Next week, world leaders will come together for the financing for development
summit in Addis Ababa, where crucial decisions will be taken on how to finance the fight against global poverty for the next 15 years.
Many of those dignitaries, particularly those from rich countries and from financial institutions like the World Bank and the European Investment Bank, are planning to push the role of the private sector in development. They will champion public-private partnerships (PPPs) as the right tool to finance the infrastructure projects for which developing countries are crying out.
But before they board their planes
, they would be wise to read Eurodad’s new report
, which explores the startling truth behind the glossy veneer of PPPs, spelling out why they must be approached with extreme caution.
PPPs are agreements through which private financiers essentially replace governments as providers and funders of traditional public services such as schools, hospitals and roads. In the past decade, their use in developing countries has soared.
According to our research, investments in PPPs leapt from $22.7bn (£14.7bn) to $134.2bn between 2004 and 2012. There was a lull in 2013, but a fresh surge appears to be just around the corner.
Proponents of PPPs would argue that enabling the participation of the private sector has the capacity to deliver high-quality investment in infrastructure
and reduce the need for the state to raise funds upfront, thus increasing the chances of getting more investment for much-needed public services.
Yet the existing evidence (where available) shows that PPPs can often be expensive and risky for the public sector. In some cases, PPP projects have not been successful, leaving lasting legacies in both rich and poor countries. Governments often choose PPPs to circumvent their debt limit, which is set either by the International Monetary Fund (debt limits policy
) or by EU treaties (“fiscal compact
But the evidence shows that liabilities from PPPs can pose a huge risk to the public sector. Even the World Bank, one of the great promoters of PPPs, has not paid attention to the hidden debts (contingent liabilities) of PPPs.
Our report, What lies beneath?
, is the result of a painstaking examination of the evidence already available and investigations into the experiences of two countries – Peru and Tanzania.
Overall, the report finds that:
- PPPs are, in most cases, the most expensive method of financing, significantly increasing the cost to the public purse. The cost of financing a PPP project can be twice as expensive for the public purse – necessarily involving higher interest rates – than if the government had borrowed from private banks or issued bonds directly.
- PPPs are typically very complex to negotiate and implement and are all too often renegotiated, which entails important costs for the public sector. According to IMF staff, renegotiation is common and tends to favour private sector companies. In total, 55% of PPPs get renegotiated, on average every two years. An increase in tariffs occurred in 62% of all renegotiations.
- PPPs are all too often a risky way of financing for public institutions. For example, there is the case of the Queen Mamohato Memorial hospital in Lesotho, one of the poorest and most unequal countries in the world. Although the World Bank reports some satisfactory results – still highly contested – the reality is that the hospital swallows up more than half of the country’s health budget, while giving a high return of 25% to the private sector provider. This has diverted much needed public funds from rural hospitals, where three-quarters of the population live. The government remains locked into this agreement until 2027.
- PPPs face important challenges when it comes to reducing poverty and inequality, while avoiding negative impacts on the environment. The evidence shows that the impact of PPPs on development outcomes are mixed and vary greatly across sectors. PPPs often build user-fee funded services, which eventually exclude the poor from access.
- PPPs suffer from low transparency and limited public scrutiny, which undermines democratic accountability – including proper redress of affected communities – and offers greater opportunities for corrupt behaviour. In Peru, for instance, there have been cases where communities have demanded, through mass demonstrations, an open and transparent process of public consultation.
Private finance has a role to play in development, but placing it front and centre while ignoring its limitations and the experiences of the past is a mistake.
If our leaders are really serious about ending poverty in developing countries, they will read through the evidence, listen to our recommendations and show caution before blindly pushing this agenda next week. They should focus on developing the right tools at country level to identify whether – and under what circumstances – it is worthwhile to use PPPs, and when it is best to build up the public sector instead.
The Addis Ababa summit provides a great opportunity to speak honestly about this issue. Governments should commit to including PPPs in national accounts and stop hiding their true cost. They must increase transparency and public accountability and put developing country governments, and the needs of their people, in the driving seat. If not, it will be the private sector – mostly based in rich countries – that benefits.
María José Romero is Eurodad’s policy and advocacy manager on private finance, and author of the What Lies Beneath? report