Harnessing the Power of Public-Private Partnerships: The role of hybrid financing strategies in sustainable development

By Samuel Colverson, Oshani Perera on February 15, 2012

IISD has undertaken a preliminary investigation to gauge the scale and structure of PPP agreements in today's market. In doing so, it has emphasized the sustainability credentials of PPP theory and practice, asking to what extent PPPs can and do fit into sustainable development frameworks.

It is imperative to note that PPPs are highly contextual. There are several different types of contractual agreements between governments and the private sector for the provision of public infrastructure and/or services, often differing in the division of financial investment between state and private sectors, the responsibilities of either and the method of remuneration to the private sector.

At first glance, PPP theory seems to suggest that PPP benefits outweigh their drawbacks. Not only can the private sector achieve more value for money because of its alleged efficiency and optimization of the design and operation of the infrastructure project or service, it also takes over an important part of the risk, guaranteeing projects and services are more quickly delivered. On a financial side, PPPs can attract more financing certainty and investment for necessary public projects by, for example, allowing governments to have a larger access to additional capital/off-balance sheet financing. On a sustainability front, PPPs may encourage project leaders to invest in the best available technologies, as they will be responsible for the operation of the infrastructure over the whole life cycle.

However, it is still unclear whether PPPs can actually deliver in practice what they promise in theory. In addition, there are a number of significant drawbacks. High tender costs, complicated contracts and the transfer of risk to the private sector may come at a high cost and reduce, rather than increase, its competitiveness. In addition, in order to be administered successfully PPPs require skilled capacities in both the public and private sectors. In the absence of these capacities, PPPs often tend to include rigid and inflexible contracts. Because of their complexity, there are also often delays and holdups in the implementation of the infrastructure project. All these elements, which ultimately drive up costs, may eventually have to be carried by consumers through higher prices in service provision. Finally, the PPP model generally weakens accountability and transparency, which are two key elements of the public sector.

Many countries already have some experience using PPPs for procurement of infrastructure. Many EU countries have been using the model for years, with a peak before the financial crisis and a large decrease in the following years. Similarly, Canada and Australia have been using the model for some time. The United States, however, has been reluctant to undertake PPP agreements prior to 2007. Also developing and emerging nations have long experimented with PPPs. Because of growing PPP practice and popularity, dedicated PPP units have been created. However, these units are still relatively young and can still learn a lot from experience. The financial crisis has led to a shift of financial burden and risk to the private sector. However, this comes at a price, often related to the compensation governments are required to provide for the private sector to bear such risks.

It has been found that if the government gives the correct incentives, the private sector will take up risk and invest to innovate in solutions that will promote sustainable development. At the same time, however, it is found that governments do not yet use PPPs to lead in and advance on environmental and social sustainability. As private partners react mostly to technical specifications within a PPP tender, governments should be in the leading role to promote sustainability in that stage, as well as when signing the contract. In addition, the economic as well as the environmental and social sustainability of a project depend on thorough pre-project assessment and evaluation. This is especially the case when PPPs deal with long-term agreements. For sustainable development, rather than growth alone, it is essential that changes are made to the underlying norms of risk transfer and compensation for PPPs, which to date do not always provide the correct incentives for the private sector to make real sustainability investments.

To integrate sustainability into PPPs, a whole life value approach needs to be adopted. For this objective, best practice in the implementation of sustainable public procurement policies across the world may serve as good starting points. It can be observed that the principles of transparency, accountability, whole life costing, value for money and the importance of triggering positive economic externalities across the domestic economy have not yet been prioritized in the design of PPPs. Similarly, policy guidelines often do not yet include explicit tests to measure environmental or sustainable risks or benefits as standalone features. It would therefore benefit sustainable development if safeguards were integrated into pre-project approval requirements and ongoing performance evaluation criteria.

In addition to these sustainable procurement principles, it is imperative that institutional frameworks allow for a beneficial partnership between public and private sectors. This means that not governments should not only consider future costs associated with the infrastructure or service project, but also assess whether PPPs are appropriate for the type of service to be provided. It should be kept in mind at all times that long-term contracts often do not allow for modification to evolving sustainable development priorities. To counter these problems, it is of vital importance that the public sector builds up knowledge and gathers data that improve PPPs over time.

Report details

Public Procurement
Focus area
IISD, 2012