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“It is extremely difficult to negotiate PPP contracts”


02/2007 		 

“It is extremely difficult to negotiate PPP contracts”

Public-private partnerships (PPP) can contribute to lessening the financial burden a government must bear. As Barry Anderson, budgeting expert at the OECD, explained in a conservation with Hans Dembowski, however, the approach goes along with serious risks.


[ Interview with Barry Anderson ]

What exactly is a PPP?
Well, there is no generally accepted definition. For example, many governments do not employ water engineers. They have a government-owned and -operated utility, and hire private-sector engineers to handle technical problems. That is a public-private partnership in a manner of speaking, but what really distinguishes a PPP in my view is the ownership and the operation of the capital asset. If a private firm owns and operates the filtration plant, pipes, pumps and so on, that is a real PPP, with the company being at risk in the case of an earthquake or a massive flood.

Why is PPP an important approach?
There are two main reasons. The first is that many governments can only raise a limited amount of money to invest in public goods. Therefore, it is an attractive idea to have private investors pay for capital assets, for instance, a new road. The second reason is that one would like to harness the efficiency of the private sector for providing public services. After all, private businesses normally operate more efficiently than government bureaucracies can.

But isn’t that due to the fact that they are profit-driven? While private companies operate more efficiently, their services normally do not reach as many people. They only serve customers if doing so pays.
Well, that may happen, but not necessarily so. It depends on how the compensation for the private sector’s services is provided. Of course, one can construct a road and have the users of the road pay tolls for their use. In that case, poor people are likely to use the road less than others. However, one can also construct the same road, but have something called “shadow tolls”, where the users don’t pay tolls directly. Instead, it is the government that pays, based on some measure of how many cars use the road.

A tax on gasoline could serve that purpose.
That’s an option. But the government could also pay the tolls from its general revenue, making sure that poor people have access to important infrastructures. There are a lot of different arrangements that are possible.

What exactly must a government do to make sure that private-sector firms work efficiently?
That’s an excellent question, it goes straight to the heart of the matter. You see, PPPs are not easy or simple arrangements. There has to be a very clear arrangement between the public sector and the private sector on what services are going to be provided and what the compensation will be. Moreover, we are talking about long-term contracts that span 10, 20 or even 30 years. Accordingly, it is very difficult to take account of all relevant unknowns and to make adequate arrangements. Let’s not forget that there is natural tendency on the part of the private sector to try and get guarantees. Of course, they want to make sure they get a safe return on their investment. But if they get all the guarantees they would like to have, they automatically loose the incentives, or at least part of the incentives, that make private-sector businesses more efficient in the first place. Well-designed PPPs therefore always involve intense negotiations between the private sector and the public sector.

But if it is so difficult to harness the benefits, does it really make sense to bank on PPPs in countries were governance is not all that good and where statehood may be fragile?
The answer is that the poorest countries are frequently the ones that want to use public-private partnerships the most, but they are also the least able to do so in terms favourable for them. It is extremely difficult to negotiate PPP contracts. Good intentions do not suffice. In many developing as well as developed countries, the civil service does not have the expertise to negotiate these kind of contracts to the benefit of the government and the taxpayer. There is a real risk that PPP projects can turn into public burdens.

PPPs did not have a good reputation in the UK after they were introduced in the water and transport sector. Too often, services remained inadequate.
Well, the UK paid a price in terms of learning how to do it and how to do it right. They made many mistakes initially. They started to implement many PPPs at the time of the Thatcher and Major governments. Since then, they have learned what a PPP is, they have learned how hard they are to do, and they have learned what the risks are. One really should emphasise the word “risk”. Risk is the fundamental aspect for a PPP. Who is bearing what risk? Who is going to pay if something goes wrong? In Britain, they have learned their lesson. It wasn’t cheap, it wasn’t quick, but now they know what they are doing.

It seems we are not looking at an ideological issue of private versus public sector, but tackling pragmatical questions of how to do it right.
I couldn’t agree more. And doing it right is tricky. Some governments have benefited from the UK experience. They have been talking with their British counterparts. South Africa, Ireland or France have used that kind of information well.

Can experienced civil servants from rich countries help to negotiate PPP contracts in poor countries or would doing so undermine national ownership?
They can certainly help. The countries that have been most active in this field include the UK, South Africa, some Australian states and Ireland. Typically, they have specialised PPP units in their finance ministries. They are specifically set up to look at PPPs. These units develop the expertise themselves. They then support the officers of other departments – such as transportation, water or perhaps prisons – when they negotiate PPP contracts. In any case, you need experts with a good understanding of the matter. Frequently it can help to hire a banker or some other professional, if a government doesn’t have the appropriate capacity itself.

What about specialists from development agencies like German Technical Cooperation or KfW Enwicklungsbank, could they do the job?
Yes, of course. But I am afraid there is another problem we must be aware of. You see, some developing countries did talk to UK officials, but they didn’t listen to what they were told. They heard only one thing, and that was “off-budget”. And once they had heard that term, nothing else mattered any more. They wanted to escape the constraints of rules imposed by their parliaments, the IMF or perhaps by the European Union, and yet acquire a capital asset, but get it off-budget. Unfortunately there have been some very bad deals that will turn out very expensive for the governments in the long run. Some PPP schemes are likely to prove much more expensive then they would have been, had the respective government chosen a conventional path to financing investment. You don’t see the costs in the budget today, but they will be there in future budgets.

Could you name some examples?
Well, I would look in Eastern Europe first of all, and consider Hungary and Romania. Brazil is another country that has run into problems.


Barry Anderson
 heads the OECD’s Budegting and Public Expenditures Division. From the United States, he previously held posts as deputy director of the Congressional Budget Office and as assistant director for budget in the Office of Management and Budget.
Barry.Anderson@oecd.org