Mastering the Risky Business of Public-Private Partnerships in Infrastructure

Abstract

Investment in infrastructure can be a driving force in the economic recovery from the COVID-19 pandemic. Investment needs were large before the pandemic and have been made more urgent by the need to ensure quality delivery of basic public services such as health and education, create jobs, foster inclusive growth, and facilitate economic transformation with greener and more resilient infrastructure and accessible digital platforms. Public resources alone will unlikely meet the demand, and the private sector will be called on to supplement the public sector to reach investment objectives. Public-private partnerships (PPPs) bring a promise of efficiency when carefully designed and managed to avoid creating unnecessary fiscal risks. When applied to the right projects, well-designed and properly implemented PPPs can benefit governments in many ways. They can mobilize additional sources of funds, bring private-sector management capacity, and create incentives to deliver and maintain better-quality infrastructure. They may also allow governments to identify project costs more transparently and focus on outputs and performance levels. PPPs usually bring higher financing costs, require more complex tendering and careful contract management, and expose governments to significant fiscal risks. These risks-that is, the possibility of deviations in outturns compared to the projected fiscal position of government-are linked to not only contractually accepted risks, but also potential change during the long contractual term. Enjoying PPP benefits requires governments to carefully manage the PPP processes, including fiscal risk management considering their long-term nature and the complexity of risk-allocation agreements.