The World Bank has been leading other multilateral development banks (MDBs) and international financial institutions to press developing country governments to ‘de-risk’ infrastructure and other private, especially foreign investments.
They promote public-private partnerships (PPPs) supposedly to mobilize more private finance to achieve the Sustainable Development Goals. PPP advocacy has been stepped up after developing countries’ pleas for better international tax cooperation were blocked at the third United Nations’ Financing for Development conference (FfD3) in Addis Ababa in mid-2015.
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De-risking?
The World Bank’s latest Guidance on PPP Contractual Provisions measures progress in terms of “successfully procured PPP transactions”. The Bank explicitly recommends ‘de-risking’ PPPs, effectively involving ‘socializing’ risks and privatizing profits.
But the term ‘de-risking’ is misleading as some risk is inherent in all project investments. After all, projects may encounter problems due to planning mistakes, poor implementation or unexpected developments. Hence, Bank advice does not really seek to reduce, let alone eliminate risk, but simply to make governments bear and absorb it.
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Off the books, out of sight
Both World Bank and International Monetary Fund (IMF) research has found many governments using PPPs and other similar arrangements to keep such projects ‘off the books’ of official central government accounts, effectively reducing transparency and accountability, while compromising governance.
Such project financing typically involves government-guaranteed – rather than direct government – liabilities. Not booked as government development or capital expenditure, it is also not counted as part of sovereign or government debt, e.g., for parliamentary reporting and accountability.
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Shifting responsibility
PPP financing is typically booked as government-guaranteed liabilities, rather than as sovereign debt per se. Being ‘off the books’, governments face fewer constraints to taking on ever more debt and risk. With such commitments, they also become much more vulnerable to ‘unforeseen’ costs.
Such contractual arrangements, typically set by private partners in most PPPs, do little to improve governance and accountability. To be sure, normal government budgetary accounting and audit procedures for PPPs may not meaningfully improve transparency and accountability.
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Moral hazard
World Bank guidance is clear that even a private partner who fails to deliver as contracted must be compensated for work done before a government can terminate a contract. Whether private partners actually deliver as promised does not seem to matter to the Bank which provides no guidance for addressing their failures to meet contractual obligations.
The Bank thus contributes to ‘moral hazard’ in PPPs: the less likely the private partner stands to lose from poor performance, the less incentive it has to meet contractual obligations. Guaranteeing cost recovery, revenue and profit erodes the motive to deliver as promised and to consider project risks.
Enthusiastic PPP promotion – by the Bank, other MDBs and donors urging developing country governments to bear more risk – is not only encouraging ‘moral hazard’, but also creating more opportunities for the corruption and abuse they profess to lament.
Instead, private partners have greater incentives to try gouging rents from government partners, e.g., by renegotiating existing contracts to their advantage. Conversely, governments have to choose between bearing the costs of failed projects, and paying even more to save problematic ones in the hope of cutting losses.
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Ignoring evidence
Many governments can undertake large infrastructure projects themselves, or alternatively, make much better procurement arrangements. IMF research has also found, “In many countries, PPPs have not always performed better than public procurement”.
Ironically, Bank research has shown that “well-run public firms tend to match the performance of private firms in regulated sectors”, concluding, “There is no ‘killer’ rationale for public-private partnerships”.
Even the Bank’s Research Observer has published a summary of “some of the most compelling examples of this kind of emerging critique” of infrastructure PPPs in telecoms, transport, water and sanitation, waste management and electricity.
Yet, the Bank continues to promote PPPs as the preferred mode of infrastructure financing, trying to shift more risk to governments, ostensibly to attract more private investment. Meanwhile, Bank guidance typically fails to warn governments of the risks involved and their implications.
Prejudiced guidance
Bank and other PPP advocates dismiss criticisms as ‘ideological’ despite growing empirical evidence. Such damning findings have had little impact on their PPP advocacy. Instead, the new fad is for more ‘blended finance’ to PPPs, using official concessional finance to subsidise and attract more private investment.
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Unsurprisingly, despite Bank, donor and other efforts, PPPs have only generated 15~20% of developing countries’ infrastructure investments, according to the Bank’s Independent Evaluation Group, while remaining negligible in the poorest countries.
PPPs, and related institutions are little more than looting by private actors.
