Beating the odds? How PPPs fare in fragile countries.

While discussion about Maximizing Finance for Development (MFD) is ramping up with governments and the international development community to seek innovative approaches to mobilize more private sector investment in developing countries, there is a group of countries with an additional layer of complex challenges.

It brings me no pleasure to say this, but a fair number of countries have economic and financial conditions, business environments, and rule of law that are almost always weak. Clearly, these conditions significantly increase the risks of investing in infrastructure for the private sector; consequently, the markets for public-private partnerships (PPPs) tend to be less developed.

We recently looked into how PPPs performed in these countries and evidence from our new report— The State of PPPs in Countries Affected by Fragility, Conflict, or Weak Institutions—indicates that we should not raise expectations about the role MFD may have in the 61 countries analyzed. These are countries that have a country policy and institutional assessment score of less than 3.2, presence of a United Nations mission, and/or refugees/internally-displaced persons comprising more than 10 percent of the population.

The good news is that we found some of these countries were indeed able to bring projects to the market, and even a few were able to create PPP programs. The bad news is that these good performers are the exceptions.

The striking—though perhaps unsurprising—reality is that most of these fragile countries have few or no PPP projects. Investments there remain low both in absolute numbers and as a percentage of gross domestic product. While investment has increased in recent years, the rise has been driven by a small number of countries—mainly Colombia and Nepal. 
         

A little light at the end of the tunnel (pun intended)
What can we learn from those countries that were able to bring projects to financial close? The answer seems to be in developing small renewable energy projects, as most have gained experience in energy PPPs. This is where we see the most projects and the greatest investment volume during the 2012–16 period. In fragile countries where grid infrastructure is nonexistent or seriously damaged, new off-grid and mini-grid renewable energy technologies seem to play a significant role in increasing energy connections. 

There’s additional light: among other reforms, many of the analyzed countries have been strengthening their institutional and regulatory frameworks for PPPs to attract private sector investments, particularly for infrastructure projects. In recent years, some have approved new PPP laws or reformed public procurement laws. That said, the countries still lag with respect to the preparation and management of contracts.

And here are the surprises we found:

• While fragile countries tend to have low public-sector technical and financial capacity to develop PPP projects, they were not more prone to accept projects originated through unsolicited proposals (USPs). This is a positive finding, as we advise that USPs should be used with caution as an exception to the public procurement method, to protect the public interest.

• The overall picture shows that projects in fragile countries do not underperform when compared to other developing countries. The share of cancelled PPP projects in fragile countries was only slightly higher than in other developing countries. It was actually lower when cancellation rates were assessed as a percentage of investments. Contrary to perception, only one-fourth of these projects were cancelled due to lack of security or halted because of civil war, and one-third of those cancelled were terminated during the conflict.  The existing literature suggests that this could be explained by the fact that projects in in these countries have higher support from multilateral development banks and bilateral agencies.

To wrap up, our research shows that, despite efforts to mobilize private sector infrastructure financing, the number of PPPs and investments in fragile countries remains low. We need to do more to come up with innovative approaches to get more private participation in, especially as we know that infrastructure is an important tool that supports conflict resolution and or to helps countries avoid relapse.

The report was produced through the support of PPIAF, a technical assistance facility financed by 17 multilateral and bilateral donors
 
To find out more about the challenges of developing PPP markets in fragile countries, please read the report here.
 
Related posts:

The 2018 Fragility Forum: Managing risks for peace and stability

Partnerships in post-conflict environments

Making PPPs work in fragile situations

Infrastructure in Fragile and Conflict-Affected States on the PPP Knowledge Lab
 
Handshake: Reconstruction PPPs (issue #9)