The Paradox of Public-Private Partnerships
Why the countries that need PPP projects are worst equipped to deal with it.
I introduced Public Private Partnerships (PPP) in my previous post. Public-private partnership (PPP) is a unique procurement mechanism based on long term contracts between a private entity and a government entity, aimed at increased efficiency for the provision of public services and/or development of public infrastructure in which risks and rewards are shared. The PPP method is different from traditional procurement mechanisms in several different ways.
In the post, I articulated the benefits that PPP offers. However, I also included the limitations of the PPP. In this post, I delve deeper into some fundamental issues, which are often overlooked when discussing PPP. I call these issues “paradox of PPP” because the countries that can benefit the most from having more PPP projects (the relatively poor countries, who lack financial resources to invest in large public infrastructure projects), are also the most vulnerable to corruption and lack the capacity and trust from people, which are critical factors to properly implement PPP projects. Hence, the paradox!
The first point to emphasize is that developing, implementing and managing a PPP project is a lot more difficult than it sounds. PPP projects require more complex agreements, higher transaction costs, longer time frame of commitment, better regulatory and oversight capabilities for the government. Hence, a government with good capacity (to monitor without corruption and capacity of enforcing regulations and regulatory oversight) is required for successful implementation of PPP projects. But good/strong capable governments are also generally the governments of advanced economies and least developed or developing country governments are generally considered ‘weak’ capacity governments (the causal connection;- whether more economic growth/wealth lead to good governance, or good governance lead to more economic growth/ wealth, is still debated). Thus, the rich countries with the best capability, are also the ones which generally do not have a financing gap,- which means that they have the financial resources or access to low interest debt for financing large infrastructure projects, hence not requiring private capital (it can be argued, the main benefit of PPP projects is not private capital and risk sharing, but increased operational efficiency). The comparatively poorer countries need the PPP attracting private capital to fill up the deficiency of capital poor countries to take on necessary infrastructure projects, which are also countries without good capacity (which is partly the reason why they lack the capital and are poor).
But perhaps, a stronger argument for developing countries to take more PPP project initiatives is that PPP projects have better efficiency due to private sector innovation, experience and management. But despite that, governments also play a key role in PPP projects. Given that PPP projects are agreements of long term (more than 20 years for them to be feasible), it is also unrealistic to expect the governments which lack management and financial capacity to handle traditional public infrastructure contracts (5–10 years) are going to do better with complex 20–25 year PPP contracts. Most of these governments also severely lack the training and experience to prepare, evaluate and supervise the complex engineering projects.
So, PPP in countries where they are most needed, might not be effective because they lack the monitoring and regulatory oversight capabilities.
It is also a myth that PPPs are less expensive. In fact, they are more expensive over the longer term because private financing is more expensive than public borrowing. Costs can be inflated because private investors may charge more to compensate for regulatory and political risks. However, PPPs do not require high up-front cost, which the government might want to avoid, or not have the necessary financial resources simply.
Another key benefit of PPP is to realize efficiency gains by better and more efficient management by the private partner. But in most poor countries, the private entities lack the capacity and are not much more efficient than the government. Even in these case, the more competent and capable private organizations are in the advanced economies. Hence, often the PPP projects in poorer countries are awarded to private organizations from advanced economies.
PPPs, like any other long term projects, can also become problematic in democracies, given that governments change every 5–6 years and a newly elected government might disagree with previous agreements made (hence, higher political risk, which also increases the project costs as private partner needs to be protected). Anew government might be tempted to use legal arguments to renege on a contract that was approved by the former government. As PPP projects also lack flexibility once the contracts are signed, it is more difficult for poorer governments to adapt project design and output based on the new realities on the ground.
Finally, PPP projects also create more decision-making points than traditional projects and hence, create more opportunities for corruption. For poorer governments, corruption is a big and persistent problem. E.g. often governments will make PPP agreements for services or infrastructure that is not required/ demanded. But because the politicians and officials get a lot of under-the-table bribes/ payments for making such deals.
The paradox of PPP exists. But it does not mean that no developing or poor country should take on PPP projects. It means, governments should be cautious when deciding which projects can be PPP suitable. PPP should be a complement to, not a substitute for, public investment in infrastructure.
