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Making PPPs work in fragile situations

Andrew Jones's picture
I have been working in both Afghanistan and the Palestinian Territories for several years now, supporting both upstream enabling activities and working on specific public-private partnership (PPP) transactions. I recently traveled back to both places for our Public-Private Infrastructure Advisory Facility (PPIAF) to help design new interventions that will help develop private sector participation in infrastructure.
 
 
Kabul, Afghanistan
Supporting the development of private sector participation in infrastructure in fragile and conflict affected states is a strategic priority for PPIAF, where immediate and overwhelming infrastructure needs are apparent.
 
In that realm, PPIAF has long been supporting Afghanistan and the Palestinian Territories, among many other conflict impacted economies, and has achieved significant impact, particularly in the telecommunications sector in Afghanistan, and the solid waste sector in the West Bank. Increased access to infrastructure is crucial in fragile and conflict-affected states, and resulting services create opportunity and drive economic growth, thereby reducing the risk of resurgent conflict.
 
While both places face unique challenges, my experiences demonstrate some commonalities that could be applied to other economies with similar situations. Both Afghanistan and the Palestinian Territories have recently undergone political transition, and both have outlined plans to pursue private sector participation to accelerate access to infrastructure and drive economic growth. This comes in the context of growing fiscal constraints and reduced future donor budgetary support.  
 
Let’s look at the specific economic and political context of both Afghanistan and the Palestinian Territories to put things in perspective:
 
 
Kabul, Afghanistan
Afghanistan
The recent democratic transfer of political power in Afghanistan has brought in a national unity government that is whose goals include: commitment to stimulating economic growth, enhancing productivity and realizing self-reliance. Afghanistan faces an economic slowdown as a combination of the international military withdrawal, declining aid, political uncertainty, and a deteriorating security situation, all of which have contributed to a sharp decline in economic growth among other factors.
 
According to World Bank data, in 2014, growth in Afghanistan was estimated at only 1.5 percent, compared with an annual average of 9.4 percent over 2003-2012, while more than 36 percent of Afghans live below the poverty line. Building infrastructure to support economic growth and regional integration is a key priority for the new national unity government. The constrained fiscal situation and declining aid has led the government to pursue a PPP program in order to support the development and delivery of high-quality infrastructure services.
 
Palestinian Territories 
The West Bank and Gaza’s unique political, geographic and security context has had significant negative impacts on the provision of infrastructure services. In April 2014, an agreement between the Fatah and Hamas political parties led to the formation of a compromise unity government, with national elections to take place in due course. The population of the Palestinian Territories is growing at an estimated three percent per year, yet economic growth has slowed in recent years to only 1.5 percent in 2013.
 
The Palestinian Authority faces a weak fiscal situation due to falling growth and a reduction in donor support (which fell from US$1.8 billion in 2008 to US$0.8 billion in 2011). In its 2014-2016 National Development Plan, the Palestinian Authority recognized the need for significant improvements to the quality and affordability of infrastructure services, and acknowledged that its fiscal situation would require private sector participation to provide the necessary expertise and investment to supplement its public infrastructure budget.
 
Delivering PPPs in Afghanistan and the Palestinian Territories 
 
Three of the most critical components for PPP programs in any country are infrastructure planning, donor coordination and capacity. In Afghanistan and the Palestinian Territories, these components are even more important, as scarce resources need to be allocated and prioritized efficiently in a capacity-constrained environment to respond to massive infrastructure needs.
 
Infrastructure planning
While the infrastructure needs are vast in both places, neither of them has a robust public investment planning process to help prioritize public and private infrastructure investment. This leads to rather ad hoc infrastructure investment (by both governments and donors), and allows for neither efficient sector planning nor the filtering of projects suitable for private sector investment. This process creates challenges for the establishment of a successful PPP program, as pipeline development (a key element in the launch of a PPP program) is opportunistic rather than efficiently structured.
 
Enabling and encouraging PPPs in fragile and conflict-affected states therefore requires a broader analysis of the overall public investment planning process, of which PPPs is only a small part, in order to create the right conditions for systematized identification of PPP projects.
 
Gaza City

Donor coordination
Due to the ongoing fiscal constraints and risks involved in investing in both places, it is highly likely that PPP transactions, at least initially, will be reliant on donor support. This could be in the form of capital subsidies, guarantees or other mechanisms to enable private sector appetite.
 
With this in mind, PPIAF has an important coordination role to play in order to engage donors in the design and implementation of program activities. This process is intended to ensure long-term donor commitment and buy-in to PPP programs in both countries, as well as to encourage donor support to specific projects identified under the pipeline screening exercises.
 
In addition to increasing government capacity and understanding of PPPs, PPIAF also needs to support a mindset change among donors who are more used to one-off commitments to specific assets than longer-term support for infrastructure services.
 
Capacity
In Afghanistan, the Ministry of Finance established its PPP Unit to serve as the coordinating body and central champion for PPPs. In the West Bank and Gaza, the PPP program currently falls under the remit of the Deputy Prime Minister’s Office for Economic Affairs (where the PPIAF activity will seek to define a long-term institutional structure).
 
There is significant commitment in both countries to establish long-term and sustainable PPP programs, but there is recognition that they are only at the start of the process. Due to the lack of significant PPP experience in both countries, capacity building and training to build institutional and individual capacity will be required to enable the identification, development and implementation of PPP projects.  
 
In both places, many of the staff working on PPPs are donor-hired and funded consultants (with contracts linked to donor funding cycles). However, in order to ensure long-term benefits, capacity building processes should seek to identify and support talented PPP champions from within the civil service.
 
PPIAF is continuing to support the development of PPP programs in Afghanistan and the Palestinian Territories. Despite the challenging environments, there is strong government commitment to improving the delivery of infrastructure services by leveraging the private sector. Working with committed counterparts is an enriching experience, and I look forward to working in Afghanistan and the Palestinian Territories for many years to come.
 

Comments

Submitted by Maria Florencia Attademo-Hirt on

Thanks for this article that highlights the main challenges of enabling infrastructure projects under PPP schemes in fragile states. Which of your many lessons learned could be applied to small-island states facing limited institutional capacity and lack of infrastructure planning? Can you share any specific WBG PPP experiences in small-island states in the energy sector?

Submitted by Andy on

Hi Maria, thanks for your comment. Institutional capacity is a major challenge in small-island states, and this also relates to infrastructure planning and market size. PPPs entail large up-front transaction costs (human and financial), so the question is how to balance infrastructure needs/PPP potential with the likely small pipeline of projects. To what extent is it worth investing in PPP institutional/legal etc frameworks in a very finite market?

This is where the need for robust infrastructure planning becomes even more important in filtering/prioritizing the absolute top priority infrastructure projects, and from there identifying which projects would benefit most from a PPP approach (this may only be one project per year, if that). For economies of scale, it might make sense to centralize the institutional PPP responsibility and infrastructure planning in one place, such as the Ministry of Finance. If there are concrete opportunities in the energy sector, it may also make sense to nominate a PPP champion within the Ministry of Energy who would take responsibility for identifying and developing projects, and liaising with the central government authority.

Given that PPPs are only one component of a robust infrastructure planning process, it may make sense to focus technical assistance here, with the understanding that the PPP identification/development process would naturally draw from this planning process.

PPIAF has also done some recent PPP work in the Caribbean (not energy-specific) that might be worth reading: http://www.ppiaf.org/sites/ppiaf.org/files/publication/PPIAF_CaribbeanPPP_Report.pdf.

Submitted by David W. Lawrence on

Thanks for a very interesting post. I wonder if you've seen PPPs used for long-term housing needs of internally displaced persons? Ukraine now has over a million IDPs and the question has come up here.

Submitted by Andy on

Hi David, thanks for your comment. Interestingly we have been looking at potential housing projects in Palestine due to the chronic housing needs in Palestine.

Three points to note:
1) General housing sector: PPPs in the housing sector globally are challenging. Dependent on the structure, the payback period on housing projects might be very up-front (i.e. at the point of house purchase) so wouldn't necessarily lend itself well to long-term PPP contracts. In addition, dealing with off-site/connecting infrastructure (and who pays for it) is a particular challenge. Houses are also not complex infrastructure projects, so I would guess the only motivation to go the PPP route is financial rather than technical expertise?

2) Nature of PPPs: a house is a long term asset, and PPPs by their nature are long term contracts. There would have to be a significant amount of certainty about the long-term settlement of these IDPs to provide comfort to investors on bankability -- this would be extemely difficult I think.

3) Cultural/political issue: granted Palestine is a unique case, but a housing project to provide long-term housing for refugees would never fly culturally/politically. Palestinian refugees have a deeply help view on their right of return, so any solution short of this return has to be "temporary" in nature or it would be seen as an acceptance of the status quo. It's for this reason that so many Palestinians continue to reside in temporary refugee camps rather than accept permanent alternative solutions.

I am not familiar with the Ukraine case, but I am not convinced that a housing PPP for IDPs would make sense.

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