Public-private partnerships (PPPs): are they the right tools for development?

Added 10 May 2013

By Stéphanie Colin and María José Romero

Public-Private Partnerships (PPPs) are high on the development agenda and they are increasingly being promoted as a way of closing the infrastructure financing gap in developed and developing countries alike. Given the complexity of the issues and risks involved, any decision to promote the use of PPPs in developing countries further should be based on a thorough assessment of these mechanisms, and on the lessons learned from past experience.

PPPs moving up the development agenda

In the current financial context, the central role of the private sector in development is being mainstreamed in policy discourse, and donor governments are increasingly turning to PPPs to deliver public infrastructure and public services. According to the International Institute for Sustainable Development, the “rise to power of PPPs” is “likely to continue following the 2007–2008 global financial crisis that sees many jurisdictions strapped for cash and seeking alternative methods of meeting the increasing demands for investment in public sector development”.

This is happening in various policy forums, as shown by the EU project bonds, the World Bank’s call to increase support to the private sector for growth highlighted by Eurodad’s analysis, as well as the private sector and infrastructure development focus of the new African Development Bank Strategy. As a recent paper by the Catholic Agency for Overseas Development (CAFOD) shows, this is likely to affect developing countries too, as European governments are more and more interested in using PPPs as a way of delivering development assistance, not only due to fiscal constraints but also because of the business opportunities they represent for European companies.

The G20 has been promoting the PPP approach in its different initiatives and work streams, including the Development Working Group. Just one example of this is the report of the High-Level Panel (HLP) on Infrastructure, appointed by the G20, which promotes mechanisms for scaling up PPPs globally.

Additionally, at the recent Spring Meetings in Washington, the G2O’s Russian Presidency underscoredthe importance of long-term financing for investment, including in infrastructure, in enhancing economic growth and job creation”. A Study Group on financing for investment – chaired by Germany and Indonesia – was created last February (see Eurodad’s article) in order to specify how to reach these objectives. This group will discuss strengthening public policy and improving PPPs, among other issues, with a workplan that will be agreed at the upcoming G20 Summit in September.

At the March 2013 G20 Sherpa meeting, the Russian Sherpa stated: “we are considering the possibility of modifying mandates of national and international development banks, with the goal of focusing the institutions for development on promoting investment, primarily in infrastructure, and supporting public-private partnerships (PPPs) in this area“.  This might have consequences for key sectors such as energy, water and agriculture.

Key concerns to address before scaling-up PPPs in developing countries

Any decision to promote PPPs further in developing countries should draw the lessons from past experiences to ensure that PPPs are a productive and complementary development agent. What past experience has shown is that PPPs are complex and varied mechanisms that have brought mixed results.

The Eurodad briefing PPPs: Fit for development? highlights several problematic issues, including:

  • The capacity of PPPs to deliver positive development outcomes cannot be assumed.
  • PPPs tend to benefit private firms that already have sufficient access to finance at the expense of domestic micro, small and medium-sized enterprises.
  • Risks are often disproportionally carried by the public sector.
  • There are no prior poverty and social impact assessments in PPP projects and no systematic data on PPP projects’ outcomes.

Similarly, there are enough reasons for not exporting PPPs as a mechanism to deliver aid to developing countries, as shown in two papers on the issue, one by Nancy Alexander from the Heinrich Böell Foundation and the most recent one from CAFOD. Both papers raise red flags pointing out some additional and complementary concerns:

Alexander’s paper stresses that:

  • PPPs cannot function effectively without an adequate regulatory framework.
  • There has been a lack of contract transparency.
  • There have been problems with methodologies for assessing PPPs.
  • Local knowledge and ownership are key ingredients of PPP models and implementation. 
  • There is a need for a clear and transparent regulatory framework to prevent corruption.

 CAFOD’s paper highlights that:

  • PPPs are more costly than conventional procurement.
  • PPP projects usually do not require the prior consent of populations.
  • Government officials in developing countries lack the skills and resources to negotiate beneficial PPP deals.

The Organisation for Economic Co-operation and Development (OECD) principles on the governance of PPPs, which were adopted in May 2012, are a further illustration of the complexity of PPPs and some of the issues that should be addressed. In OECD terms, these recommendations to OECD governments are “appropriate steps to ensure that PPPs are affordable, represent value for money and are transparently treated in the budget process”.

These recommendations include:

  • Assessing whether PPP projects are actually better at delivering value for money compared to other procurement methods.
  • Conducting a cost-benefit analysis of the PPP project to ensure coherence of the project with overall government policies and objectives.
  • Having the necessary skills to write and negotiate PPP contracts.
  • Clearly defining and measuring the risks associated with the PPP project.
  • Involving end-users in defining and monitoring the project and encouraging the active participation of all stakeholders.
  • Ensuring budget transparency.
  • Ensuring a competitive tender process, allowing the participation of domestic firms.  

As the G20 and other development actors are becoming increasingly engaged in this agenda, it is essential to consider these concerns and draw lessons from past experience in order to ensure that PPPs contribute effectively to development.