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 development banks include renewable energy, water desalinization, and infrastructure projects that support the tourism-focused economy. Donors and development agencies such as USAID, the World Bank and the Asian Development Bank are also requiring the Maldives to procure PPP projects through competitive and transparent tenders. Donors and MDBs are also requiring that comprehensive feasibility studies also be undertaken to ensure that candidate projects also offer “value for money.” Additional underlying values include innovations in projects that will meet sustainability and resilience best practices through adaptation strategies that will ensure that climate risk to projects is mitigated.
Impoverished communities can be prime beneficiaries of social sector PPPs
At risk communities can benefit from new investments in social infrastructure. However, objectives underlying desired benefits are dependent on the clearly defined objectives and desired outcomes which need to be aligned with government SDG (Social Development Goals) policies. Moreover, there is increasing pressure from multilateral development banks (MDBs) and bilateral donors, who support PPP projects, to promote specific efforts to uplift impoverished communities (i.e., poor woman, unemployed, malnourished children) as the primary goal of social sector PPP projects. This applies especially to investments in water and sanitation infrastructure, health care, and education facilities.
PPP formula for social infrastructure evolved and refined
“Impact-focused” investments are increasingly popular among new PPP project proponents. This includes investment fund managers that are requiring enforceable and accountable monitoring of ESG project commitments that claim to promote sustainable, resilient, and environmental best practices. There is also increased monitoring and oversight of ESG focused PPP projects to ensure that project “greenwashing” is avoided. Numerous PfPPP project proponents are exploring hybrid financing models that include elements of philanthropy; however, such projects still need to be commercially and economically viable and sustainable. This does require alternative financial formulas that are focused on long term returns and not quick recovery of investments. Additionally, there are impact investors who are offering more lenient debt terms to ensure that projects are implemented that normally would not be of interest to traditional investors.
Role of World Bank Group (IBRD, IDA, and IFC) and MDBs in PPP financing
Multilateral Development Banks (MDBs) are providing considerable support to client countries that are cultivating PPP projects. Support actions include the funding of feasibility studies; capacity building of institutions which are implementing partnership projects; improving enabling environments through legal reforms; and government loans. Banks are becoming increasingly open to alternative finance models, so long as the associated risks are understood and mitigated.
In December 2022, the World Bank announced an $18.35 billion investment in the private sector aimed at financing infrastructure in developing countries. The Public Private Infrastructure Partnership (or PPIP) provides grants and private investment for large infrastructure projects in developing countries. It is part of a broader effort to promote private investment in countries facing infrastructure challenges.
Key lessons learned through pilot and experimental PPP initiatives
Ground-level testing of PPP best practices has yielded these lessons:
- Building sustainable and resilient projects (although initially more expensive) mitigate investment risks in the long-run.
- Stakeholder involvement is critical in supporting project “buy-in” and effective service use by targeted communities.
- Every project is unique and requires specifically designed financial plans and models – no single economic model fits all projects. There is an increasing use of blended financial models and innovative hybrid models that have been developed by investors collaboratively with the public sector to ensure that projects are more financially viable.
