Mind the Gap: Strategies for Public-Private Partnerships to Achieve Growth

The world invests approximately $2.5 trillion per year on transportation, power, water, and telecommunications systems. Nevertheless, this amount falls short of the global needs to invest an average of $3.5 trillion per year just to support currently expected rates of growth, according to the McKinsey Global Institute. Years of chronic underinvestment in critical areas such as transportation, water treatment, and power grids are now starting to effect global economic growth. If investments gaps continue to increase, they could erode future growth potential and productivity.

During a recent Society for International Development conference on “Global Transitions: Reshaping Development,” I led a discussion about public-private partnerships (PPPs) as a tool to develop sustainable and reliable energy and infrastructure. The discussion focused on how to leverage collaboration of the public sector, the private sector and civil society to close the financial gap required to achieve socially inclusive and environmentally sustainable growth (with a specific focus on energy and infrastructure).

Capturing the full opportunity for infrastructure productivity requires a detailed understanding of where processes tend to gear off track. All nations need to build expertise and establish the locally-adapted organizational structures for developing critical skills and sharing best practices. Efforts to build stronger capabilities and institutions  - even in more advanced economies - can pay remarkable dividends, since infrastructure influences quality of life and paves the way to productivity growth and competitiveness.

Accordingly, it is paramount that a collaborative public, private and civil society work together to develop socio-economic policies and structures that will attract financing to urgently needed projects. To have a successful public-private partnership, governments, the private investor and civil society should initiate discussions at the project planning phase so that there is a fair risk and profit sharing between interested parties. All parties should fully enter into contractual agreements, understanding the implications of entering into long-term deals that can constrain lawmakers’ policymaking options for decades.
 

Why Do Public-Private Sector Partnerships Fail?

A broad public sector understanding of the public-private sector landscape is paramount to convey the government’s socio-economic development objectives. The most common reasons for failure are:
  • Poor legal framework and enforcement;
  • Weak institutional capacity and PPP strategy;
  • Unrealistic revenue and cost estimations;
  • Lack of thorough financial and economic analysis;
  • Inappropriate sharing of risks;
  • Lack of competitive procurement; and
  • Public resistance (willingness to pay not assessed).

As leaders assess PPP structures for the public interest, they should keep the following in mind:
 
1. Creating a robust legal framework and transparent procurement. We need both a solid legal framework for PPPs and a transparent bidding process to specify the “rules of the game” for the private sector and reduce risk, thus improving the success rate of PPP projects. An underlying strong legal basis will have a twofold effect in ensuring that the public sector has the authority to develop projects and attracting the private sector as it will ensure legal enforceability of the projects.

2. Making public sector project planning a priority. Each government should first prioritize projects based on economic and financial feasibility studies to capture projects’ social, environmental, and fiscal impacts while taking into account the political environment. The absence of a solid feasibility study can reduce the benefits of PPPs and diminish project attractiveness to private investors. Without a feasibility study, the government cannot predict its potential total financial liability.

3. Defining key potential private entity bidders. Strong partnerships are based on finding the right alignment of interests, which is why it is essential to understand what makes a project appealing to private sector investors.

4. Determining solid revenues and cost estimations. PPPs require localities to find durable and resilient revenue sources that will pay for the investment over the long-term. Feasibility studies should emphasize strong forecasting revenues and costs.

5. Building public sector capacity. Institutional arrangement should ensure coordination, technical support and that checks and balances are appropriately applied. It is critical to assemble an empowered public sector team that is capable of making and executing informed procurement decisions.

6. Assessing willingness to pay and prepare a communications plan. Widespread public opposition to a PPP project can prematurely end the concession. PPPs are inherently complex and require early-stage public engagement to ensure that the deal is in the interest of the community and executed at the highest standards possible.

7. Monitoring and learning from the partnership. PPPs involve decades of dedicated attention that requires thoughtful monitoring, flexibility in the face of a changing world, and a willingness to learn from mistakes.
 
Public-private partnerships bring benefits for governments, private firms and citizens. Engaging the public and private sector as well as civil society are paramount to deploying solutions that maximize public-private partnerships’ bankability and mobilize additional untapped financing.
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