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Report upbeat on public-private partnerships

Investment: an image of Bermuda featured in the KPMG Foresight report into island regions and public-private investment opportunities

Island jurisdictions like Bermuda should grab public-private investment opportunities and worry less about risk and the small print in contracts.

The view came in a report by professional services firm KPMG into infrastructure in island regions.

The report said: “The reality is that many governments are starting to recognise that — by striving to take a minimalistic approach to risk or to achieve structural or contractual perfection — they have in fact been missing the point and in doing so have been making projects more complicated, less attractive to investors and slower to take to market.”

The island regions edition of KPMG’s Foresight report added: “Essentially, governments are starting to recognise that it is the public sector that needs to energise projects and that, to date, they have relied far too much on the private sector to achieve their economic, social and environmental objectives.

“The reality is that the private sector is looking for commercial returns, whereas governments are seeking to achieve long-term economic benefits and other national objectives.

“As such, we expect to see governments start to become more active in influencing and catalysing their infrastructure markets.”

But the report, the end result of four years of tracking key trends likely to influence the development of infrastructure in the coming years in island jurisdictions, predicted that this year would see them taking steps to “unclog the pipelines” by galvanising private markets.

KPMG said: “Government leaders will recognise that, in many cases, establishing markets and getting projects delivered and realising the long-term economic and social benefits thereof is more important than minimising risk or perfecting other variables.”

The report added that island jurisdictions had been “transfixed” on transferring risk to the private sector without a necessarily complete understanding of the implications in terms of cost and project viability.

It said: “The reality is that without public-private partnerships island governments are entirely exposed to risks that they may be inadequately prepared to mitigate.

“As islands build institutional capacity, an understanding of risk transfer, risk premiums and risk management is likely to be a top priority. Above all, islands need to make a step change in managing those risks that are retained.

“Top among priorities for island governments to rebalance risk and reward is seizing opportunities to diversify the economy — for example, Curacao’s commodities market and Caymans’ Health City.”

The report also singled out power plays by competing major nations, which it said could create “fundamental shifts in the world order, trade and investment flows.”

It added that more cash was entering the global market and that the competition for investable infrastructure projects had “reached fever pitch.”

But it warned: “However, island governments and owners still need to understand that private capital will only be attracted and sensibly priced to markets that create a predictable and stable investment environment.”

The KPMG report said that investor interest in regulated assets like power generation could open up new opportunities for island countries keen to replace ageing plant, adopt new technologies and reduce “the burden on overstretched government borrowing facilities.”

It added: “As with any public-private undertaking, island governments will need to advance clear and effective legislation to attract investor interest while protecting public interests.”

And the report said: “While no investor likes uncertainty, it seems that many are currently underpricing the increased risk into their models.

“In part, this is likely due to the current oversupply of equity in the market which has forced investors to compete more fiercely for investments.

“But in time, we expect investors to start becoming much more considered about the way they assess, manage and price this type of uncertainty.”

KPMG added it predicted that the shift in views would in the long term “alter the dynamics of who takes the risk.”

But it said: “Ultimately, however, we believe that this may well be the tipping point that ushers in 50 years or more of prosperity as capital starts to match up with projects which, in turn, will drive economic growth in the smaller and emerging countries and shore up retirement savings in the mature markets.”