Balancing the PPP equation

At a young age we are introduced to the concept of “equations” – first in math class and then in chemistry. And, slowly, without us realizing it, the concept of equations becomes something we apply constantly to our day-to-day life.  Cooking, for example, is a chemical equation after all. Just like two atoms of hydrogen and one atom of oxygen gives you water (2H2 + O2 = 2H20),

thick-cut pancetta/bacon + eggs + pecorino/parmigiano cheese + salt and heavy pepper + spaghetti = pasta carbonara.

So, can we not extend the equation concept to PPP projects?

Clear policy + consistent processes + robust institutional framework + strong political will + adequate project preparation + proper risk allocation + competitive tendering + monitoring = PPP projects.

Here’s a closer look at the parts of the equation:

At the enabling environment level: A conducive enabling environment replete with a clear, consistent, and sound policy, legal, and regulatory framework is a key ingredient for the long-standing success of PPP projects in a country.  Add to this well-defined infrastructure planning processes with a public financial management approach and clearly defined institutional roles and responsibilities—with adequate capacity within the public sector to prepare and structure projects—the chances of a successful PPP program are even higher. Strong political will is to a successful PPP project what the spaghetti is to pasta carbonara. Without it you may cook up something, but it is surely not a successful PPP project.

A leaf out of some recipe books

A World Bank study on the relative proportion of investment commitments made by the public, state-owned enterprises,  and private sector to infrastructure projects found that, while the share of public sector investments in infrastructure (83%) was disproportionately higher than the private sector (17%), there were 10 countries where private sector investments exceeded public sector investments. A closer look at these countries revealed that most have been pursuing a policy shift and institutional reforms aimed towards promoting PPPs.

The Philippines has consistently attracted multibillion-dollar private investments in infrastructure projects every year, ever since the 1990s. The government enacted the BOT Law and associated regulations in 1990 with the Government Procurement Reform Act coming in 2003. These initiatives contributed to the financial closures of more than 70 projects receiving private investment between 1987 and 2003. As well as establishing a PPP regulatory framework, the government also established two PPP units—the PPP Center in 2010 and the PPP Governing Board in 2013. These efforts, along with the current national strategy to utilize PPPs as a means to accelerate annual infrastructure investment to five percent of GDP from 2016 onwards, has resulted in a constant flow of successful PPPs. A total of 189 projects receiving private investment, worth $70.6 billion, reached financial closure between 1990 and 2017.

In addition to this high-level attention, it is important that public authorities spend adequate time and resources in project preparation through robust PPP viability assessments and feasibility studies.  This likely includes hiring quality transaction advisors with international experience. Proper risk allocation to the party best suited to manage and mitigate the risk is another crucial aspect of ensuring success. While it might be tempting for public agencies to push all the risk down the private sector’s throat, this strategy may backfire and leave the PPP project in a regurgitated mess. Open, competitive, and transparent tendering is essential for deriving the best value for money. And finally, setting up a robust monitoring mechanism at the start of the project minimalizes the chances of it going haywire later.

Customized to taste

Just like the proportion of pancetta/bacon to spaghetti to cheese varies based on individual taste, the relative importance of each of the terms described above in the PPP equation also varies from country to country. For example, some countries (like Turkey) have had PPP traction without any PPP law while others (like the Philippines) have seen traction after the formulation of a law. Similarly, Mexico has done PPP projects without the presence of a central PPP unit while others, like Brazil and Jordan, have found one instrumental.

The seasoning also varies to taste. The latest seasoning to consider for PPP projects is climate adaptiveness. Some countries are more vulnerable to climate change than others and hence, should start trying out the green and resilient seasoning to their PPP projects soon to preserve themselves well.