International finance institutions insist Public Private Partnerships (PPPs) are useful in the developing world, despite a few notable failures.
The PPP is not a new concept. It dates back to Napoleon, who made deals with his suppliers for his invasion of Spain.
More recently, an uptick in PPPs in both developed and developing countries was seen after the credit crunch of 2008. PPPs are now used in more than 134 developing countries. Total PPP investments in developing countries increased by a factor of six, from $24.4bn to $144bn between 2004 and 2012.
So who is lending the money? The more “bankable” deals, such as projects in stable, upper-middle-income countries and in more profitable sectors like energy (electricity generation) and transport (airports) are lent credit from commercial lenders. In poorer countries, Multilateral Development Banks (such as the World Bank) and bilateral institutions (government to government) have to step in and play the active role, helping gather and mobilise private funds where private lenders may not be comfortable taking the punt.
But the PPP’s efficiency is seriously up for debate. One of the leading studies in this area comes from the Netherlands’ Foreign Affairs Ministry, whose report for the OECD found that, post-project evaluations of PPPs in the developing world focused more on “resource sharing” but paid little attention to the “risk-sharing” and “revenue distribution” dimension of partnerships.
Another conclusion the researchers drew is that with evaluations there is no clear causal link between the PPP and the development outcome and it is therefore not sure whether the effects of an intervention can be attributed to the PPP. Moreover, the goals that are set within the PPPs are defined in general terms and lack specific, measurable, attainable, relevant and timely objectives.
For a worst-case scenario, look to a PPP hospital in Lesotho. Supported by the World Bank, the project in 2014 swallowed up half of the country’s health care budget while giving a high return of 25 percent to the private sector provider. In an already impoverished country, healthcare funds to other areas of the country were drained.
Another horror story was the PPP for water provision in Cochabamba, Bolivia. In 2000 the residents – two-thirds of which lived below the poverty line – were issued dramatically raised water rates, leading to violent protests, a state of emergency and martial law. The contract was ultimately terminated and responsibility for water services was turned over to a coalition of protesters.
So the challenge is to design a decent PPP that is not only financially viable, low risk and lucrative from the private sector perspective, but also prioritises poverty reduction first, and does not leave the host government under disadvantageous terms.
Resources are being thrown at the problem to build capability and capacity within governments to navigate the complex private-public process, particularly at the early stages of negotiation. But it seems more education, training and research is required on all sides to make sure this funding model is genuinely representing the formost development goal – reducing inequality.
“The idea of a PPP works well, but you’ve to make sure all the things around the deal have been built. That means credible institutions, the rule of law, then the notion of protecting the most vulnerable,” says World Bank lead finance officer, PPPs Cledan Mandri-Perrott.
Mandri-Perrott, who graduated in civil engineering, now manages the bank’s Infrastructure Finance Hub and says the reason for PPPs is simple: supply and demand.
“The paradigm we are in today is that the international demand for infrastructure is huge. Demanding on who you speak to… but it’s in the trillions [of US dollars]. The other fundamental point is that governments can’t do it all, neither can institutions like ours.”
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Mandri-Perrott says under increased demand, governments have to be much cleverer in the way they look at infrastructure. “Governments must be much more strong or strategic in the way in which they use their own resources, in the way they raise money for infrastructure, and the way they use different stakeholders.”
He says PPPs have been used successfully to benefit host economies, for example in Mexico for waste-to-energy solutions, and in South Africa for solar projects.
“One has to think about our whole reason to be the [World] Bank, it’s to combat inequality,” says Mandri-Perrott.
“We’re not looking at things through rose-coloured glasses, we know what the reality is on the ground. I don’t think we have reached the full potential.”
One thing that becomes clear is that there must be honesty and clear communication on both sides of the negotiating table around the sustainability of a PPP. Of course that is easier said than done.
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“Once you get past the technical and economic aspects of a PPP, the political part comes into play,” adds Atkins Acuity associate director Marie Lam-Frendo.
Lam-Frendo has worked extensively in Africa and more recently in Laos, advising the government there on PPPs. Laos has much of the same issues that countries (developing and developed) around the world face – political will for infrastructure not extended beyond the electoral cycle.
A ‘pipeline’ on infrastructure spending, such as those published recently in the UK or Australia, simply does not exist for Laos, or in most countries of the world. It is because they are tricky to write – it took the African Union Commission seven years to write theirs.
“If you don’t have a pipeline that is clear and established by all counterparts, when you have a new presidency or ministers coming to power then they reset the agenda with projects they are more interested in,” says Lam-Frendo.
“You need to know these projects are bankable, before a PPP can be created. And in the public sector there is a quite limited understanding of the criteria the private sector is evaluating.”
How will these guys be able to move ahead without the support of the Multilateral Development Banks?
Atkins Acuity associate director Marie Lam-Frendo
Lam-Frendo says there is also limited understanding of the “middle income trap” – economies not mature enough to attract private funding, yet not poor enough for development assistance.
“I think then, how will these poorer countries be able to move ahead without the support of the Multilateral Development Banks? It’s really something that should be monitored more closely. I don’t think it is understood completely or explained clearly enough.”
Lam-Frendo says that with some countries reaching, at best, 15 to 20% of infrastructure spending by PPP, it is clear they will never provide the silver bullet to global poverty woes.
Engineering a better world | Private Poor Partnerships