Mythbusters: Using data to disprove PPP fallacies

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Photo Credit:  NATS Press Office

Editor’s Note: The World Bank Group is committed to helping governments make informed decisions about improving access to and quality of infrastructure services, including using Public-Private Partnerships (PPPs) as a delivery option when appropriate. One of the PPP Blog’s main goals is to enhance the understanding of PPPs while eliminating misconceptions about them, ultimately enabling better decision making throughout every stage of the PPP cycle. To that end, the new “Mythbusters” series, authored by PPP professionals, addresses and clarifies widely-held misunderstandings.

In the PPP universe, both advocates and detractors use anecdotes to prove their points about PPPs and infrastructure. PPP successes and debacles are recycled endlessly to argue for one side or the other. But we can move past the myths, in part with the help of the World Bank’s Private Participation in Infrastructure (PPI) Project Database, which includes information on over 6,000 projects from 1984 onwards, capturing data across 30 fields, including contractual form, project closure date, location, contract duration, private sector partners, and multilateral support. By drawing on that resource, alongside other large data sets and comparative case studies, we can confirm or debunk PPP myths rooted in popular commentary. Here are a few examples that show how research can set rumors right.

Projects involving multilaterals tend to fail more often.”
The PPI Database does, indeed, show that a higher percentage of projects with multilateral support have been cancelled or are in a state of distress compared to those that do not have multilateral financial support. But economic analyses that tease out institutional, political, and project factors show that the involvement of a multilateral is actually positively significant to project survival and levels of investment.

The descriptive statistical patterns result because multilateral institutions tend to support projects in regions with complex and challenging operating environments that make cancellation more likely and limit foreign direct investment in general. That is, higher rates of failure are generally attributable to the local conditions where multilaterals tend to operate, not their participation. Moreover, the legal and political characteristics of a market are important determinants of multilateral development bank (MDB) participation. Countries with higher legal risks are more likely to involve MDBs in their PPPs.

PPP success is just a matter of designing good contracts.”
Contract design is undoubtedly critical to PPP success. A paper by Manabu Nose, for example, empirically demonstrates the importance of risk allocation in the contract and the risk-bearing capacities of government and business. On the one hand, a contract cannot allocate risk too excessively to the private partner. But the research also demonstrates a dilemma: while guarantees can make projects bankable by relieving private-side risk, larger government contingent liabilities increase the risks of cancellation, since called guarantees are likely to spur disputes. These kinds of findings are helpful to inform other contracts.

Looking past the contract, research also tells us that attracting and sustaining private participation depends on a host of institutional and bureaucratic conditions. A government’s capacity to protect property rights becomes important to the ability to sustain a PPP over the long term, particularly for concessions. Analysis of the structure of property rights suggests that judicial independence, legal enforceability of assigned rights, ability to utilize the legal system, and integrity of the legal system are significant to long-term concession survival. On the investment side, larger markets with stable inflation, stable political systems, sound rule of law, and the capacity to provide quality regulation lead to more PPP investment. These results give us an appreciation of the legal, institutional, and economic underpinnings required to attract and sustain PPPs.

PPPs are too risky to work in politically volatile and highly democratic markets.”
Patterns related to political participation are interesting, as they shed light on the dynamics of politics, investment, and performance. On the one hand, increased citizen voice and political volatility can discourage investment due to costs of garnering public approval and risks associated with public dissent. Political resistance has been recognized as a central factor in private investment failures in many countries. But more active democracies also tend to see better contract performance and investment, as increased transparency controls graft and intensifies pressure to perform.

Data is an essential tool in untangling myths and facts about PPPs.  As we continue to build good data sets (on both private and public infrastructure services) and test common rhetoric empirically, we should also incorporate lessons of the past, generate finer and more extensive appreciation of the variables that matter to PPP performance and investment, and better focus our efforts to address the challenges that impact PPP outcomes and infrastructure investment.

To read more about data and PPPs, see Handshake.


Schuyler House

Infrastructure Economics and Policy Consultant

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