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.

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?

PPPs have the potential to deliver…

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.

…but several fundamentals are required for PPPs to succeed

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:

• Political commitment. PPPs breed and grow in the presence of a stable political commitment that is often overlooked. IEG’s 2014 PPP evaluation found that lack of political commitment was responsible for 50 percent of failed attempts by the WBG assistance to client countries in structuring PPPs. Creating political commitment, however, is not the same as “lobbying” for PPPs.  The latter may result in a fragile commitment based on uninformed or biased political consensus, which increases the risk of PPP failure.
   
• Sector reforms. Adequate laws, regulations and institutional capacities are well-known necessary conditions for PPPs to succeed. However, those sector reforms are not easy to achieve. Despite the WBG’s leverage and country presence, IEG’s 2014 PPP report found that sector reform success was manifest in only 55 percent of World Bank PPP loans. While government commitment explained a lot, other factors contributed to success, for example, a smart sequencing of Bank Group’s interventions and the continuous engagement by WBG institutions in a country --over several years and project cycles-- as sector reforms often took longer than anticipated.  The 2016 IEG evaluation on “transformational” change corroborated the lesson that best PPP results were achieved when WBG used a comprehensive approach to stimulate and sustain systemic change, supported by several interventions.
   
• Being inclusive. Early engagement with stakeholders, building broad coalitions and political consensus early in the PPP process, can build support and maintain momentum behind sector reforms. Likewise, according to IEG reports on PPPs and transformational engagements, when structuring specific PPP deals, early and broad-based stakeholder consultations is the most decisive factor to turn initial “troubled” PPP projects into successful ones. The Bank Group’s efforts in the Senegal water sector, for example, illustrate well that building consensus among broad stakeholder groups, including unions, civil society groups and donors, pays off. The Senegal urban water sector now ranks among the top performers – owing its success to a well-performing institutional and contractual framework with the creation of a public holding company (SONES) in charge of managing the sector assets and recruitment of a private operator (SDE) to operate the urban water facilities and deliver water services.
   
• National capacity. IEG’s 2014 PPP evaluation found that client countries generally lack the skills and resources to prepare a pipeline of bankable PPP projects to attract private sector participation.  Many countries procure a few PPPs only, which is a disincentive to build capacity.  Yet, successful PPPs require government authorities to be able to assess the bankability of PPP projects and to manage the fiscal risks associated with PPPs, basing their decisions on a sound comparison of the pros and cons of the PPP option compared with standard public procurement. Adequate monitoring of the performance of PPP projects to protect and defend the public interest in the case of PPP contract re-negotiations, for example, is also a national capacity fundamental. The Bank Group’s work in Colombia along with other development partners, demonstrates that building national capacity and developing an institutional set-up to handle PPPs is worth the investment: In the last six years, Colombia has made significant progress in developing PPPs, including the development of the Fourth Generation (4G) Toll Road Program.

Uncertain future for PPPs

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.]

Related Creating Markets blog series:

• Creating Markets: Learning from World Bank Group Joint Projects
• Creating Markets: Lessons from Experience in Developing Countries