INFRASTRUCTURE DEVELOPMENT – THE ROLE OF PUBLIC PRIVATE PARTNERSHIPS
Financing infrastructure to accelerate transformational change is among the key challenges of the 2030 Agenda for Sustainable Development. Public investment continues to play a strategic role, but public budgets are often constrained and governments may lack required capacity. This has heightened expectations that public-private partnerships (PPPs) with the domestic and foreign private sector could furnish much of the $3.3 trillion to $ 4.5 trillion per year, which is the estimated need for basic infrastructure investment in developing countries alone (UNCTAD, 2014). In addition to bringing private finance to the table, PPPs also aim at sharing risks and combining private and public managerial and technical skills. However, it is important to keep in mind that there is insufficient empirical evidence to support the growing expectations placed upon PPPs, and governments should be cautious about viewing them as a panacea. A prudent approach creating dedicated expertise on PPPs in public institutions, supported by technical assistance from the international development community, can help PPPs to deliver their expected development benefits.
PPPs have been widely used in developed and developing countries. Private sector participation in infrastructure projects in developing countries has doubled since the beginning of the millennium. It amounted to about $164 billion in 2014 (Figure 1), roughly equivalent to overseas development assistance (UNCTAD, 2015). In 2014, among low – and middle-income countries, China had the second most PPP projects – hosting 50 projects with the largest amounts spent in transport and energy – just behind Brazil, down from its first position in 2013. India remained third both years. However, projects in China involved smaller investment amounts, with total PPP investment of $4.0 billion in 2014, in the 10th place, far behind Brazil ($57.6 billion) and Turkey ($14.4 billion).
PPPs are the most effective when public budgets are severely constrained and when the technical expertise provided by the private sector improves the effectivity of public service provision. But there is significant evidence of inherent limitations, liabilities and pitfalls (IEG, 2014; ECLAC, 2015; UNCTAD 2015). PPPs typically make only a small contribution to total infrastructure development. Estimates of the public sector’s share vary from between 70 per cent to 90 per cent, especially in low income countries. And PPPs seldom emerge where needs are greatest, such as in water and sanitation (Figure 1). They are also concentrated in larger more dynamic markets (such as Brazil, China, India, Mexico, Russian Federation and Turkey) and in telecommunications and energy projects where finance could typically be obtained by other means.
This means that growing use of PPPs has not relieved state responsibilities for investment in infrastructure development; governments still need to do the heavy lifting. Caution in assessing the long-term fiscal costs of PPPs is also warranted because downstream contingent liabilities are generally not quantified at the project level. Even when things go according to plan, government liabilities can arise in various ways, whether from formal commitments through contracts, or informally, stemming from the simple fact that governments are the providers of last resort. And when things go wrong, the fiscal costs can be high. Uncertainty in PPPs’ fiscal implications is high Figure 1 because judging the risks involved in such projects is difficult due to a lack of standardized financial reporting. For example, this has prompted Brazil to introduce exposure limits for state and local governments and China to reduce the use of PPPs (UNCTAD, 2015).
PPPs remain a useful source of long-term financing for development, especially given the paucity of other resources. But it is important to understand fully the consequences and ramifications of their use and to be aware of potential future costs. This will require efforts to improve accountability and transparency on PPPs. An important step in this regard would be adopting transparent accrual accounting systems that make explicit the long-term investments and liabilities implicit in PPP structures. It is also necessary to improve decision making processes with respect to PPPs. Creating a dedicated forum for the sharing of experiences and expertise on PPPs may be useful, as well as building networks of developing countries for this purpose. Technical assistance by the international development community can also support efforts at the country level to help PPPs to deliver their expected development benefits.