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In my last blog, I compared Public-Private Partnerships (PPPs) with marriage. I had explained that, though very different, the public and private can come together as they each possess characteristics beneficial to the other. Great in theory, but often difficult in practice.
Critics of PPPs abound and listing them here would be impractical. But whether they are auditors, civil society or within the World Bank Group, critics help us improve. We try to respond to our critics, including through blogs such as this one.
It is folly to presume private and public interests are necessarily aligned, similar to assuming that marriage partners share all the same interests. This presumption misses the power of PPPs. The private sector seeks profit, and this motive drives efficiency, reputation and delivery, where incentives are aligned.
Governments are driven by politics and election cycles. This political motive drives affordability, improved service delivery and community engagement. Can the incentives align? Yes. We have also developed tools to assist clients, for example: the Standard Form contractual provisions, the risk allocation matrices, and assembling sample laws and documents from around the world. We continue to try to understand each other better, and to identify the right incentives and the right motivation.
Motives and Motivation
Some of us innately fear the profit motive, and conclude that the private sector is reaping all of the benefits to the detriment of others. This is not unlike marriage, where we spend enormous amounts of time and money trying to figure out what motivates our partners.
For the most part, private investors pursue the most profitable projects: those with revenue streams sufficient to pay debt service and a reasonable equity return. This leaves governments to deliver those projects that do not cover costs; tax monies in essence subsidize services that are not commercially viable.
Hiring experienced transaction advisers can help ensure private investors receive only the benefits necessary to attract investment. The better the project, the fewer the benefits. IFC Advisory services provide such support, as does funding from the Global Infrastructure Facility and other World Bank Group-managed trust funds.
Eventually, you have to pay the piper
Historically, PPPs allow governments to access additional capital, often supported by project revenues rather than the government’s balance sheet. When project revenues come from government (for example, through availability payments), any “off balance-sheet” treatment creates dangerous accounting incentives and may not protect the government from liabilities or fiscal risk. A thorough assessment of a project’s “value for money” is critical, no matter how attractive the financing appears. This is like selecting a spouse based entirely on their looks; great for the wedding day, but quickly becomes a nightmare.
The deferral of payments and liabilities until services are delivered is another strength of PPPs—as well as a weakness. Governments may choose a PPP to defer costs to future governments. This illusion of affordability and viability must be addressed during the feasibility assessment.
The fiscal implications of PPPs are also often difficult to measure, and rarely properly accounted for in government accounts. Either due to ignorance or intent, governments can avoid the issue and not account for nor report the fiscal risks associated with PPPs. The World Bank Group provides advice on fiscal risk management, and with the IMF have developed a tool that helps measure the fiscal risks associated with PPPs.
But to be frank, a truly honest assessment of the implications of PPPs is often difficult to deliver, both politically and practically. We at the World Bank Group try to elevate this issue every time we advise governments, but the discussion is not always as effective as we hope.
Marry in haste, repent in leisure
Many of these challenges are linked to the negotiation capacity of governments. While private investors often engage high-priced lawyers and advisers to help negotiate investments, governments generally do not, leading to an imbalance of power that can undermine government interests.
There are efforts to address this imbalance. As mentioned, the GIF provides a great service, as does the African Development Bank’s African Legal Support Facility and the IFC’s C3P, amongst others—all help governments to rebalance their negotiation capacity.
Many of us urge friends and family to carry out proper due diligence before getting married. Even if the advice is ignored. Why not follow the same advice with PPPs?