Delivering on the Post-2015 Development Agenda:
What Role for Public-Private Partnerships?
December 12, 2014
UN Trusteeship Council Chamber
Description:
Over the last decade, public-private partnerships (PPPs), equity investments, guarantees and insurance have become increasingly looked to as mechanisms for using official resources (both domestic and international) to leverage private financing through risk-sharing between the public and private sectors. Such mechanisms can help overcome the constraints that have prevented banks and investors from financing projects with the potential to promote sustainable development. However, as emphasized in the recent report of the Intergovernmental Committee of Experts on Sustainable Development Financing (ICESDF), it is important that such mechanisms learn from success and failures of the past. Poorly designed PPP’s and other blended structures can lead to high returns for the private partner, while the public partner retains all the risks. To be effective, the design of these mechanisms needs to be based on a deeper understanding of the underlying incentives of the private partner as well as the risks of the projects. This side event is part of an effort to create platforms for dialogue and information sharing on PPPs as called for in the ICESDF report, so that countries can learn from each other’s successes and failures.
Panelists explored the following questions, based on concrete practical experiences of PPPs and other forms of blended finance: When and for which sectors are PPPs appropriate? How can governments most effectively minimize risks and long-term obligations that arise from PPPs? What is the right contract design and what level of institutional capacities are required for successful PPPs? How can private sector and governments be held accountable for the results of PPPs? Are PPPs appropriate for low-income countries and if so, why are they not more widely used (over the last two decades, only 4 percent of PPPs took place in “low income” developing countries)?
Moderator: Ms. Shari Spiegel, Chief, Policy Analysis and Development Branch, Financing for Development office, United Nations Department of Economic and Social Affairs
Panelists:
- Mr. Ismaila Diallo, Technical Adviser on Tax Matters at the Ministry of Economy, Finance, and Planning, Senegal
- Mr. Stefan Apfalter, Senior Evaluation Officer, Independent Evaluation Group, World Bank
- Mr. Gad Cohen, Partner of eleQtra Ltd. and Principal Developer of InfraCo Africa
- Ms. Sarah-Jayne Clifton, Director, Jubilee Debt Campaign, UK
Summary:
The panel was moderated by Ms. Shari Spiegel, Chief, Policy Analysis and Development Branch, Financing for Development office, United Nations Department of Economic and Social Affairs. The panel comprised Mr. Stefan Apfalter, Senior Evaluation Officer, Independent Evaluation Group, World Bank; Mr. Ismaila Diallo, Technical Adviser on Tax Matters at the Ministry of Economic, Finance and Planning, Senegal; Mr. Gad Cohen, Partner of eleQtra Ltd. and Principal Developer of InfraCo Africa; and Ms. Sarah-Jayne Clifton, Director, Jubilee Debt Campaign, UK.
In her introductory remarks, the moderator of the session, Ms. Shari Spiegel, noted that blended finance, particularly public-private partnerships (PPPs), could be an important mechanism for financing the post-2015 development goals. However, noting the high failure rate of PPPs (25-35 percent in developed countries), Ms. Spiegel urged that all stakeholders evaluate both the potential and risks equally. Ms. Spiegel also encouraged panelists to clearly define their understanding of a PPP. While each panelists’ definition differed slightly, most agreed that a PPP involves a business relationship between a private-sector company and a government agency for the purpose of completing a project that will serve the public. There was wide agreement among panelists that greater conceptual clarity was needed in future discussions.
The first panelist, Mr. Stefan Apfalter, approached PPPs as instruments to address market failures. Through a PPP, the public sector involves the private sector for both funding and risk sharing in the provision of a public service. There was a wide spectrum of public-private partnerships between governments and the private sector with different levels of private and public involvement. He suggested several factors that can increase the success rate of PPPs, such as the need for PPPs to be country specific, the importance of a country’s capacity to structure PPPs and transparency in a PPP’s fiscal implications. Mr. Apfalter stated PPPs were moving towards emerging markets where PPP frameworks already existed, but where there was still a lack of experience with their implementation. He added that another challenge was to improve the monitoring and evaluation of PPPs. There needed to be better data to accurately assess the success of PPPs from fiscal, pro-poor and quality aspects.
Mr. Ismaila Diallo highlighted that Senegal has been engaging in PPPs since 2006. He noted most PPPs had been used to leverage resources for infrastructure projects, the most notable of which was its large-scale highway project. He explained that PPPs benefited Senegal through providing greater access to private sector resources and expertise. This had some positive impacts, as it unlocked public resources for education, health care and social services. However, PPPs had also experienced significant cost overruns and it was challenging to provide an adequate idea of the actual project costs prior to the implementation of the PPP. Mr. Diallo highlighted some of the government instruments, such as tax exemptions and other incentives the government provides to attract private sector partners. He concluded that PPPs had a better track record in the infrastructure sector than in the provision of social services.
Mr. Gad Cohen stated that a PPP must be a genuine partnership where private sector and governments work together at each level of the project. Mr. Cohen highlighted that the private sector often encountered resistance to investing in infrastructure in Sub-Saharan Africa, because infrastructure was seen as a strategic asset, especially in low-income countries, where the government preferred to retain full control of the project. Mr. Cohen expressed concern that the actual costs of PPPs were unknown for the private sector, and proposed to set up a framework that would correctly quantify the contingent liabilities by the public sector. He agreed that “buy-in” from all stakeholders as early as possible was critical. He noted a successful PPP case in Mexico where risks associated with power generating gas plants were gradually transferred, over 8 years, from the public to the private sector. Mr. Cohen suggested that PPP risks are often overstated where there was a lack of experience with this mechanism. However, repeated successes of PPPs would enable stakeholders to properly price risks.
Ms. Sarah-Jayne Clifton emphasized the complexity of ownership between the public and private sectors in PPPs. Ms. Clifton challenged the assumption that PPPs were an effective approach to finance post-2015 goals and stated that as a result, this meant that too much energy was committed to “making them work.” She explained that there was little evidence that PPPs were successful, particularly for pro-poor development. PPPs were negatively affected by high interest rates linked to private borrowing and the resultant need for a high rate of profit. Moreover, high transaction costs and weak procurement decision-making had undermined the success for many PPPs. Ms. Clifton also highlighted the fiscal risks that the IMF had associated with PPPs, such as increased off-balance sheet debt for governments. She shared examples from Lesotho and the UK, where the high costs of PPPs failed to deliver the envisioned level of public service and led to negative impacts on long-term fiscal positions of governments. She also highlighted problems that occurred when governments and private sector partners renegotiated contracts, such as transfers of risk and ownership of infrastructure. Ms. Clifton concluded that the push for PPPs was inappropriate at this time, especially as a mechanism to finance development goals in developing countries.
Points made in the subsequent interactive discussion included the following:
- Participants asked about the average rate of return for PPPs. Mr. Cohen responded that for “greenfield” infrastructure projects in Sub-Saharan Africa, returns were between 15-18 percent. He added that no infrastructure deals in Sub-Saharan Africa were done without the involvement of the Development Finance Institutions (DFIs). As a result, returns were determined in part by the debt service coverage ratios which were set by DFIs.
- It was emphasized that broad consultation with stakeholders was essential. However, one speaker noted that sometimes governments did not want workers (or unions) to interact with the private sector. As a result, workers had no choice but to oppose what was seemingly a “secret deal.”
- A speaker stated that many of the projects needed to achieve the post-2015 goals would be high risk and offered low returns, especially in low-income countries. He wondered as to the potential for PPPs to leverage private sector resources in these circumstances.
- A question was raised regarding the potential of pooled financing schemes to leverage finance. Mr. Cohen responded that there was an overemphasis on leveraging the private sector for financing. The primary problem was that capital costs for developing countries were too high. There was a need to bring down these costs, particularly in poor countries.
- Panelists agreed with the assertion that it was crucial to foster a common notion of how a successful PPP was defined. More research needed to be undertaken to assess the pro-poor impact of PPPs.