PPPs: A Global Surge in Private Development Finance
In this post GBPG Advisors David Baxter and David Kinley assess the potential of Public Private Partnerships as a vehicle for international development finance. It is based on an interview led by David Kinley, GBPG Advisor for External Relations and former staff member of a range of high profile international organizations, including the World Bank, UNDP and International Atomic Energy Agency as a publishing, media relations and development communication expert. Debates over “development finance” typically focus on global aid volumes, debt burdens, and aid conditionality. But sizeable flows of private funds into hybrid development partnerships registered one of the greatest investment surges into developing countries over this past decade. A 2022 World Bank report on “Private Participation in Infrastructure” reported that, since the end of the Covid-19 pandemic in 2021, the private sector has invested almost US$92 billion across 263 infrastructure projects (including World Banks and government funded projects). This large volume of funding is equivalent to 0.25% of GDP of all low- and middle-income countries. More significantly: this investment flow is roughly equal to the World Bank’s total lending to all developing countries – about $100 billion annually. Huge! Over half of the 263 projects had a majority of their stakes sponsored by foreign entities. This public-private partnership (PPP) investment increased by 23% over 2021, and at 4% increase over the 2015/2021 5-year average. Globally, Investment in the transportation sector has been largest, followed by renewable energy facilities and drinking water supplies. Cross border PPP projects are also becoming increasingly important as governments seek measures to integrate their economies into global trade through new infrastructure that crosses traditional political boundaries. This is increasingly becoming important for land-locked countries in Africa and Central Asia. In absolute terms, China, Brazil, India, Indonesia and Vietnam received the largest PPI investments in 2022, attracting US$68,3 billion, or 75 percent of the total. What makes a “Public-Private Partnership”? While there are numerous descriptions, one commonly accepted concept was developed by the World Bank: “Typically, a PPP is a long-term contract between a private party and a government entity, for providing a public asset or service, in which the private party bears significant risk and management responsibility.” Additionally, it should be noted that in a PPP, the private sector partner is rewarded according to their performance – i.e., they are compensated for their achievement of expected deliverables, either through fees or through availability payments (subsidies) when certain delivery milestones are reached. Public sector partners are usually national government line-ministries or agencies, and regional or local government entities. The private sector partners typically consist of a consortium of developers, investors and debtholders who provide alternative financing for projects they develop and operate. The history of PPPS goes back to the 17th century in the industrialized world. Concession systems established in France, the U.K and North America allowed private investors to collect direct fees from users of public infrastructures such as railways, bridges, roads and highways, and water supply and treatment networks. Some of the more famous PPPS are the Suez Canal, Brooklyn Bridge in New York City and the Erie Canal in the Eastern USA. Key Sectors for the PPP formula PPPs are increasingly employed for both public works (infrastructure) and social services (e.g., healthcare and education) throughout the developing world. As financial compensation risk is a central objective of PPPs (needed to pay for the alternative financing) PPPs projects that are commercially and economically feasible and which generate revenue are more favored. This is in contrast with projects that rely on subsidies, which are subject to political and societal headwinds. Revenue generating PPP projects include: toll roads, airports, power and water utilities, and tourism facilities. Social infrastructure and service-related projects are increasingly in popular in the post-pandemic world, especially if they help countries achieve their societal sustainable development goals (SDGs). These projects typically include healthcare facilities and services, drinking water and sanitation services, and all levels of education facilities and services. Because social service type PPP projects are typically reliant on uncertain government subsidies, they are considered riskier by many private sector partners. Countries leading successful PPP projects in social and high-employment sectors There are numerous successful examples in the developing world. Turkey has successfully adopted PPP models for healthcare facilities (e.g., provincial hospitals) that have been implemented with great effectiveness. In the MENA region (Middle East and North Africa) education PPP projects have advanced to the forefront especially in Saudi Arabia, for example, where new schools and universities have been initiated through PPPs. Globally, countries that rely heavily on tourism revenues have formed partnerships with the private sector to create new tourism opportunities directly benefiting local communities and economic development. Sri Lanka and Maldives are aggressively pursuing PPP models to boost their tourism dependent economies and their citizen’s incomes and wellbeing. PPP formula well suited for “progressive” social investments There has been a paradigm shift in recent decades away from traditional PPPs models towards support of “People first” PPPs (PfPPPs). PfPPP projects focus on using the formula as a mechanism to achieve countries SDGs rather than just a procurement mechanism. This has resulted in a reprioritization of PPPs towards those that have beneficial social impacts. There is also a rising cadre of socially conscious investors (impact investors) who support projects through special funds which have “Environmental, Social, and Governance” (ESG) requirements. While some of these projects may not have the level of financial return expected from aggressive investors, they do have societal returns that in the long run create more prosperous and socially stable economies. PPP project in Maldives enhances both economic infrastructure and social development goals The Islamic Republic of the Maldives has been aggressively exploring PPPs as a mechanism to improve the economic wellbeing of its citizens and achieve is SDGs. Due to its vulnerability to climate change and rising sea-levels, all new infrastructure projects that are procured through PPPs require implementation of ESG investment principle, SDG goals, and PfPPP best-type practices. Projects that are considered and supported by donors and
