, as well as develop various type of incentives for the development of the activities of economic entities in innovative areas [7].
The analysis of literary sources also shows that the term "public-private partnership" is applied based on a clear definition of the leading role of the government, taking into account the mentality and the leading role of governmental agencies. In addition, it is emphasized that it is the government that is the initiator of many PPP projects. The subject of a public-private partnership is always state property or a service provided by the authorities to economic entities [2].
Despite the undoubted advantages of PPP, certain factors, such as financing, constrain the successful implementation of PPP. There are various sources of funding for PPP projects. However, some of them can be used only at a certain stage of the project, while others are the basis for starting of work. Russian researcher N. E. Gerasimova proposes to use life cycle contracts (the term "Design-Build-Finance-Maintain" is used in some European countries) for PPP projects financing [3].
Russian scientists I.V Moiseeva and S. A. Kochetkova analyze the mechanisms of financing of PPP projects in their research [8]. They note that in practice there are a sufficient number of financial mechanisms, through which PPP is carried out. Financial mechanisms differ depending on funding sources. The main sources are funds from budgets of different
levels, funds from state enterprises and institutions, funds from the private sector and etc.
In foreign practice, there are the following sources of funding for the purposes of PPP projects implementation [10]:
• Private equity;
• Public contracts;
• Co-financing;
• Government debt obligations and provision of various benefits by the government.
We agree with position of Russian researcher M. A. Shul-gina, who notes that for successful implementation of PPP projects, it is necessary to carefully select sources of financing, to conduct a detailed financial analysis of both the company providing the funds and their own ability to meet their obligations, as well as effectively combine various types and directions of financing at each stage of implementation [11].
It is worth noting the publications of Uzbek researcher U. I. Jumaniyozov, who investigated the features of corporate governance in the implementation of PPP projects in construction [12].
It is important to note that currently in Uzbekistan there are only separate attempts to implement PPP projects, therefore questions on PPP financing have not been raised yet. In the light of the above, we attempted to equip future researchers and practitioners with modern tools for financing such projects. At the same time, it should be noted that PPP is not developed in Uzbekistan and there is not enough experience in PPP. Consequently, there are only a few separate publications on PPP. To some extent, this research intends to fill the existing gap.
Research Methodology
Currently, large-scale reforms are implemented in Uzbekistan. These reforms require the mobilization of significant financial resources, including funds of the state budget. At the same time, as global experience shows, by means of PPP it is possible to attract private sector funds to finance infrastructure projects.
However, Uzbekistan does not have sufficient experience in implementing PPP projects, although private healthcare is widely developed, in addition, there are private construction, private schools, kindergartens etc. Recently, the President of the Republic of Uzbekistan signed the resolution of "On priority measures to create the legal and institutional basis for the development of Public-Private Partnership" [1], which is the foundation for the development of the legislative-regulatory framework of public-private partnership in Uzbekistan.
Another important problem is the absence of a formed PPP market in Uzbekistan. In various industries, the supply of projects is quantitatively and qualitatively quite limited. This
is because in the absence of current legislation, government authorities are responsible for organizing a tender. Thus, there is a problem of financial support for the activities of ministries and departments, as well as local authorities for the preparation of PPP projects.
In our opinion, another constraint to the development of public-private partnerships is the lack of financial resources. Despite the fact that there is a practice of supporting PPP projects by a number of commercial banks, nevertheless, this problem in Uzbekistan has not yet been resolved.
In modern conditions, long-term financing of PPP projects by commercial banks is not so widely supported due to their insufficient liquidity. At the same time, the number of investors, who looks for alternative investment opportunities increases. This is due to macroeconomic uncertainty, the instability of stock market indices and the declining creditworthiness of financial institutions. The confidence of foreign investors in Uzbekistan cannot be called positive for a number of reasons that go beyond the scope of the problem we are considering within this research.
Today, one of the additional sources of financing public-private partnership projects could be the funds of individuals. This requires an increase in income of the population.
PPP tools from extrabudgetary sources can attract funding in capital-intensive long-term projects. In such a situation, it becomes necessary to develop mechanisms for guaranteeing and ensuring public-private partnership projects against the risks associated with the state's fulfillment of its obligations. After creating such tools, it will be possible to attract funds from international financial institutions, as well as funds from private investors from Uzbekistan.
Financing of PPP projects has its own mechanisms and tools, which determine the specifics of this area. PPP provides an opportunity to finance projects from different sources and to combine own and borrowed funds.
The main risk lies in the possibility of the government or local authorities failing to fulfill their obligations in the long term. After all, a public-private partnership is, above all, a long-term relationship, respectively, in order to dispel all possible investor concerns, the state must create favorable conditions and provide reliable guarantees.
In addition, currently, the constraining factor for the development of public-private partnership at the level of regions, cities, and districts is the lack of financial resources. It is important to note that most of the regions and districts of Uzbekistan are subsidized.
Under these conditions, public-private partnership projects can be viewed as one of the important areas that can support the implementation of the goals defined in the Action Strategy initiated by President of the Republic of Uzbekistan
Sh. M. Mirziyoev. The search for new sources of financing for PPP projects, including funds from private investors, becomes relevant when solving a number of issues, in particular, social ones, will be carried out not at the expense of budget funds, but by attracting private business resources based on PPP projects.
For successful implementation of PPP projects, it is necessary to carefully select the sources of financing, conducting a detailed financial analysis of both the company providing the funds and their own ability to meet their obligations, as well as effectively combining different types and directions of funding at each stage of implementation.
Depending on the specified sources in PPP-projects, financing schemes are determined, the most prevalent of which are government funds and loan [8].
As a result, the following financing mechanisms are formed:
• Loan (borrowing);
• Mixed (attraction of own funds of two or more partners);
• Hybrid (combination of own and borrowed funds).
The implementation of projects in the framework of PPP
requires appropriate financial support and compliance with the basic principles of its financial mechanism. Important principles for financing PPP projects include redistribution of financing risks between government and commercial structures; additional involvement of economic resources in the country's economy; use of financial resources of the non-state sector of the economy while maintaining by governmental authorities their functions and powers.
The sources of financing for the implementation of projects in the framework of PPP currently include the following:
• Government subsidies. This type of financing is used when the government needs to demonstrate real support, as well as attract the attention of the investment community. This form of financing is used with a high level of general expenses and the expected profitability is not sufficient to adequately maintain loan and equity capital;
• Commercial Lending. Commercial loans are provided by commercial banks. When granting a loan, the ability of the PPP project to produce the necessary positive cash flow for timely servicing of debt obligations is taken into account;
• Project bonds. This type of financing of PPP projects is of limited use, as currently the securities market is not sufficiently developed in Uzbekistan. At the same time, one should recognize the merit of this method. The positive side of this tool is that the cost of issuing bonds may be lower than a bank loan. On the other
hand, the capital market for such bonds may be very limited, which in turn will create difficulties for large projects in mobilizing the necessary capital.
• Share capital. This type is considered one of the promising sources of financing of the PPP project and is provided by investors from their own funds as a combination of issuing shares and subordinated debt.
It should be noted that a public-private partnership implies participation in financing and sharing the risks of both parties to the contract. To date, the range of instruments for financing projects of public-private partnerships is quite wide. The main place among all other instruments is project financing.
Project financing is executed in the form of "limited recourse" loans, which are issued by a specially created target project company. This company has the right to carry out construction and operation of the facility within the project. One of the main positive aspects of project financing is that the obligations of the project company are not reflected in the balance of the grantor or shareholders and, therefore, do not affect their investment attractiveness [2].
The effectiveness of project financing is as follows:
• Provision of the favorable weighted average cost of capital compared to net financing from own funds;
• A possibility of using a more transparent risk sharing mechanism;
• Creation of incentives for improving the quality of work of all project participants and effective risk management.
Project financing schemes implemented on the basis of PPP have their own characteristics. This is, first of all, the presence of the project company, which creates cash flow, which is the basis for a settlement with creditors and shareholders, as well as the use of a complex system of financial instruments and contracts.
As with any commercial organization, funding sources can be divided into internal and external. Internal sources include the profits and the funds generated from it in the form of depreciation, insurance claims, land plots provided. fixed assets, etc.
External sources offunding for a PPP proj ect depend on the composition and size ofthe funds raised, the focus ofthe project, the volume of upcoming work and costs, and other factors.
Part of the funds is included in the equity capital of the project company. This may be equity; founders' funds; government subsidies; funds allocated under the state targeted programs, etc.
The remaining sources of financing are attracted in the form of borrowed bank loans, the main of which are: loans provided by non-bank organizations (for example, pawnshops,
credit unions, etc.); bond issues; government loans; commercial loans; leasing, etc.
Special attention should be given to the effective form of attracting sources of financing, such as leasing, which is rarely used in Uzbekistan and still not sufficiently developed.
Currently, along with the above types of financing of PPP projects, they have begun to use innovative tools to raise funds for the PPP project. These include new innovative financial instruments: infrastructure bonds. mezzanine financing, junk bonds, etc. [9]
The following figure shows a scheme for financing PPP projects based on innovative financial instruments. (Fig. 1)
Now we give a description of each type of the above innovative financial instruments. Interest in the development of public-private partnership is currently growing in Uzbekistan, so it is important to determine the sources of funding for projects in this area.
Special purpose vehicle (SPV) - the issuer of bonds
One of the main mechanisms for attracting investments for the successful development of public-private partnerships is the financing of infrastructure projects through the issuance and placement of infrastructure bonds, when the issue of bonds is carried out under the guarantee of the state.
Infrastructure bonds will allow private capital to participate in mutually beneficial projects with the state, reducing the burden of the latter on the cost of building and maintaining public infrastructure to lift restrictions on economic growth in the country.
Infrastructure bonds are bonds issued by a special project company (SPV — special purpose vehicle) in order to raise funds to finance the creation or reconstruction of infrastructure facilities (roads, railways, air terminals, power lines, etc.), fulfillment of obligations for which provided in the amount and manner prescribed by law.
Local and foreign investors -
purchasers of bonds
The object of the PPP project
(e.g. construction of a dwelling house)
I
Population that uses the services of a PPP project after its completion
State body that is the guarantor of the PPP project (khokimiyats of regions, cities and districts)
Figure 1. A scheme for a PPP project financing using innovative tools
It is important to note the undoubted advantages of issuing and placing infrastructure bonds. This type of bonds has certain advantages, including the following:
• Attracting non-state financing for investments in objects of state importance;
• Reduction of government spending on the maintenance (operation) of infrastructure facilities;
• Sharing of project risks between the state and private investors;
• Ensuring cost-effective management of project implementation by transferring management functions to a private investor;
The attraction of modern, high-performance technologies in infrastructure development.
All infrastructure bonds can be divided into two groups: general coverage bonds and bonds secured by project revenues. The second type of bonds deserves special attention, since they are issued based on income from the proj ects being implemented.
The state can resort to the issue and placement of infrastructure bonds when it is interested in private investment while retaining ownership of the object. Among the advantages of issuing and placing infrastructure bonds, it is important to note its versatility: it can be used in most sectors of the economy, it can be used to develop railway and underground transport, to build engineering and utility infrastructure, energy, telecommunications, healthcare, education, culture, tourism, and sport.
Another type of innovative instruments for raising funds for a PPP project is a mezzanine loan. Mezzanine is a kind of symbiosis of debt financing and equity financing. As you know, debt is the cheapest money, and equity is the most expensive money. Mezzanine financing occupies an intermediate position: the financial resource provided is more expensive than debt money, but cheaper than its own.
A mezzanine loan is an unsecured loan, in other words, loan provided without collateral or having a deeply subordinated security structure. The latter is characterized by the fact that the lien right has on the property of the third turn, but without the right of recourse against the borrower. Such a loan is granted for a period of at least 3-5 years with the repayment of the loan body at the end of the term. The essence and meaning of the mezzanine is to allow companies — project initiators to make large investments, while not possessing significant capital. Mezzanine lenders, combining both the lender and the investor, usually prefer borrowers with strong growth potential. At the same time, the investor bears increased risks in comparison with conventional bank financing and, accordingly, expects a higher return on his investments. From the point of view of financing conditions, the mezzanine is a hybrid between debt financing and direct investments, and its use may allow optimizing the conditions for parallel receipt of a bank loan for a specific project [4].
In conclusion, it should be noted that at present in many countries, public-private partnership is an important tool contributing to economic development. Successful implementation of the Action Strategy for the five priority directions of development of Uzbekistan in the coming years will depend to a certain extent on the search and implementation of new mechanisms ensuring the stable economic development of the country. One of these tools is PPP. However, the development of PPP in our country largely depends on the adoption of the Law "On Public-Private Partnership", as well as on the choice of appropriate methods of financing projects in this area. In our opinion, the effectiveness of PPP projects is crucially dependent on the use of innovative tools offered by us, such as the issuance and placement of infrastructure bonds and mezzanine credit.
Conclusion
1. Financing of PPP projects have their own characteristics. First of all, the funds of the state budget can be used, however, in modern conditions, when the budget is limited it is required to find innovative sources of financing for PPP projects. In recent years, innovative financing instruments have become widespread in foreign countries, including infrastructure bonds, mezzanine bonds and junk bonds.
2. In connection with the implementation in Uzbekistan of structural reforms identified by the Action Strategy in the five priority areas of the country's development for the period 2017-2021, public-private partnership will be widely developed. Implementation of PPP projects will require significant financial resources, sources ofwhich may be innovative tools. However, this will require changes in the Law of the Republic of Uzbekistan "On Securities". In addition, it is important to change the thinking style of local investors so that they believe in the legitimacy of innovative tools.
3. The formation and development of a public-private partnership in Uzbekistan depend on the adoption of relevant regulatory acts governing both such activities directly and issues relating to the development of forms of co-financing investment projects from the state budget, private investments, venture capital funds, direct investment foreign investment, issuance of infrastructure bonds, etc.
4. In order for a PPP to become a real instrument that contributes to the economic development of a country, it is necessary to adopt an appropriate Law, which should define the legal framework of a public-private partnership. It is also required to pay special attention to the issue of redistribution of property rights in the process of implementing a joint project, since the subject of PPP is state property. Taking into account that PPP projects are mainly of an infrastructural nature, the complete transfer of ownership rights to private business can lead to social and political tensions in society. Therefore, it is recommended to transfer the limited powers, such as the right to control the use of assets, the right to income, the right to control, as well as the right to change the capital value of the objects of the agreements and the right to transfer certain property rights to others etc.
References:
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