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Not all PPPs are Made Equal

June 11, 2012

Infrastructure development is an integral part of sustainable economic growth.  Indeed, a recent African Development Bank Group  (AfDB) article estimates that improving African infrastructure would lead to a 3% increase in annual growth.  In order to meet the Millennium Development Goals and achieve this level of growth, it is thought that $93 billion a year  is necessary to spend on infrastructure development in Africa for an entire decade.  The same AfDB article argues that public-private partnerships may help achieve these ambitious goals.

In the European Center for Development Policy Management’s (ECDPM) May 2012 publication of GREAT Insights Melissa Dalleau outlined six necessary conditions for successful public-private partnerships (PPPs) in infrastructure development.  According to ECDPM, the keys to success are “enabling environments” that facilitate PPPs; “project preparation”; “risk mitigation”; “coordination” of various governmental and private organizations; effective communication; and the “alignment of incentives” such that private endeavors benefit the public.  The successes and failures of particular infrastructure development projects best demonstrate the importance of these conditions.

The South African government has been particularly successful in leveraging the private sector to achieve development goals.  As of January 2012 South Africa has completed over twenty different PPP projects.  Most notable among these projects is the Gautrain rail system linking Pretoria and Johannesburg.  Costing nearly $4 billion, the project was realized through the combined efforts of Bombela Concession Company and the Gauteng province.

Gautrain in South Africa

With a PPP unit entrenched in its legal system South Africa certainly has an environment that enables and even encourages PPPs.  The extremely extensive concession agreement drawn up between Bombela and the South African government establishes the responsibilities of the two parties, facilitating clear communication, negotiation, and mediation.  The concession agreement also creates a risk-sharing framework in which neither the government nor the private sector is fully exposed to the risks associated with the project.  Prior to starting the project, the South African government undertook “complex projections and calculations,” indicating a significant level of project preparation.  Finally, and perhaps most importantly, the project aligned public and private interests, reducing road traffic while also providing a cheaper alternative to driving.  The conditions determined by ECDPM were clearly in place in South Africa and led to the successful implementation of the Gautrain rail system.

Conversely, an effort to improve infrastructure in Mexico demonstrates the disastrous effects of ignoring best practices in PPP implementation.  In the early 1990s the Mexican government turned to PPP to improve their toll road system with no so positive results.  The effort suffered from poor project preparation, as government officials rushed through traffic surveys and private companies failed to conduct full cost estimates.  Furthermore, poor communication between the Secretary of Communication and Transportation, banks, and construction companies led to poor quality control, which in turn led to a funding failure. Finally, the Mexican government limited bids to a small group of construction companies whose interest in profiting off of road construction did not match the public interest of creating financially viable roads.  Unlike the Gautrain project, risk was not shared between the two parties, with the government bearing a disproportionate amount of the burden.  While this may have incentivized private companies to invest in the project, it ultimately resulted in the Mexican government bailing out failed projects.  Thus, the Mexican toll road project demonstrates the importance of strong institutional capacity in implementing successful PPP.

The nature of the Gautrain’s success and the Mexican toll roads’ failure suggest that the ECDPM’s guidelines for best practices in PPP are essential to successfully joining the public and private sectors to scale up infrastructure in the developing world.

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