UNCTAD Investment Policy Reviews and public-private partnerships: best practices and recommendations
Since 1999, Investment Policy Reviews (IPRs) have been prepared for 50 economies. They include an assessment of the investment framework in the beneficiary country, which involves the regulatory regime for foreign direct investment (FDI) as well as investment-related areas such as taxation, business facilitation measures, labour and skills, access to land, environmental considerations, competition rules, and others. As part of the assessment, many IPRs have dealt with the policy and legal framework for privatization and public-private partnerships (PPPs). They have reviewed the experience of beneficiary countries, the measures they adopted and provided recommendations. Where IPRs have reviewed PPPs, the sector concerned has been predominantly infrastructure, particularly energy (mainly electricity) and transport (roads, ports and airports). The bulk of IPR recommendations regarding PPPs emphasized regulatory reform and the need for regulatory oversight, as well as institutional capacity to be able to plan and award concessions, negotiate contracts and monitor performance – and finally to terminate concessions if need be. Read more about IPR.
A comprehensive set of guidelines to assess a country’s preparedness to engage in PPPs was developed during the IPR of Guatemala (2011), which drew on UNCTAD’s best practices in road concessions (2009-2011)  and is summarized as follows:
1) Plan. Are projects derived from a strategic plan and thus likely to be priority projects with strong public benefits? The first step in attracting beneficial FDI is to ensure that the projects considered for concessioning are in line with the strategic priorities for national development.
2) Project pipeline. Has a pipeline of well-tested projects, suitable for concessioning, been identified and prepared? Projects should pass stringent feasibility as well as cost-benefit assessments and receive environmental approval before they can be considered for selection. Part of the selection process should involve developing a public sector comparator model for each candidate project to determine whether a concession approach would deliver better value than traditional public works procurement. It should also confirm the commercial viability of projects, so as to avoid turning the process into a wish list of the different government agencies sponsoring them.
3) Policy. Are the policy variables that shape successful concessioning likely to be understood and applied, such as design of the competitive bidding process, detailed risk assignment, and the application of Key Performance Indicators (KPIs)?
4) Expertise. Is the government developing and deploying appropriate expertise to handle the complex policy and commercial issues involved in concessioning? Concessions involve complex public policy and commercial issues that must be understood and knitted together to structure and execute each transaction. Moreover, the key terms, many of which have a direct impact on the public, are locked in for up to 25 years or more. A central core of expertise within government must be developed to handle these issues. As a result of the complexity involved in PPPs and the need for countries to address the various issues raised above to ensure a successful and beneficial utilization of PPPs, UNCTAD’s IPRs have consistently recommended countries not to engage in large scale PPP projects before developing the relevant expertise. In this regard, starting with a pilot project and seeing it through from the beginning to the end should enable PPP agencies to develop the necessary experience.
5) Champion. Will a senior minister or ministers take active responsibility for ensuring the successful execution of concession projects? Good practice is to ensure that a senior ministerial group is empowered to facilitate decisions and permitting, as well as dealing with unforeseen events. Coordinating the work of the institutions that are responsible for doing community consultations, land clearance and environmental impact assessment will be essential for ensuring buy-in from affected communities and generating sustainable development benefits.
6) Project execution and control. Is the government prepared to undertake its project obligations as a contractual partner rather than in its familiar principal/client role in public works procurement? The best way to reflect a concession’s contractual relationship, in which both parties have obligations, is to appoint an independent project verifier (IPC) for the construction phase. The IPC verifies that each party is performing its obligations in accordance with the agreed Key Performance Indicators.
7) Capital market and financing. How developed are the local capital market and banking system, and can they provide long-term local currency finance? Retail and institutional financial agents, such as local banks and pension funds, are natural sources of long-term infrastructure funding.
8) Local participation. PPPs offer opportunities for linkages with the local economy: are local contractors prepared for the scale, complexity and operating issues that differ in concessions from public works contracts? And will local investors be willing to associate with foreign owner-operators or contractors, or will there be pressure to package up smaller projects to suit the local industry, thereby losing the benefits of scale and advanced technical capacity?
9) Competition. Have the authorities taken steps to ensure competitive outcomes from the bidding process? It is important that lack of horizontal competition does not lead to vertical arrangements that restrict competitive bidding. This can arise if suppliers form alliances with one investment consortium and freeze out other bidders directly or indirectly. Bidding may therefore appear de jure competitive, but will there be sufficient competition in practice?
10) Foreign investors. What types of foreign direct investors are realistically available to invest in infrastructure - are they owner operators, contractors or financial consortia?
The following cases summarize the experience in six IPR beneficiary countries. A full list of IPRs can be found here.
Colombia (2006). Following the publication of the IPR, which recommended attracting private investment to strengthen Colombia’s infrastructure, the country adopted a modern PPP regime specifically for infrastructure development. In addition, the Government prioritized the institutional strengthening of the National Infrastructure Agency (ANI) to evaluate, prepare and tender an ambitious PPP project pipeline, with more resources, both technical and financial. A first wave of projects underwent a two-year feasibility study, and were selected and ready for tendering in 2014. While air transport infrastructure is now mostly operated privately and considered good, it is too early to tell if the PPPs have been successful, Colombia’s progress on attracting private investment to infrastructure continues to lag behind other emerging economies. Large infrastructure projects represent a challenge for the coordination capacity of public institutions. For example, coordinating the work of the institutions that are responsible for doing community consultations, land clearance and environmental impact assessment will be essential in avoiding the delays and excessive costs that have occurred in the past, as well as for ensuring buy-in from affected communities and generating sustainable development benefits.
Dominican Republic (2009). The country has a relatively long history of offering concessions for private development of public facilities and services, particularly in electricity generation, airports and port terminals. A general law was introduced in 2006 to establish principles and a comprehensive framework, and a new statutory authority (Directorate-General of Concessions) was created to plan and award concessions as well as monitor performance. The IPR made two key recommendations: (1) concessions should only be conducted where competitive outcomes are likely, including bidding and structuring transactions to ensure competition in the market; (2) highly sensitive public services, such as water and sanitation services, should not be concessioned, as commercial outcomes would be in doubt given the high risk premiums for private investors and the country’s poor regulatory track record. In addition, questions were raised about the adequacy of dispute settlement provisions, stressing that the proposed conciliation panel should be composed of industry experts rather than academics. UNCTAD’s Implementation Report (2016) noted that energy infrastructure and provision was still patchy, and that deficiencies in the competition law had not been addressed, and no significant independence of sector regulators was recorded.
Guatemala (2011). Prior to the IPR, the Government had introduced some limited concessions in the energy and transport sectors. The results were mixed with improvements to electricity supply but a discontinuation of rail freight services, following a compensation claim by an investor. The IPR examined investment in roads, electricity and mining, at the request of the Government, and made the following recommendations: (1) the country should prepare a pipeline of projects to attract private investors (although not all projects were PPPs); (2) the agency responsible for concessions (ANADIE – the national agency for partnerships in economic concessions) should be adequately funded in order to develop the capabilities needed for handling the complex issues involved; (3) concession projects needed ‘political champions’ to help facilitate permitting decisions and coordinate government agencies and ensure that government obligations for the project delivery are met; (4) ANADIE should review the terms of the contracts to ensure the balance of public and private interests; (5) given the importance of local capital markets in concessions, Guatemala would need to reform its local capital markets. The IPR also recommended strengthening competition and regulatory oversight in the electricity market.
Mongolia (2013). Further to the adoption of a State policy on PPPs in 2009, a new law on concessions was introduced in 2010. The law provides a clear and comprehensive basic framework for concessioning, which draws upon best practice internationally. Nonetheless, the IPR recommended the country undertake a number of further measures to attract investment to the infrastructure sector: (1) improve planning to avoid selecting projects based on patronage and ensure that they pass feasibility studies and environmental and social impact checks; (2) use PPPs only for commercially viable projects; (3) substantially increase the human and financial capacity of the Division on Concessions to create a specialized concessions agency with functional independence that can conduct market studies; (4) enhance efforts to encourage competition and active enforcement of the competition policy, since powerful monopolies in some infrastructure sub-sectors may act as barriers to progress; (5) finally, the IPR noted that local capital markets and financial institutions were insufficiently developed, which would limit the source of both private financing and public guarantees for concession projects.
Mozambique (2012). Mozambique has been recognized for its achievements as a post-conflict country at attracting private investment in infrastructure, in particular, electricity, roads and ports, including the Maputo Port concession awarded in 2002. Mozambique adopted a law on PPPs and mega-projects, including mining, in 2011. However, it had a number of shortcomings, such as seeking to regulate distinct issues under a single umbrella (mining and infrastructure), and imposing excessive operational constraints on local participation. The IPR recommended that the scope of the PPP law should be restricted to projects where private investors are involved in the provision of goods and services of a public nature, and that separate contracts be concluded in the mining sector. The creation of a dedicated PPP unit in the Ministry of Finance could enable Mozambique to better manage the technical and financial aspects of partnerships with the private sector, and that a strong promotional component should be added to the PPP unit. Its role would be to actively seek private partners to develop projects of particular interest and benefit to the country. It could identify, among others, a pipeline of projects and prepare preliminary feasibility studies, focusing on “low-hanging fruits” investments with strong commercial viability, limited technical complexity and demonstrable impact. In this promotional work, the unit would have to work in close cooperation with the IPA (Centro de Promoção de Investimento).
Zambia (2006). Prior to the IPR, the Government had been involved in concessioning the railway network. It offered a 20-year concession to a South-African consortium for Zambia Railways in 2003, for the operation and upgrading of track and rolling stock. The participation of the Swedish Development Agency (SIDA), through the provision of expertise and management, was instrumental in preparing Zambian Railways for concession, and highlights the role that bilateral development assistance can play in PPPs. In 2009, the country adopted a PPP policy and other measures for increasing private investment in infrastructure. The Office of Promoting Private Power Investment is charged with identifying and promoting new hydro-power development initiatives. A master plan was launched in 2010, and it includes rural electrification projects which are being implemented by the Rural Electrification Authority. The private sector is also directly engaged with the Government through bilateral agreements or PPPs, for example, at Kafue Gorge Lower and at ITezhi Tezhi. However, Zambia’s experience with concessions has been mixed: in 2012, the Government ended the Zambia Railways concession citing mismanagement and underinvestment. UNCTAD’s Implementation Report (2014) also cited safety concerns as an additional reason for the contract’s termination.