Opportunities and risks of PPPs
What are the opportunities of PPPs?
PPPs may provide certain benefits, such as:
- Alleviating the financial burden on the public sector due to rising infrastructure development costs, thereby allowing public money to be diverted into other critical areas;
- Allowing risks to be transferred from the public to the private sector;
- Exploiting synergies in the use of resources and application of private sector management knowledge; and
- Increasing the “value for money” spent for infrastructure services by providing more efficient, lower cost, and reliable services.
What are the risks of PPPs?
Interests of the private and public partners are not always aligned: while the public sector is interested in an adequate economic and social return on investment that is in line with its policy objectives, the private sector seeks an adequate financial return on investment.
If not properly planned or implemented, PPPs may do “more harm than good”, and risks may outweigh the afore-mentioned advantages.
Risks may include or arise from:
- Lack of prudent fiscal management/bypassing of public financial management controls;
- Poor planning and project selection;
- Weak management of the project;
- Lack of community buy-in.
How can the risks presented by PPPs be minimized?
The abovementioned risks call for a careful design and implementation of PPPs.
For countries, a sound enabling institutional framework for PPPs is crucial to create, manage, evaluate and monitor PPPs:
- Credible, transparent and competitive process for the planning and selection of PPPs: this includes a sound cost/benefit analysis;
- Structuring of contracts that appropriately price and transfer risks to the private partner (optimum risk allocation)
- Transparent and comprehensive fiscal accounting and reporting standards (including transparency on fiscal implications)
- Legal, regulatory and monitoring frameworks that allow for the enforcement of contracts as well as appropriate pricing and quality of service (which is also important for strengthening transparency and public scrutiny and by safeguarding the public interest, citizens’ welfare and sustainable development;
- All of this requires technical assistance and capacity building;
- Optimum risk allocation also implies, among others, managing potential exposure of States to ISDS claims on grounds of PPPs. Careful treaty drafting can help to manage this exposure and safeguard the right to regulate, while providing investment protection.