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The Latin America and Caribbean region (LAC) has an infrastructure gap: the region needs to invest at least 5% of GDP to cover its infrastructure needs, but is currently investing only half that. To put it mildly, there is still a lot of room for improvement for both the public and private sectors, and also for multilaterals working in the region.
In a combined effort to reduce infrastructure gaps, Public-Private Partnerships (PPPs) have become, again, a popular tool since 2005. LAC was the predominant region for PPPs until the late 1990s, when investments plummeted due in part to a backlash of poorly-implemented PPPs.
Triggered by low commodity prices and rising fiscal deficits, as well as by improvements in PPP readiness, many countries established dedicated agencies and strengthened regulations leading to increases in PPP investments from $8 billion in 2005 to $39 billion in 2015. In total, LAC has seen investments of $361.3 billion in around 1,000 PPP infrastructure projects in just one decade, mostly in energy and transport.
Their potential usefulness is clear: PPPs can help overcome some of the limitations of public provision— inefficiencies, lack of technical skills, slow procurement processes and budget constraints. But they also raise concerns: large-scale projects pose many risks, including technical, financial, environmental, and social. They also require institutional developments that take time to consolidate which, if done poorly, can result in higher costs and fewer, or worse, services. Moreover, transparency is key to mitigate corruption risk, which has recently gained much more visibility in LAC.
In this context, multilateral development banks (MDBs) can play an important role in supporting the development of suitable environments to attract private investment, providing independent project preparation assistance, and helping to close financing gaps. And they have a potential comparative advantage, given their ability to engage directly with both public and private sectors.
So how can MDBs strengthen their role and effectiveness when dealing with PPPs?
With that question in mind, the Office of Evaluation and Oversight of the Inter-American Development Bank (IDB) Group has reviewed its support to infrastructure PPPs at three levels: (1) enabling environment; (2) project preparation; and (3) financing, as well as the experience of other MDBs. MDBs financed a small (3%) but important share of the PPP investment in LAC, and the IDB Group was the largest (35%) among them, with 145 operations approved for $5.8 billion between 2006-2015.
Drawn from our findings, the Evaluation of Public-Private Partnerships in Infrastructure, published in March 2017, presents 10 recommendations that, although meant for the IDB Group, can be useful for other MDBs:
At the strategic level
- Identify and assess the potential demand for PPPs through country diagnostics that include analyses of, at least: infrastructure needs at the sector level, PPP environment, fiscal constraints and risks, and type of support governments are looking for.
- Define priorities, including a general framework considering in which countries and sectors support is needed and what type of support is needed, and defining priorities.
- Establish a PPP focal point in the general structure, with sufficient authority and resources to foster collaboration and pull together all relevant parties in the organization.
- Assess the current PPP capacities, taking an inventory of the current skills, identifying what is missing, and working on attracting and retaining needed skills.
- Reform incentives, rewarding the amounts mobilized from private investors and creating incentives for collaboration.
- Analyze infrastructure projects in the pipeline and advise countries on the most suitable delivery model, ideally independently of the sector that will be originating the operation.
- Explore the use and development of new financial and advisory products tailored to countries’ specific needs – local currency financing, advisory services, specific instruments to subnational governments, project preparation facilities.
- Strengthen the results framework for PPP operations. They should routinely review the value for money, the quantity and quality of services delivered, the costs for taxpayers and users, the likely sustainability of the arrangements and whether critical environmental and social objectives have been met.
- Design a specific PPP knowledge strategy, systematically capturing and documenting the results and lessons learned of PPP operations through an improved system for knowledge management.
- Systematically incorporate lessons of experience from your own organization and from other MDBs in the design and implementation of new PPPs operations.
MDBs are well-positioned to have a key role in these future PPPs, providing support to make them economically, environmentally and socially sound, to develop suitable environments that attract private investment, and to close financing gaps. Only by implementing these recommendations will we be able to contribute to a wave of successful PPPs and avoid the backlash we have seen before. The IDB Group has accepted the recommendations and is now moving to implement them.
- IDB Group’s Evaluation of Public-Private Partnerships in Infrastructure (English and Spanish)
- Dissemination event at the IDB Group (June 2017) – 5-minute video clip
- Infrascope for LAC: 2017 and 2014 editions
- World Bank Group PPP Knowledge Lab LAC PPP profiles
The content of this blog does not necessarily reflect the views of the World Bank Group, its Board of Executive Directors, staff or the governments it represents. The World Bank Group does not guarantee the accuracy of the data, findings, or analysis in this post.
The views expressed in this blog are those of the author and do not necessarily reflect the views of the Inter-American Development Bank, its management, its Board of Executive Directors, or its member governments.
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