Creating Markets: Are PPPs the Answer?
World Bank Group experience suggests several fundamentals need to be in place for PPPs to contribute to infrastructure market creation.
World Bank Group experience suggests several fundamentals need to be in place for PPPs to contribute to infrastructure market creation.
By: Stefan ApfalterJosé Carbajo MartinezIf they are designed and implemented well, infrastructure PPPs ‘can deliver the goods’: mobilize private sector finance, help the public sector improve its procurement skills for the preparation, selection and design of infrastructure projects; transfer risks from the public to the private sector; achieve on-time and on-budget project execution; and ensure adequate service operations and maintenance.
Under the Maximizing Finance for Development (MFD) agenda, the World Bank Group (WBG) has outlined a new approach that prioritizes private financing and sustainable private sector solutions to help countries achieve the Sustainable Development Goals by 2030.
With its potential to attract private funding, design expertise and operational know-how, many view Public Private Partnerships (PPPs) as an example par excellence of private sector solutions that can help build infrastructure, deliver access, and provide quality services.
Much hope, therefore, rests on PPPs to help mobilize an estimated $1.8 trillion every year, the amount needed from the private sector to bridge the investment gap to achieve the SDGs. Most of these funds would flow into construction of basic infrastructure such as roads, railways, ports, power stations, water and sanitation. But is such hope realistic or overstated?
If they are designed and implemented well, infrastructure PPPs ‘can deliver the goods’: mobilize private sector finance, help the public sector improve its procurement skills for the preparation, selection and design of infrastructure projects; transfer risks from the public to the private sector; achieve on-time and on-budget project execution; and ensure adequate service operations and maintenance.
By contrast, poorly structured PPPs can quickly materialize high risks, and create many headaches for the public sector and private parties involved through a variety of unwelcome developments. Overly optimistic demand forecasts, for example, can quickly turn into insufficient revenue and lead to bankruptcy or public-sector bailout; poorly designed payment mechanisms can result in excessive tariff increases creating affordability problems; inefficient provision of government guarantees can have severe fiscal implications through the related contingent liabilities.
Hence, for PPPs to help deliver adequate services and create markets for infrastructure, a good understanding is required of the underlying incentives of the private parties involved and of the political economy factors that contribute to successful outcomes.
Recent IEG work, such as the 2014 evaluation on PPPs; the 2016 Synthesis Report on Health PPPs; and the 2017 Learning Note on Transformational Engagements contain a rich set of lessons from the PPP experience of the World Bank Group, which identify fundamentals required for PPPs to succeed and create markets for infrastructure:
Perhaps the difficulty of putting in place all the above fundamentals, including the complexity associated with PPP arrangements, explains the recent decline in private sector participation in infrastructure. According to the 2016 World Bank Private Participation in Infrastructure (PPI) Database, the year 2016 experienced the lowest level of investment commitments compared with the previous 10 years. The volume of PPPs in 2016, for example, decreased by 41percent compared to the preceding five-year investment average of $121.4 billion.
A new report, Contribution of Institutional Investors to Private Investment in Infrastructure, paints an even gloomier picture: the current level of institutional investor activity in new infrastructure deals is only 0.7 percent of total private participation in infrastructure investment in emerging markets and developing economies (EMDEs).
This evidence points to the importance of the “Cascade Approach” in the Bank group’s MFD agenda, with its focus on remedying the obstacles that block private sector solutions. Helping client countries identify sound PPP opportunities and subsequently “de-risking” those through regulatory reform and building of national capacities appear more relevant than ever.
[NB: This is the third blog in the Creating Markets blog series. The motivation for the blog is to share lessons from relevant IEG evaluations early enough to help the Bank Group be successful in its systematic implementation of the Creating Markets concept.]