Reforming Infrastructure Governance in PPP Investments
Published: 15 September 2021
Challenges include creating an enabling environment, national and sectoral planning, multiyear assessment of fiscal risks, and gaps in project preparation.
Prior to the coronavirus disease (COVID-19) pandemic, global private participation in public-private partnerships (PPP) was on a gradual decline from $55 billion in 2010 to $30 billion in 2019. Although there were signs of a recent pickup in PPP commitments, the pandemic caused the delay and cancellation of many projects.
While governments in Asia and the Pacific and globally continue to pursue PPP as a viable alternative to traditional infrastructure procurement, the fundamental question that remains to be answered is: can PPPs consistently deliver their promised value for money?
There are four fundamental institutional and governance challenges for PPPs to become a more reliable procurement option for infrastructure development:
- effective legal, regulatory, and institutional environment reforms and development;
- national and sectoral infrastructure planning;
- multiyear fiscal planning and assessment of fiscal risks; and
- effectiveness of project preparation.
Understanding PPP Procurement
Governments most of all need to address these challenges for all infrastructure projects before getting to the PPP procurement decision. PPP procurement is a crucial argument for sequencing. There should be an effective public investment management framework (Figure 1) that ensures the following:
- Project prioritization, planning, and appraisal are in line with fiscal capacity and national priorities.
- Project implementation benefits from a competitive procurement process, effective portfolio management and oversight, and project management.
- Multiyear budgeting and project selection results in the best allocation of resources.
These mechanisms emphasize the importance of being selective with PPP projects as not all are priorities. Likewise, keeping to a high standard of filters (challenges enumerated below) will increase the value for money proposition on a systematic basis. Upstream institutional capacity for project preparation is essential to deliver planning-relevant, fiscally sustainable, and climate-resilient infrastructure.
Figure 1. Public Investment Management, PPP, and Fiscal and Debt Management
Challenge 1: Effective Legal, Regulatory, and Institutional Environment Reforms and Development
Prioritizing the creation of an enabling environment distinguishes a strategic approach to PPPs from the more transaction-natured version as this further ensures value for money.
However, it is much more than just developing lax legal and regulatory frameworks that make it easier for PPP transactions to reach financial closure—a dangerous misunderstanding. Policies must guide the actions required to align legal and regulatory frameworks with economic and fiscal priorities and the government’s capacity to manage risks and efficiently utilize limited resources.
Government officials must have the training and competence to implement policies, leverage legal and regulatory frameworks, and align incentives of external advisors with government priorities.
PPP legal and regulatory frameworks should be supported by institutional capacity across the ministries involved in the planning, analysis of environmental and social impacts, and fiscal and debt management.
Challenge 2: National and Sectoral Infrastructure Planning
Governments should treat PPPs as one of the many ways to procure infrastructure within the national and sectoral planning for infrastructure. All potential public investments must be subjected to rigorous economic appraisal, cost-benefit analysis, or affordability analysis. Those that have the most economic merit within the fiscal constraints of a country’s medium-term budget framework must be prioritized for funding.
Consideration of a project in the priority list for implementation should follow from a positive cost-benefit analysis. Affordability analysis, based on the lifecycle cost of current and future projects, is essential to select priority projects and to avoid starting new projects that the Finance Ministry cannot accommodate within the reasonable expectations for future budgets. A planned approach to PPP development is also fundamental in terms of ownership and alignment to a country’s development priorities. It can save governments from opportunistic schemes often associated with unsolicited projects—those that may be supported by special interests. Likewise, having an institutionalized governance approach can promote value for money across the entire PPP cycle.
PPP is often seen as a free lunch by many politicians lured by a wrong perception that it bypasses fiscal constraints or by the “procure now and pay later” idea. In many jurisdictions, by keeping PPPs off-budget, inadequate fiscal accounting rules and practices can extend a government’s long-term commitment in a project without the necessary legislative scrutiny or oversight (or transparency), frequently jeopardizing fiscal sustainability.
Moreover, PPP or not, a large portion of fiscal risks in infrastructure projects originate from weaknesses in the early stages of the project cycle, mainly during strategic planning and project appraisal. In the case of PPPs, consequences are exacerbated given the long-term nature of the additional fiscal commitments and risks locked-in into the concession contract.
Agreeing to share risks across parties in a transaction requires not only close identification, management, and pricing/valuation of these risks but also competitive tension at all stages of procurement. If the capacity across public sector partners is weak—the most often case in developing economies, the weaker party will most likely be left holding a disproportionate amount of the liability. Procuring advisors, under the right set of contractual incentives, are crucial mitigators of this problem, but this needs to be addressed early on.
Challenge 3: Multiyear Assessment of PPP Fiscal Risks
The treatment of fiscal risks requires policy makers to undertake a comprehensive multiyear assessment of funds available for infrastructure plans and commitments within the medium-term fiscal framework (and respective rolling sector ceilings). They also must understand, assess, and manage the proposed (explicit and implicit) fiscal risks in PPPs proposals from a portfolio perspective.
Governments should establish a transparent system, for identification and prioritization of infrastructure investment projects, that is integrated with their own national and sector development policies and strategies and the sectoral boundaries of their medium-term fiscal resource envelope projections. This allows for improved scrutiny of risk assessments as part of the investment planning and budget review. This can strengthen the risk-weighted returns of the projects and ensure a more predictable future funding stream.
Challenge 4: Effectiveness of Project Preparation
Governments should identify upstream shortcomings in the legal, regulatory, and institutional frameworks that govern project preparation, such as risk allocation; the right of way; environmental, social and climate concerns; and fiscal issues that affect project readiness.
In most developing countries, there is inconsistency in the capacity of the public sector to plan, prepare, and procure PPP projects. There is often little or no methodology behind the development of PPP pipelines and a limited understanding of PPP project selection and prioritization.
The International Monetary Fund (IMF) developed the Public Investment Framework that evaluates infrastructure governance by analyzing the policies and effectiveness of institutions responsible for project planning, budgetary allocation, and implementation. The results for developing countries in Asia and the Pacific show that the design of institutions and policies is often better than the actual implementation of policies.
The least effective public investment management institutions in developing countries are those involved in project appraisal and selection, funding maintenance, multiyear budgeting, and public assets monitoring. The capacity for upstream work varies from mature markets with strong operational and policy experience to nascent PPP markets in the process of developing their institutional frameworks and capacity to plan and implement PPPs.
A governance brief published by the Asian Development Bank (ADB) highlighted the essential upstream work that is still required to improve risk management. Among the major causes for the loss of confidence in PPPs are the approaches taken in contracts, risk allocation, and dispute resolution. More collaborative contractual arrangements, such as standing Dispute Resolution Boards, and the suitability of their use for PPPs in the context of the development conditions that are likely to exist following the COVID-19 should be considered.
The Asian Development Bank (ADB) is helping countries to put into practice measures to address upstream challenges and avoid gaps in the PPP life cycle that may undermine the goals, objectives, and ultimately the value-added proposition. For example, several policy-based assistance interventions in Armenia helped the authorities establish a legal and regulatory framework, in tandem with fiscal risk management upgrades and with a new public investment management framework, to ensure only PPPs that can maximize value-for-money are approved. ADB’s support to strengthen the government’s capacity to manage a PPP program and its fiscal risks was in close coordination with other development partners.
Reforming infrastructure governance requires looking beyond the well-established need for financing. Additional investment in both PPPs and traditional infrastructure investment will enhance sustainable and resilient economic growth when supported by infrastructure investment efficiency, that is maximizing the quality and amount of infrastructure for a given level of spending. This calls for fiscal sustainability, project prioritization, and ensuring that infrastructure performs over the asset life cycle.
With a strategic approach that embeds PPP projects into the national development strategy and the sector infrastructure plan, which properly assesses the risk-returns of the project and takes stock of important considerations affecting the risk-return profile, PPPs can reliably deliver value for money.
Asian Development Bank (ADB). 2019. Public Partnership Monitor: Second Edition. Manila.
ADB. 2020. Restoring Confidence in Public-Private Partnerships. The Governance Brief. Issue 41.
G. Schwartz et al. 2020. Well Spent: How Strong Infrastructure Governance Can End Waste in Public Investment. International Monetary Fund.
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