Public-private partnerships for investment and delivery of Affordable Housing in emerging market economies:
“ A partnership between the public and private sectors established through a contractual relationship which seeks to access private sector finance, design, construction, commercialization, maintenance or operational management for the delivery of affordable housing and, in some cases, ancillary services.
The public sector contribution can be provided in the form of cash or equivalents such as land, development rights, revenues (rents/tariffs) generated from land, infrastructure and building assets, taxation relief, and/or a share in the equity generated over a fixed period. The private party’s remuneration is significantly linked to performance.”
Three Differentiations:
1. Differentiating affordable housing PPPs from government contracting private firms as builders (who take no financial or commercial risk).
2. Differentiating transaction-based, contractually governed PPPs (i.e. “strictly defined” PPPs), from broadly defined housing P-P-P agreements which include a host of mechanisms to incentivize the market players to increase the supply of affordable housing units.
3. Differentiating affordable housing PPPs from large-scale infrastructure PPPs.
Government Offtake/ End-user pays [Ownership]
Open bidding. Bidders compete on a discount basis. Canopus was a single bidder and provided a 1.5% discount.
Government Offtake/ End-user pays [Ownership]
Developers/ investors competed based on the lowest requirement for subsidy or the highest premium they are willing to offer.
Government Offtake/ End-user pays [Ownership]
Investors compete on (1) residual valuation of the land, (2) housing affordability mix, (3) equity: debt leverage, and (4) development program.
Typical Challenges to Affordable Housing PPPs in Emerging Economies
• The real estate industry is underdeveloped and unregulated;
• Non-competitive domestic market dominated by a few developers;
• Few private sector investors/developers able to assume risks;
• Weak public sector capacity to appraise, monitor administrate processes;
• Limited public/private capacity to design, structure, and complex transactions;
• Lack of trust in the public sector to honor commitments;
• Lack of access to mortgage financing and construction financing.
Key Points:
1. PPPs are not a panacea: a wide range of outcomes and no clear formula for success
2. It remains critical not to lose sight of improving housing sector fundamentals, strengthening the institutions, and removing constraints that can enable and inhibit private sector investment
3. PPPs require that appropriate legal structures be in place and that the various parties be competent to perform their assigned tasks under the model
4. It is important to initiate an incremental shift of investment and risks to the private sector in affordable housing.
1. Partnership takes time: each party needs to learn how to work as partners
2. No silver bullet – each project requires its context-specific structuring
3. Affordable housing PPPs require sufficient capacity for both partners
• Both: Undertake local market dynamics (targeted income segment, affordability, predicting demand over time);
• Public: project appraisal (including value for money analysis), contract management (including negotiating with developers);
• Private: willingness to work with the government, an understanding of affordable housing-specific rules, regulations, and incentives, and appreciation of the targeted “consumers.”
4. Delay in the provision of trunk Infrastructure is one of the most common barriers to a successful PPP
5. Need for enhancing the capacities of the implementing agencies at the state/city level to enable them to effectively implement PPP projects
a. Technical
• Developing a shelf of bankable projects
• Formulating tender documents and legal agreement
• Fair compensation structures via innovative cross-subsidization models, subsidies, and incentives like ‘additional FSI’, ‘Transferable Development Rights’, etc.
• Flexibility/ re-negotiations in contract document – flexibility in contracts document with provisions of requisite institutional mechanism for reviewing contract terms and conditions and suggesting a course of correction.
b. Organizational culture of implementing authorities.