Public-private partnerships

Making the right choice for the right reason

Governments may find public-private partnerships (PPPs) especially tempting in the aftermath of a financial crisis, but how can hasty choices be avoided?

When national budgets are on bread-andwater diets, PPPs are like a parcel of cheese and sausage under the floorboards. In reality though, PPPs are long-term contracts whereby the private sector delivers services–such as a bridge or hospital building–used by the public sector. Major investment projects carry a range of inherent risks: in construction, for instance, in terms of getting the building completed on time and within budget, and in market demand, whether forecast customer demand ends up matching reality. Actually having the asset available to users when needed is another risk to be absorbed. In a PPP, such risks are shared in innovative ways between the public and private sector in order to deliver better value for money than would have been the case using traditional procurement. Still, they have on occasion been used to finance expenditures which would not otherwise be approved given the debt and deficit constraints on national budgets. Ceding to that temptation too hastily now would be ill-advised. This does not mean that governments should stay away from PPPs, but they have to focus on using PPPs for attaining value for money, not accounting gimmicks.

The financial crisis has been rough on PPPs. The lack and high cost of credit stymied plans for new projects and the refinancing of those already underway. Moreover, operational PPPs such as transportation projects and airports, which depend on drivers paying tolls and airline companies paying landing fees, have watched revenue dry up as travellers cut back on spending.

Despite the historic drop in interest rates, risk premiums soared between 2008 and 2009, widening the spread of corporate bonds to the highest in recent memory. The threat to PPPs was clear, and as part of the large stimulus plans enacted in OECD countries governments adopted various initiatives to keep interest in PPPs alive.

The UK, for instance, created the Infrastructure Finance Unit to fund PPPs unable to secure loans on the market. Once market conditions become more favorable, the loans will be sold off prior to maturity. No ceiling has been set on the amount that can be loaned. Likewise, until the end of 2010 the French government is guaranteeing up to 80% of the capital needed for PPP investment projects–and has set aside €10 billion for the purpose. Portugal has earmarked €7 billion euro for a similar programme. Korea is funneling 15% of its fiscal stimulus investments through PPPs. Most of these projects are “build-transfer-operate” projects (typically transportation services such as roads and railways) and “build-transfer-lease” projects, for example, the construction of schools and dormitories or the expansion and improvement of sewage systems. Most of these initiatives involve so-called dedicated PPP units. These are groups of experts brought together to assist governments in managing risks associated with PPPs in a bid to ensure value for money.

Seventeen OECD countries today have dedicated PPP units.* They provide policy guidance and technical support, for which they are sometimes criticised, since they might mingle policy formulation and technical support during the assessment of a project. There are also fears that the closer a unit is to the relevant political authority, the more vulnerable it is to political sway when it comes to choosing projects. Another concern is that the creation of a unit implies the approval of PPPs as the policy tool of choice, undermining the case for other viable procurement methods. Despite these reservations, dedicated PPP units have an important advantage over regular procurement methods: they have the skills to focus on attaining value and ensuring that budget considerations, both in terms of the benefits and the costs of projects, are kept to the fore in project choices and that contingent liabilities are rigorously evaluated. They can also mitigate some of the problems stemming from the fact that PPPs or traditional procurement methods are, in some countries, not subject to the same tests–making the playing field uneven, as recent OECD research reveals.

Another strength of PPP units is to reassure potential private partners that the government possesses the necessary expertise to negotiate PPPs, allaying anxieties over the waste and confusion caused by the distribution of management responsibilities among a host of government departments. The units consist of experts who advise the various relevant government departments, although they may also carry out mandatory reviews. More rarely, they approve projects and promote PPPs. Approval is usually still the prerogative of the ministry of finance’s central budget authority. Units may be located in the higher ranks of government such as in the ministry of finance, farther down in line ministries like transport and power, which are already familiar with PPPs, or outside government in an independent government agency working in collaboration with one of the ministries.

What the lending initiatives mentioned above all have in common is that they are temporary and reversible. This is an important caveat. In trying to reawaken investors’ appetites for PPPs, governments are assuming considerable risk. This is why the OECD recommends that in addition to being temporary and reversible, these initiatives be assessed in terms of cost, budget and transparency. There are many examples of support measures carried over into subsequent and more clement budget cycles where they are not needed. When the additional cost of entering a PPP under the current economic conditions outweighs its efficiency and value for money, the project should be postponed until market conditions improve.       Fortunately, there are signs that the clouds are lifting. An economic recovery is slowly under way, and market conditions for PPPs are brightening again.

However, they must not be chosen for the wrong reasons. The survival of certain projects will require hard decisions from governments. Such decisions will be less onerous if the budget and costs associated with the projects are made transparent, with the overriding principle being value for money.


*Australia, Belgium, Canada, Czech Republic, Denmark, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Korea, Netherlands, Poland, Portugal, UK

Ian Hawkesworth is the co-ordinator of the OECD network of senior PPP officials.


References

OECD (forthcoming 2010), Dedicated public-private partnership units: A survey of institutional and governance architectures, Paris.

Burger, P. and I. Hawkesworth (forthcoming), “How to Attain Value for Money: Comparing PPP and Traditional Infrastructure Public Procurement”, working paper, Paris.

OECD (2008), Public-Private Partnerships: In Pursuit of Risk Sharing and Value for Money, Paris.


©OECD Observer No 278 March 2010



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