The Curious Case of PPP
Published on 11 December 2018
“Without data you’re just another person with an opinion”
To PPP or not to PPP, that’s the question. At least it looks as if there are some conflicting views on the use of PPP (to put it mildly). Whereas the likes of the World Bank, ADB, EBRD, IsDB, IADB, AfDB and the UN are supporting many governments throughout the world with the development of PPP frameworks and projects, organisations like Eurodad and the European Court of Auditors are promoting a cease to the use of PPP. Whereas the UK Treasurer Phillip Hammond swears he will never sign a PFI again, the government of Ethiopia is embarking on a US$ 7 billion PPP program.
Who is right and who is wrong? As with many big issues the world is facing, it is unfortunately not a matter of black of white though more along the lines of 50 shades of grey. However, what is frustrating, is the observation that so little reference is made to empirical evidence. Many, both proponents as opponents are using anecdotes to justify their case. Have we not all learned from the Quality Management guru Dr. Edward Demings that “without data you’re just another person with an opinion”?
It is for this reason that I have tried to recap the most notorious research findings with regard to PPP. Hopefully it will fuel the debate in a more substantive matter and not only an exchange of cases of good PPPs and failed PPPs. The main conclusions:
1. Infrastructure is risky business
It will be hard to disagree with the conclusion that developing infrastructure is not without risks. It is a universal fact that many infrastructure projects around the world have been facing cost overruns and delays and demand forecasts are rarely accurate.
2. PPPs manage construction risk more effectively
Various studies have confirmed the hypothesis that the use of PPP reduces the risks of cost overruns and delays. Possible explanations could be the additional layer of due diligence by banks leading to more realistic cost estimates and timelines, and the alignment of interests. With PPP it is no longer in the interest of the developer to seek variation orders and delay the process as he needs to generate revenues in time in order to start paying back the loans.
3. Banks involvement in traffic studies reduce risk of biased traffic forecasts
It is widely acknowledged that the uncertainty of demand is the most complex variable in any infrastructure development. A transfer of the demand risk should therefore be carefully considered and if transferred preferably not without any protection to the private partner. Managing demand for a public service typically goes beyond the private sector’s ability. Nevertheless, although research is somewhat outdated, it can be noted that banks tend to deliver more reliable demand studies than project sponsors. This is presumably driven by the need to ensure sufficient cash for debt service vis-à-vis the need to have the project approved or win the tender.
4. On average, PPPs lead to substantial cost savings
Perhaps the most controversial benefit refers to the costs savings arising from PPP. The problem is that this so-called value for money assessment comparing the costs to society when using PPP with those costs when using traditional procurement is purely hypothetical. Once the decision has been made for PPP and it has been implemented as such you can compare the actual costs only with the assumed costs if it would have been implemented otherwise. Nevertheless, attempts have been made to approximate those savings based on the Public Sector Comparator and they confirm the hypothesis that PPPs on average are delivered at a lower cost to society.
5. PPPs increase quality and or efficiency of services
Transferring the performance risk to the private sectors appears to be effective on average. International research for example in the water, electricity and health care sector concludes that the private sector outperforms the public sector in terms of quality and efficiency of service provision.
6. Vast majority of the market perceive PPP as beneficial
Although there will always be PPP sceptics, the available satisfaction surveys among public and private stakeholders confirm that the benefits arising from PPP are also being perceived as such by the vast majority.
7. Though PPPs can fail and PPPs have failed
The overwhelming evidence in favor of PPP does not imply that PPPs are a guarantee for success. There are numerous examples of failed PPPs. With K-infra I have just completed a critical review for the EBRD of the PPP experiences in the transport sector in Europe. The review took note of not less than 18 failed PPPs and 8 successful transport PPPs with the aim to illustrate the importance of proper preparation and appraisal as well as overall sound management of the cycle and how most of project failures relate to the lack of them.
In conclusion, PPPs have to potential to provide substantial benefits in terms of a more effective and efficient delivery of infrastructure projects and related services. However, PPPs also have a risk of failure in particular when the necessary preparation is lagging. The aim should be to minimize the risk of failure by understanding the principles underlying PPP, the need for sound preparation and by allocating the appropriate resources in terms of capacity and time.
The fact that we don’t always do it right doesn’t mean that it isn’t right