The Unaccounted Risks of Public Private Partnerships

This brief article examines the ramifications of adoption of the public-private partnership (PPP) mechanism in the urban infrastructure and service sector. I focus on the debate concerning the efficacy and equity of PPPs and, particularly, the issue of risk. I first provide a definition of public-private partnerships and discuss how the literature concerning them has approached risk. I highlight the fact that public-private partnership proponents and critics alike are concerned with this question, albeit in very different ways. The mainstream management literature sets up a comprehensive list of risks associated with these structures so that these may be delimited for each project and addressed as efficiently as feasible to avoid cost increases. The political and economic literature focusing on such partnerships meanwhile, approaches the question of risk more broadly. These analysts outline the challenges that attend the PPP mechanism in comparison to other development alternatives, such as traditional procurement, and to traditional public sector provision of public goods and services. Of particular concern to scholars in this literature are the effects of public-private partnerships on popular participation in decision-making, on power sharing among groups and on the distribution of wealth. These investigators contend that, unchecked, these risks challenge the very premise that PPPs can more efficiently address a widening infrastructure gap. These concerns also work against regulatory frameworks founded on the principle that greater public participation and control in public decision-making can better address geographic service-related disparity and income inequality.

Broadly defined, public-private partnerships may be considered, “contractual arrangements of varied nature where the two parties share rights and responsibilities during the duration of the contract” (Farquharson, de Mästle, and Yescombe 2011, 9). Hodge and Greve (2007, 545) have similarly loosely defined PPPs as “co-operative institutional arrangements between public and private sector actors.” The World Bank, which along with other multilateral agencies is committed to the use of PPPs worldwide, has defined these collaborations as:

a long-term contract between a private party and a government entity, for providing a public asset or service, in which the private party bears significant risk and management responsibility, and remuneration is linked to performance (The World Bank 2014).[1]

This definition assumes that the private sector bears the brunt of a PPP’s associated risks. However, several analysts have sharply challenged this view, as discussed below.

The principal animating or foundational idea underpinning public-private partnerships is to enhance the production and delivery of public goods and services, while at the same time addressing governmental funding and technical constraints. PPP proponents argue that governments alone are not able to address a widening gap of urban infrastructure and service needs resulting from, among other factors, rising rates of urbanization. These individuals point to estimates that suggest that globally, the current need for investment in infrastructure development is as high as $3 trillion  (World Economic Forum 2010),[2] with actual annual investments estimated at about one-half of that total (Boston Consulting Group 2013).[3]  At the same time, many analysts have suggested that inadequate infrastructure has a detrimental effect on economic growth worldwide, a dynamic that is particularly pervasive and critical in less developed nation contexts, where service levels are usually below what is required to meet existing demand. In these situations, economies face “congestion or service rationing, [where] infrastructure services are also often of low quality or reliability, while many areas are simply un-served” (Farquharson, de Mästle, and Yescombe 2011, 31). This scenario routinely poses a challenge to governance and often reflects not only insufficient fiscal resources and financial forecasting and management, but also generally inadequate planning and design, poor project ordering and weak or insufficient capacity for infrastructure maintenance. Proponents of partnerships contend that greater private sector participation can help governments overcome these challenges, “by mobilizing additional sources of funding and financing for infrastructure” (Ibid).[4]

The mainstream literature highlights PPPs’ advantages as encompassing:

  • whole of life costing, or the integration of all project-related technical and financial responsibilities under a single partner, which, proponents assume, “incentivizes the single party to complete each project function (design, build, operate, maintain) in a way that minimizes total costs;”
  • risk transfer, meaning that part of the risk associated with owning and operating infrastructure is shifted from the public to the private sector, imagined (once again) to be “better able to manage it;”
  • a focus on service delivery and performance, facilitated by the establishment of a long-term contract in which a private agent is given the flexibility to incorporate innovations, and to pursue additional sources of funding to help defray project costs in ways that the public sector cannot (Farquharson, de Mästle, and Yescombe 2011, 32).

Advocates of partnerships acknowledge that every PPP carries risks, which can negatively affect a project’s ‘financial value.’ To mitigate this drawback, proponents argue that each proposed effort should include a comprehensive list of its likely risks and a calculation of their estimated costs and how these might be allocated or mitigated, as appropriate. Analysts have argued that there are

… two main goals of [such] risk allocation. The first is to create incentives for the parties to manage risk well—and thereby improve project benefits or reduce costs. The second is to reduce the overall cost of project risk by ‘insuring’ parties against risks they are not happy to bear (Iossa, Spagnolo and Vellez 2007 in The World Bank 2014, 149).

PPP risks commonly are divided into three types: macro, or those related to the economic and political environment, as well as to extreme events such as natural disasters; meso, or risks specifically associated with a project, such as land acquisition and production management; and finally, micro-level concerns, associated with relationship and personnel issues within a collaboration’s management structure. These last factors may include inadequate experience with PPPs, lack of commitment from one or more parties and staffing challenges (Bing et al. 2005).

Given the multi-dimensional character of these challenges, critics have suggested that mainstream public-private partnership studies have been overly focused on microeconomic analysis (Flinders 2005) and have therefore failed to acknowledge how the public sector—as well as the citizenry—are likely to bear most (if not all) of the costs associated with the risks of such initiatives.  As Shaul (in Flinders 2005, 226) has observed, “far from transferring risk to the private sector, PPP[s] transfer the risk to the government, workforce and the public users and tax payers … the concept of risk transfer in the context of essential services is fundamentally flawed.” Examining the national government’s experience with public-private partnerships in Great Britain, Edwards and Shaoul (2002, 397) have argued that “public agencies, not the commercial partner, bore the management risk and costs fell on the public at large and/or other public agencies.” Overall, these studies are concerned with the way in which PPPs affect, and distort, the distribution of wealth amongst social groups, the public sector and the market, transferring resources away from the general citizenry and to private elites (Shaoul 2005).

Miraftab (2004) has analyzed the effects of partnerships on power sharing between the public and private sectors, as well as local communities in South Africa, and concluded that analysts must be more careful in assuming that any given partnership’s major players can perform their designated roles, i.e., the state, the private sector and the community, as these vary in their political, fiscal and administrative capacities to address needed project scale and implementation requirements. In the context of decentralization, which has characterized South Africa’s post apartheid regime, private actors involved in the delivery of public infrastructure worked with recently established local government agencies that lacked capacity to play the mediating roles required in complex PPPs. As result, the partnership initiatives Miraftab investigated often resulted in the privatization of community assets and further dispossession of poor communities from their locally mobilized resources (Ibid, 98).

Arguing that public-and-private cooperation is not new, Hodge (2004) has sought to identify what, specifically, contemporary partnerships entail. Thus, he has argued that today’s PPPs are characterized by: “the use of private finance arrangements, the use of highly complex contracts to provide the infrastructure or services, and the altered governance and accountability assumptions accompanying this” (Ibid, 37). The preference for private financing, he notes, can result in greater costs for taxpayers. The innate complexity of these cross-sectoral arrangements can limit policy makers’ and citizens’ understanding and ability to evaluate their outcomes, including their actual direct and indirect costs. In this sense, PPPs can make it difficult for government officials and the public to determine accountability for such project’s outcomes, while also failing to promote community involvement. Hodge has argued for the need to separate project specific ‘commercial needs’ and broader ‘governance risks.’

He has applied his evaluative criteria to a road infrastructure PPP project in Melbourne, Australia (i.e., City Link) and concluded that in that case the private sector bore the bulk of the project’s commercial risk, as stated in the contract for the effort. However, in addition to those foreseen risks, there were also unforeseen ones, related to legal disputes among the private parties involved and to public mistrust of the project. Those risks, which Hodge classified as political and governance related, were extremely large and were borne wholly by the public sector. Hodge (2004, 47) concluded that the actual price citizens paid for the development of City Link never became clear, and suggested that PPP contracts, “need not only to be optimal in the technical sense, but also accompanied by a priority for democratic debate, transparency and clarity.”

More recently, Greve and Hodge (2013) found improved private sector performance and accountability in PPP implementation. However, they focused this fresh analysis on projects in Australia and the United Kingdom, and not on developing nation efforts, where public-private partnerships are still often unfamiliar. Moreover, these authors were unable to ascertain in their review of the literature whether PPPs overall could save the public sector money or secure improved efficiency, as often argued. Instead, they concluded that partnership outcomes are highly contextual. They also highlighted the fact there is often far greater concern with regulating and monitoring the roles, responsibilities and potential benefits to the public and private sector actors and much less attention to the outcomes of PPPs for local citizens. Henjewele, Fewings, and D. Rwelamila (2013, 226) have also recently contended that public-private partnerships “across Africa, North and South America, Australia and Europe” often marginalize the citizenry. While directly affected communities are often addressed in PPPs, their impacts on the general public are often not assessed as a result of a lack of proper community consultation and involvement (Rwelamila et al. in Henjewele et al. 2013).

This review suggests that there is a wide gap between the management of risk in public-private partnerships at the project scale and the implications of such efforts for the broader political economy of the jurisdictions in which they are implemented. Project managers and those analysts who adopt their perspective approach risk as a set of project related challenges that must be identified, allocated and mitigated so as to avoid increases in project costs. For these individuals, the focus of analysis is restricted to a particular project and risk is measured in terms of financial value. Their ultimate goal is to address a widening infrastructure gap that is also measured in financial terms. Scholars in the political economy literature take a very different view and assess risk in terms of the challenges that PPP’s represent to wealth allocation, power sharing and popular participation in decision-making.

Overall, it is valuable that critical analyses of PPPs take into consideration that these efforts are dynamic; lessons learned in past experiences can be, and have been, used in a way to improve the design of new collaborations. However, it is even more important that analysts and managers alike address the broader concerns raised by the political-economy literature, for these are at the core of the current political and policy debate regarding deepening international and intra-national economic and social inequality. To be sure, this examination must be grounded in the crucial understanding that, in developed and developing economies alike, public-private partnerships have not had a good record when it comes to sharing power and resources with local community and civil society groups.  Public and private sector actors have developed improved capabilities to devise more effective partnership contracts while local community groups remained marginalized. To some analysts, this lack of public control helps explain why PPPs often deepen, rather than alleviate, the concentration of power and wealth amongst political and economic elites (Miraftab 2004, Shaoul 2005). Such findings should be taken very seriously in light of Miraftab’s (2004) conclusion that PPP trajectories are shaped by local cultural and regime characteristics and past experiences.

 

Notes

[1] The World Bank. 2014. Public-Private Partnerships reference guide Version 2.0. Accessed in January 27, 2016. http://ppp.worldbank.org/public-private-partnership/library/public-private-partnerships-reference-guide-version-20.

[2] World Economic Forum. Paving the Way: Maximizing the Value of Private Finance in Infrastructure. New York, 2010. Accessed in January 27, 2016. http://www3.weforum.org/docs/WEF_IV_PavingTheWay_Report_2010.pdf.

[3] Partnerships Help Bridge the Infrastructure Gap. Accessed January 27, 2016. https://www.bcgperspectives.com/content/interviews/public_sector_transportation_travel_tourism_gerbert_partnerships_help_bridge_inf_gap/.

[4] It is important to describe the methodology for calculating the global infrastructure gap. This figure is based on OECD’s forecast expenditure on infrastructure for OECD and emerging countries for the period 2000 – 2030, as percentage of global GDP (equivalent to 2.84% for the period 2000-2010 and 2.58% for 2010-2020), and its comparison with the World Bank’s estimate for required infrastructure investment needs for emerging economies. This last estimate is equivalent to 7 to 9% of emerging countries’ annual GDP (World Economic Forum 2010, 6-9). This is therefore a subjective measure, which can vary significantly from country to country, according to local characteristics and values, needs and  resources.

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 References

Bing, Li, Akintola Akintoye, Peter J Edwards, and Cliff Hardcastle. 2005. “The allocation of risk in PPP/PFI construction projects in the UK.” International Journal of project management 23 (1):25-35.

Farquharson, Edward, Clemencia Torres de Mästle, and ER Yescombe. 2011. How to engage with the private sector in public-private partnerships in emerging markets: World Bank Publications.

Flinders, Matthew. 2005. “The politics of public–private partnerships.” The British Journal of Politics & International Relations 7 (2):215-239.

Greve, Carsten, and Graeme Hodge. 2013. Rethinking public-private partnerships: strategies for turbulent times: Routledge.

Henjewele, Christian, Peter Fewings, and Pantaleo D. Rwelamila. 2013. “De-marginalising the public in PPP projects through multi-stakeholders management.” Journal of Financial Management of Property and Construction 18 (3):210-231.

Hodge, Graeme A. 2004. “The risky business of public-private partnerships.” Australian Journal of Public Administration 63 (4):37-49.

Hodge, Graeme A, and Carsten Greve. 2007. “Public–private partnerships: an international performance review.” Public Administration Review 67 (3):545-558.

Miraftab, Faranak. 2004. “Public-Private Partnerships The Trojan Horse of Neoliberal Development?” Journal of Planning Education and Research 24 (1):89-101.

Shaoul, Jean. 2005. “A critical financial analysis of the Private Finance Initiative: selecting a financing method or allocating economic wealth?” Critical Perspectives on Accounting 16 (4):441-471.

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Priscila_Izar_2016 (1)Priscila Izar is a Ph.D. candidate in the School of Public and International Affairs and graduate research assistant at the Global Forum or Urban and Regional Resilience. Her work explores the connections between financialization and urban space production. Her dissertation examines the scope, limitations and meaning of financialized urban policy in contexts in which the size and character of financial markets are not clear. Priscila holds a master’s degree in International Development Policy from Duke University and a professional degree in Architecture and Urban Planning from Mackenzie University in Brazil. She has previously worked in the fields of housing and local economic development, including efforts to develop especially impoverished areas.

 

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