One question, eight experts, part one: Isabel Rial

Some public-private partnerships (PPPs) fail. That’s a fact. But when the lessons these failures impart are integrated into future projects, missteps have the potential to innovate — energizing the learning cycle and setting the stage for long-term success. To gain a better understanding of how innovation in PPPs builds on genuine learning, we reached out to PPP infrastructure experts around the world, posing the same question to each. Their honest answers redefine what works — and provide new insights into the PPP process.

This is the question we posed: How can mistakes be absorbed into the learning process, and when can failure function as a step toward a PPP’s long-term success?

Our first response in this eight-part series comes from the International Monetary Fund's Isabel Rial.

For centuries, PPPs have been used by governments as an alternative to traditional public procurement for the provision of public infrastructure, although results have been mixed. If properly managed, PPPs can deliver substantial benefits in terms of mobilizing private financial resources and know-how, promoting efficient use of public funds and improving service quality.

Yet in practice, PPPs have not always performed better than traditional public provision of infrastructure. The reasons for this vary across countries.

In many countries, infrastructure projects have been procured as PPPs not for efficiency reasons, but to circumvent budget constraints and postpone recording the fiscal costs of providing infrastructure services. Due to inadequate budgeting and accounting of PPPs, they can seem much more affordable, encouraging governments under short-term pressure to reduce their deficit or debt to use PPPs — even if, in the long run, they could cost more than public procurement. This has led some governments to go forward with low-quality and fiscally costly projects that would otherwise have been excluded from their public investment plans.

In some cases, PPPs have also resulted in large fiscal costs due to bad contract design and the realization of contracted risks, such as those associated with revenue guarantees. Therefore, if not properly managed, fiscal risks from PPPs can potentially have significant macroeconomic implications. They can potentially undermine efforts toward fiscal discipline by moving spending off-budget, creating firm and contingent liabilities for government.

International experience shows that there are many factors underpinning the so-called “failure to deliver” in PPP projects. This can include a weak monitoring and controlling capacity of PPPs across the public sector, but particularly in Ministries of Finance (or budgetary authorities). Second, a lack of integration of PPP projects into the budget process, medium-term fiscal frameworks, and debt sustainability analysis (given that PPPs are typically off-budget) is to blame. And third, a lack of transparency in fiscal reporting practices and quantification of fiscal risks can be at fault.

Yet governments can manage fiscal risks arising from PPPs to ensure that the potential benefits from PPPs are realized without weakening public finances or jeopardizing macroeconomic stability. Here are some ways to do that:

• Governments can pursue only “good projects” by having sound project planning, evaluation, and selection. There should be a clear investment strategy to select public investment projects on the basis of national priorities and cost-benefit analysis. Once a project is selected, the next step should be to determine whether procuring it as a PPP provides greater efficiency than public procurement.
• Governments can develop strong fiscal institutions to manage PPPs. It is essential that the Ministry of Finance manages a “gateway process” for PPPs that gives it sufficient control at each stage of the process. At any point in the process, the Ministry of Finance should be able to stop projects that are fiscally unaffordable. A dedicated PPP unit, with specialized and capable staff, can be helpful in managing this process. The Ministry of Finance can also consider establishing ceilings on both the stocks and flows of PPPs to help control fiscal risks.
• Governments can ensure a sound legal framework to manage public investment in general and PPPs in particular. This should involve a clear, fair, and predictable legal environment for the private sector. The legal framework should also clarify the roles and responsibilities of all relevant counterparts in PPP transactions.
• Governments can also implement good budgeting, fiscal accounting, and reporting for PPPs aimed at achieving full and transparent disclosure of all future budgetary costs and fiscal risks from PPPs. The impact of PPPs on future government spending should be incorporated in the debt sustainability analysis and medium-term budgetary frameworks. The use of commitment appropriations in the budgetary process, which authorize governments to commit public resources for future years, can also be helpful in drawing attention to the future costs of PPPs.

PPPs can be effective in delivering public infrastructure under certain conditions, but they also entail fiscal risks. These are manageable when officials pay close attention to models that have worked for other countries and tailor their approach accordingly.