Traditionally, decisionmakers have sought to engage the private sector in the provision of infrastructure and key public services in an effort to access a wider range of innovations, resources, and expertise. Public-private partnership (PPP) projects in particular allow governments to introduce incentives that favor economic efficiency through an adequate allocation of project risks. In addition, under certain circumstances, the PPP has no impact in terms of country debt—an element that may be decisive for some governments looking to deliver needed infrastructure and boost economic growth without bearing additional budget burdens.
Fortunately, institutional investors and a constellation of private actors have shown that they’re willing to risk their own money for transparent public initiatives if the government pays periodically a predictable amount that allows for investment repayment and compensation for financing intermediation and the project risks they assume.
In general, we can say that the approach used to deal with projects risks has worked fairly well until now, in part thanks to the existence of a safety net shaped from a number of implicit and explicit obligations (including credit guarantees, insurance policies, economic and financial rebalance clauses, force majeure clauses, and contingent liabilities) directly linked to hazard events that are difficult to predict.
But COVID-19 has changed so much, and this formula appears to be insufficient to avoid the unprecedented damage that a good number of PPP projects are facing as people across the world hunker down to prevent the virus’ spread. These impacts are unprecedented; we already know that some projects will not survive. Moreover, in the months and years to come, other PPPs—especially in the transport sector—will have to cope with an unprecedented scaling down in-service demand. While they may technically survive, it won’t be easy or without cost.
In this context, a debate on how future PPPs should be conceived to enhance project resilience in the face of future unforeseen stress events has surged. There is a broad appreciation that the “new normal” stemming from the pandemic implies deep changes in people’s behavior in shared public spaces. This, in turn, will affect the way transportation infrastructure and related facilities have operated until now.
The consequences of this new normal are relevant for the private sector’s involvement in the financing and provision of infrastructure and public services, mainly because they mean a paradigm shift for businesses that partially base their economic and financial viability on demand assumptions. Moreover, in the absence of a complementary mechanism that can enhance the financial resilience of PPPs in the face of unforeseen stress events, developing countries that are the more prone to use PPP deals as leverage to incentivize economic growth and socioeconomic development could become collateral victims.
We have so little clarity for most things right now. Yet, what is crystal clear is that the current system of incentives is not favorable to private actors involved in projects that will be called to play a central role in COVID-19 national recovery strategies.
To the contrary, the current system tends to penalize the private partner in the case of black swan events, contributing to the worsening of the financial situation of ongoing projects and reducing their chances of survival. We need a more sophisticated evaluation framework for PPP deals.
Currently, there’s significant emphasis placed on assessing Value for Money. But the distribution over the years of the net benefits and actual payments that users and/or taxpayers will endure is central to ascertain whether a particular project will make sense in the case of unforeseen events. It is in this sense that I’d like to introduce two complementary forms of assessment: Value for People and Value for Future. Allow me to break these down.
Value for Money (VfM) is generally understood as whether a project makes economic sense, and its assessment aims at determining whether a particular PPP arrangement can lead to acceptable outcomes in terms of intergenerational effects, at least with regards to any possible alternative via conventional public procurement.
Value for People (VfP) refers to whether the net benefits directly linked to the particular project (economic, social, environmental and other broader benefits in the territory) are enough to compensate the actual financial burden that users and/or taxpayers will have to bear over the years.
Value for Future (VfF) looks at whether the project will contribute to enhancing the well-being of successive generations, taking into account the obligations linked to how it will be actually financed.
My new way of appraising PPPs, which makes use of the Intergenerational Redistributive Effects Model (IREM), allows processing these elements comprehensively. The model informs us about the impact on project socioeconomic benefits of different interest rates, loan conditions, and other financial compensations given to private partners for project risk mitigation. The rationale behind these indicators is that users and/or taxpayers should contribute in a fair way to project funding as successive generations will end up suffering negative redistribution effects if the project’s flows of net benefits and actual payments are not balanced.
What does this mean for the current heady environment for PPPs? It means that, if properly assessed, ongoing projects that show a future terminal downward trajectory could be put in quarantine while decisionmakers use their limited resources more efficiently. This would increase the possibility of survival during crises where what is needed is a relatively simple restructuring of the PPP’s financial package to conform to new realities or limited economic stimulus.
The World Association of PPP Units and Professionals (WAPPP) has already begun to build awareness of these measures before COVID-19 hit us all so hard. Now is the time to emphasize their relevance, as governments worldwide seek to limit the pandemic’s fallout on essential infrastructure services and eventually move into economic recovery.
You might also be interested in reading these related publications by the author:
Intergenerational redistributive effects due to the financing formula of investments in transport infrastructure : a microeconomic analysis
Intergenerational Redistributive Effects of Transport Infrastructure Financing. Case Studies from European and Non-European Countries.
Disclaimer: 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.
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