A healthy Public-Private Partnership (PPP) has several defining features: strong competition, bankability with low financial costs, lower risk of renegotiations, secure value for money, and efficiency gains.
What does it take for countries to develop PPPs that can fit this description? Why is it that some countries such as India, Colombia, Turkey, and Egypt have been able to develop strong and successful PPP programs while others have not been able to award any projects under special-purpose PPP legislations?
Our experience with infrastructure PPPs across the globe suggests that three institutional pillars are needed to increase the probability of PPP success.
1. Political will
The provision of infrastructure and services by the private sector is a radical change in the status quo. In many cultures, the very idea of private sector management, operation or ownership of ‘public services’ is foreign, and securing buy-in for PPPs requires significant political leadership.
In that context, firms looking to enter a new PPP market like to see strong political support from the highest levels of government (President, Prime Minister, or someone close), especially considering that firms take much more risk in a PPP than they do under a more traditional public procurement contract (in a PPP design, private companies assume the risk of construction, operation and financing under a long-term contract; in traditional procurement, by contrast, the works are paid for in advance).
2. Institutions and governance
Making credible, high-quality PPP bids requires time, effort, and money. To justify these high transaction costs, firms considering entering a PPP need to know their bids will be reviewed in a timely manner using a transparent and standardized process. This is key to reducing delays and risks related to judicial proceedings, bad press, unforeseen investigations, or any kind of discretionary decisions. Standardization is particularly important to international investors, who need comfort and confidence in how they will be treated (contract terms related to termination, arbitration and dispute resolution, and repatriation of profits are particularly important in this context).
Transactions that are subject to approval from different branches of government– some countries require parliamentary approval– can be perceived as especially risky by potential bidders; from an investor’s perspective, it would be preferable to focus the approval on the project and process, and to make sure it can be secured before the actual bidding.
On the other hand, excessively fast procedures are likely to scare off high quality bidders as well—not just because preparing quality bids requires time, but because a bidding process that cuts corners becomes more vulnerable to judicial or other investigations down the road.
3. Technical teams
Another key condition to the success of PPPs is the presence of a strong technical team in government that understands the market, the potential pool of bidders, their requirements, their limitations, and ensures clarity and consistency in the process.
But a strong technical team in government is perhaps even more important for contract management during the implementation phase. PPPs are a sophisticated business that requires very specific and strong financial, legal and technical skills to set the level of service, risk allocation/mitigation measures, project finance, legal provisions for contracts, contract monitoring based on outcomes, etc. Governments should expect that firms investing large sums of money into a project will use the very best legal, financial and technical support to protect their interests. It is paramount that the skills on the government’s side measure up to this, if only to avoid the risk of expensive renegotiations that would undermine the public benefits of the PPP.
Countries must pay attention to all three pillars simultaneously: if some pillars are strong but one is weak or missing, the success of the entire PPP framework will be compromised. For better outcomes, governments first need to strengthen these three pillars and then start with relatively simple projects such as roads or ports. This might not be the easy way out. But getting the institutional foundations right is the essential first step for any country looking to gain experience, create confidence in its PPP program, and achieve lasting results.