9 Public-private partnerships in developing
and transition countries
| (25871)
11856/04
SEC(04) 1033
| Commission Staff Working Document: Public-Private Partnerships in Developing and Transition countries — A critical review of existing experiences and analysis of possibilities of donor intervention
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| Legal base | — |
| Document originated | 30 July 2004
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| Deposited in Parliament | 12 August 2004
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| Department | International Development
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| Basis of consideration | EM of 28 August 2004
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| Previous Committee Report | None
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| To be discussed in Council | 22-23 November 2004 GAERC
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| Committee's assessment | Politically important
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| Committee's decision | Cleared, but further information requested
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Background
9.1 Public-private partnerships (PPPs) are defined as "forms
of cooperation between public authorities and the world of business
which aim to ensure the funding, construction, renovation, management
or maintenance of an infrastructure or the provision of a service".
9.2 In general terms, PPPs are considered to be a
promising instrument for growth and economic development in developing
countries. 1.1 billion people lack access to a safe water supply,
2.4 billion people do not have access to adequate sanitation and
around 2 billion people are estimated to lack an electricity connection.
Funding from governments and the international donor community
will not be sufficient to close these gaps, and many hope that
PPPs will bring in finance for infrastructure investments in developing
countries, enabling the international community to achieve the
Millennium Development Goals.[12]
Against this background, the staff working paper reviews the experiences
of public-private partnerships (PPPs) in infrastructure development
and provision in developing and transition countries and analyses
the scope for donor support for this process in these countries,
and aims to start a process of analysing and evaluating the possibilities
for support by the Commission for the use of PPPs in developing
and transition countries, with an emphasis on the delivery of
infrastructure.
Commission Staff Working Paper
9.3 The very helpful Explanatory Memorandum of 28
August 2004 from the Secretary of State for International Development
(Mr Hilary Benn) analyses the paper in more detail:
"The paper identifies the costs of PPPs as:
- Increased costs to the user/tax
payer to meet the commercial return on investment required by
the private sector;
- Increased transaction costs arising from setting
up and implementing PPPs; and
- Increased cost of long-term financing for the
private sector compared to the public sector.
"The benefits are identified as:
- More effective and efficient
management of public utilities;
- Acceleration of infrastructure provision;
- Greater innovation and up-to-date know-how; and
- Freeing up of public budgets for spending on
direct pro-poor interventions.
"In recent years, three main areas of donor
and development bank support for PPPs have emerged — technical
assistance, financing and guarantees, and grant support for projects.
The paper identifies existing international instruments, and current
and potential areas of EC support for PPPs.
"In relation to technical assistance for governments
and agencies, the paper recommends that capacity building facilities
should be extended to help governments and local business to transact
and manage complex PPP structures. The EC will help strengthen
these aspects by working with sector approaches and by joining
the Public Private Infrastructure Advisory Facility (PPIAF). PPIAF
is a multi-donor facility, initially developed by DFID, that works
with developing country governments at central and municipal levels
to improve the enabling environment for private sector involvement
in infrastructure services.
"In relation to financing instruments to promote
private sector participation, the paper notes that there are gaps
in the coverage offered by existing guarantee facilities, and
suggest that more attention should be paid to equity insurance,
foreign exchange risk and sub-sovereign guarantees. The paper
proposes that funding from the Investment Facility, (a €2.2bn
[£1.46bn] programme launched in 2003 for private sector development
in ACP countries),[13]
could be used to take forward work in this area. On the issue
of subsidies, the paper recommends that the EC consider supporting
existing pilot initiatives in the field of output-based aid (OBA),
a form of subsidy which is paid only when defined service outputs
are met, and makes reference to the DFID supported Global Program
for Output-Based Aid. The paper also suggests that the EC could
examine the possibilities for increased use of OBA[14]
in its grant financing of services of general interest.
"The paper identifies a number of guidelines
and consideration[s] for donors in supporting PPPs. These are:
- It is necessary to carefully
evaluate the costs and benefits of private sector participation
on a case-by-case basis
- Donors should look at the possibilities to tender
design and construction work together;
- More donor support is needed to improve the capacity
of governments in developing and transition countries to transact
and implement PPPs;
- Development banks need to improve the scope and
volume of financing and guarantee instruments suitable for PPPs;
- Grant support to subsidise services of general
interest needs to be carefully aligned with national priorities
on the use of subsidies; and
- The EC, when using grants, should look increasingly
at the possibilities of output-based aid approaches."
The Government's view
9.4 The Secretary of State says that:
"DFID believes that there is a role for the
EC and the [European Investment Bank] in facilitating PPPs, and
we welcome this in the initial analysis. The poorly developed
infrastructure prevalent in most developing countries contributes
to poverty and represents a serious constraint to the growth of
business and the overall economy. Current investment in the poorer
developing countries, (whether it is from developing country government
sources, official development assistance or the private sector),
is insufficient to fund additional infrastructure needs, leaving
hundreds of millions of people without access to basic services.
DFID believes that donors have an important role to play in helping
to maximise the contribution of all the various sources of financial
and human capital to the provision of infrastructure services.
DFID agrees that PPPs are a promising instrument for growth and
economic development in developing and transition countries, but
recognises that there are a number of risks involved that might
prevent PPPs from benefiting the poor.
"DFID believes that a flexible approach, both
in terms of service provider and sources of finance, should be
central to donor policies on PPP. For example, the poor often
rely on small-scale private infrastructure service providers.
Donors can do more to provide business development support to
small-scale providers, and to help link the informal private sector
to public utilities and to the large-scale private sector where
it is involved. Community and NGO-implemented projects can also
provide an alternative to large international companies. Such
projects often allow for greater user involvement which can help
to ensure that services actually meet demand. There are also multiple
sources of finance for PPPs. For example, within the private sector
the costs, amount of up-front investment, and currency risks will
vary depending inter alia on whether finance is mobilised via
the capital or credit markets, or from the local or international
financial markets.
"DFID agrees that the EC and EIB should not
set up parallel activities to those PPP programmes already covered
by existing donor and private sector interventions. Much can be
achieved by donors working in partnership and in support of government-led
national poverty reduction strategies. DFID welcomes the Commission's
commitment to join PPIAF.
"The paper notes that there is a number of gaps
in the range of guarantees covered by existing donor facilities,
and suggests that EIB Investment Facility funding could be used
to help fill this gap. However, DFID believes that there is a
potential overlap with the work already being undertaken by the
GuarantCo[15] facility,
one of the work programmes of the multi-donor supported Private
Investment Development Group (PIDG),[16]
and other PIDG programmes under consideration. Collaboration between
the EIB and PIDG could help the EIB fulfil its poverty reduction
mandate, whilst meeting the revolving fund criteria of the Investment
Facility."
9.5 He concludes by saying that the document is to
be discussed in the Development Co-operation Working Group on
9 September and is likely to go to the 22-23 November General
Affairs and External Relations Council, where Council Conclusions
will be agreed.
Conclusion
9.6 We share the Commission's major conclusion
— which it describes as "seemingly trivial" but
"often overlooked" — that public-private partnerships
(PPPs) are not a universal panacea, but in each instance have
to be analysed on a case-by-case basis. We also endorse the Commission's
view that "private participation in service provision is
not considered a goal in itself", and that costs and benefits
need to be carefully assessed, particularly in ensuring that such
schemes are indeed accessible to and benefit the poor. Nonetheless,
we agree with the Government's view that PPPs have a role to play
in addition to conventional official sources of funding, and not
just to provide necessary public services but also to improve
local management skills.
9.7 On direct Commission participation in projects,
we particularly note what the paper has to say about output-based
aid ("paid only when defined service outputs are met"),
given that it is not aspirations but outcomes that are most important,
and are glad that this innovative approach is to be further piloted.
9.8 We would be grateful if the Minister would
let us know in due course how discussion of the paper develops
in the Working Group and what Conclusions the Council finally
adopts. Meanwhile, we clear the document.
12 The eight goals that, in 2000, the UN set itself
to achieve, most by 2015: eradicate extreme poverty and hunger;
achieve universal primary education; promote gender equality;
reduce child mortality; improve maternal health; combat HIV/Aids,
malaria and other diseases; ensure environmental sustainability;
develop a partnership for development. Back
13
Based on the 2003 Cotonou Agreement with the African, Caribbean
and Pacific countries, the new five year revolving EIB Investment
Facility provides loans, equity capital, quasi-equity and guarantees,
primarily in support of private sector organisations, as the ultimate
motor and catalyst behind poverty reduction and its ultimate eradication,
the core objectives of the Cotonou Agreement. Back
14
Under Output-Based Aid (OBA), public money is applied through
performance-based contracts to subsidize the cost of delivering
basic services and target these on the poor. Service delivery
is delegated to private, including not-for-profit, organisations
under arrangements that tie the disbursement of public funding
to the delivery of pre-specified services or outputs. The contractual
commitment of public funds under OBA schemes allows private operators
to mobilise commercial funding and thus leverage public money
substantially. Back
15
Many infrastructure projects derive most of their revenues in
local currency, making hard currency debt funding inappropriate.
In 2004 PIDG launched GuarantCo, to mitigate risks for local currency
financing of infrastructure. It will support private sector and
PPP infrastructure investment in low income developing countries
by addressing market failure in the domestic capital markets of
these countries and reducing the exchange rate risks associated
with financing infrastructure that generates local currency revenues. Back
16
In 2002, DFID, SECO (Switzerland), SIDA (Sweden) and DGIS (the
Netherlands) formed the PIDG (Private Infrastructure Development
Growth), with the aim of mobilising private investment in infrastructure
for growth and the elimination of poverty. The World
Bank has recently joined the PIDG. Back
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