Public-private partnerships: why, and under what conditions

Why PPPs

1.1A context of increasingly scarce financing

Several converging trends are making the conventional financing of infrastructure through sovereign borrowing ever more difficult, particularly for developing countries and emerging economies:

• The end of the low-interest-rate era. The monetary tightening that began in 2022 has durably raised the cost of debt, notably on the Eurobond markets, from which several emerging economies have found themselves effectively shut out, or to which they have access only on prohibitive terms.
• Over-indebtedness across a large number of sovereigns. A significant proportion of low- and middle-income countries are in, or at high risk of, debt distress according to the debt sustainability analyses of the IMF and the World Bank.
• The contraction of official development assistance. Several major bilateral donors have cut their aid budgets; concessional financing is no longer sufficient to meet needs.
• Competing budgetary priorities. Debt service, social spending, security, climate adaptation: the fiscal space available for infrastructure investment is shrinking.
• The scale of the infrastructure gap. For Africa alone, the African Development Bank estimates annual needs at well over one hundred billion dollars, with a financing gap of several tens of billions per year. Demographic pressure and rapid urbanisation are widening that gap.
• The demands of the energy and climate transition, which call for unprecedented volumes of investment in energy, water, transport and resilience.
• The deterioration of sovereign credit ratings, which mechanically raises the cost of any financing backed solely by the credit of the state.

Against this backdrop, mobilising global private savings, infrastructure funds, pension funds, insurers, sovereign wealth funds, development finance institutions, is no longer an option but a necessity.

1.2A development model better suited than debt

Sovereign debt financing suffers from a structural weakness: the state borrows to acquire an asset, yet repayment is in no way conditional on that asset performing properly. A poorly built hospital, a road deteriorating for lack of maintenance, an under-utilised power plant, each continues to cost the state exactly the same debt service. The PPP reverses this logic:

• Payment is for a service rendered, not an asset delivered. The private partner's remuneration depends on the availability and quality of the facility. If the service is not delivered, payment is reduced.
• The full life-cycle cost is revealed from the outset. The contract covers construction, operation and maintenance over twenty or thirty years. This avoids the illusion of the "lowest bid" at construction, followed by chronic under-maintenance.
• Risks are allocated to those best placed to manage them. Cost overruns, delays, technical failures: these fall on the private partner, which is therefore incentivised to prevent them.
• Investment is spread over time. The state does not disburse the full cost at construction; it spreads its contribution over the term of the contract, in line with the services actually received.
• Market discipline is applied to the project. Lenders, who commit their funds on a non-recourse (or limited-recourse) basis against the strength of the project alone, exercise a degree of due diligence that public procedures do not always replicate.

It must nonetheless be stated plainly: a PPP is not free financing. The cost of private capital is higher than that of concessional sovereign debt, and the state's future payments constitute commitments, firm or contingent, that must be recorded and factored into the fiscal sustainability analysis. A PPP is justified when the efficiency gains and the risk transfer outweigh this additional financing cost, which is precisely the purpose of the "value for money" test.

1.3Benefits for governments

• Faster delivery of infrastructure, without waiting for budgetary resources to become available or for loan negotiations to conclude.
• Preservation of fiscal space and debt sustainability, provided that commitments are transparently accounted for.
• Better adherence to cost and schedule, statistically superior to traditional public procurement, as a result of the transfer of construction risk.
• Quality and continuity of service, secured by contractual performance indicators and penalties.
• Transfer of know-how and technology, training of the local workforce, and the strengthening of domestic firms involved in the projects.
• Innovation: a private sector paid on results is incentivised to optimise design and operation.
• Refocusing of the state on its core functions, defining needs, regulating, monitoring, rather than on operational management.
• Leverage: one euro of public resources (subsidy, guarantee, land contribution) mobilises several euros of private capital.
• Tax revenues and economic activity generated by the project and its operation.

1.4Benefits for investors and private partners

• Predictable, long-term revenue streams, often indexed, backed by a contract with a public authority or by essential demand (water, electricity, transport).
• An attractive risk-return profile in an environment of uncertain interest rates and bond yields, with low correlation to equity market cycles.
• Access to fast-growing markets, driven by demographics and urbanisation.
• Real assets offering protection against inflation.
• Political and credit risk mitigation instruments: guarantees from MIGA and the World Bank (partial risk and partial credit guarantees), from regional development banks, from the African Trade Insurance Agency (ATI), and from export credit agencies, among others.
• Alignment with ESG and impact criteria, which are increasingly decisive in the allocation decisions of large institutional investors.
• Diversified structuring options: equity, senior debt, mezzanine, project bonds, post-construction refinancing, and the sale of mature assets on the secondary market.
• A negotiated contractual framework, with stabilisation clauses, termination compensation mechanisms and access to international arbitration.

The conditions for successful PPPs

International experience shows that PPP failures rarely stem from the principle itself, but almost always from shortcomings in the framework, the preparation or the management of projects. The following conditions are decisive.

2.1A clear, comprehensive and predictable law

A PPP law must offer investors legal certainty and public authorities a disciplined process. Its minimum content:

Scope and definitions

• Definition of the PPP and its variants (concession, partnership contract, BOT/BOOT/DBFO, lease-and-operate or affermage), and its distinction from public procurement contracts and public service delegations.
• Eligible sectors and public authorities empowered to contract (central government, local authorities, public entities).
• Interaction with the public procurement code, the investment code, land law and tax law.

Institutional framework

• A central PPP unit with technical, legal and financial expertise, tasked with supporting contracting authorities and safeguarding the quality of projects.
• An inter-ministerial approval body, in which the Ministry of Finance must participate.
• The role of sector regulators and oversight bodies (court of auditors, public procurement regulatory authority).

Project preparation and approval

• Mandatory ex-ante appraisal: technical, economic, environmental and social feasibility study; fiscal sustainability analysis; comparison with delivery under public ownership (public sector comparator / value for money).
• Binding opinion of the Ministry of Finance on the budgetary impact and contingent liabilities.
• Inclusion of projects in a published multi-year programme.

Procurement

• The principle of competitive tendering; procedures (open tender, restricted tender, competitive dialogue); an exhaustively enumerated list of cases in which direct negotiation is permitted.
• Treatment of unsolicited proposals: strict framework, mandatory competitive tendering, with a possible bonus for the originator.
• Objective award criteria, published in advance.
• Remedies and avenues of challenge for unsuccessful bidders.

Mandatory content of the contract

• Purpose, term and conditions for extension.
• Risk allocation matrix (see 2.3).
• Payment mechanism, indexation, and the regime of penalties and bonuses.
• Performance indicators and monitoring arrangements.
• Regime governing assets (reversionary assets, assets subject to buy-back, the partner's own assets) and conditions for hand-back at the end of the contract.
• Clauses on amendment, economic rebalancing and renegotiation, with appropriate safeguards.
• Termination events (partner default, authority default, public interest, force majeure) and the corresponding compensation formulas.
• Lenders' rights: direct agreement, step-in rights, assignment of receivables, security interests.
• Foreign exchange and fund transfer regime; applicable tax and customs regime.
• Dispute resolution: mediation, technical expert determination, recourse to arbitration (including international arbitration) for projects involving foreign investors.
• Governing law and stabilisation clause.

Transparency and oversight

• Publication of signed contracts, their amendments and annual performance reports.
• A public register of firm and contingent budgetary commitments arising from PPPs.
• Anti-corruption provisions and declarations of interest.

Several emerging economies have adopted laws of this kind in recent years, often revising them after a few years of experience to correct their shortcomings: the quality of the text matters, but its effective implementation matters more.

2.2Stable political commitment and a robust institutional framework

• Sponsorship at the highest level of the state, resilient to changes of government: PPPs span several political terms.
• A PPP unit that is genuinely staffed and resourced, able to engage on equal terms with investors' advisers.
• Effective coordination between line ministries and the Ministry of Finance, to avoid projects that are technically attractive but fiscally unsustainable.
• Continuity of teams over the life of the project.

2.3Appropriate risk allocation

The cardinal principle is that each risk should be borne by the party best able to manage it, or to insure it at the lowest cost. Excessive transfer to the private partner is paid for in the form of a risk premium and ultimately passed back to the state or to users; insufficient transfer strips the PPP of its rationale.

2.4Rigorous project preparation

A poorly prepared PPP project fails at the tender stage or, worse, during implementation. What is required:

• Complete and independent feasibility studies, financed upstream (project preparation facilities of development banks, dedicated facilities).
• A bankability analysis: does the project generate cash flows that are sufficient, and sufficiently certain, to raise non-recourse debt?
• A realistic, indeed conservative, demand study; traffic over-estimates are the leading cause of renegotiation.
• Support from experienced transaction advisers (technical, legal, financial) on the public side.
• Project screening: only those projects whose size, complexity and risk profile lend themselves to it should be structured as PPPs.

2.5Fiscal sustainability kept under control

• Identification and valuation of all of the state's commitments: firm payments (availability), minimum revenue guarantees, termination compensation, foreign exchange guarantees, debt guarantees.
• Integration into the debt sustainability analysis and the budget law; ceilings on PPP commitments as a percentage of GDP or of revenue.
• Accounting in line with international standards (IPSAS 32, GFSM 2014); use of tools such as the PFRAM developed by the IMF and the World Bank.
• Provisioning and active management of the portfolio of contingent liabilities.

2.6A viable payment mechanism and tariff structure

• A coherent choice between user charges, availability payments and hybrid models, according to users' ability to pay and the state's fiscal capacity.
• Recourse, where necessary, to transparent and capped viability gap funding, to make bankable those projects that are socially essential but insufficiently profitable.
• Socially acceptable tariffs, with mechanisms to protect vulnerable users; a project that is economically viable but socially rejected will fail.
• Security for public payments: escrow accounts, letters of credit, payment guarantees from multilateral institutions.

2.7Appropriate guarantees and credit enhancement

For countries with weak sovereign credit, access to risk mitigation instruments is often the condition for reaching financial close:

• Partial risk and partial credit guarantees from the World Bank and the regional development banks.
• Political risk insurance (MIGA, ATI, national agencies).
• Equity or debt participation by development finance institutions, which reassures private investors.
• Regional liquidity facilities and first-loss guarantees.

2.8A competitive and transparent procurement process

• Competition is the best guarantor of a fair price; directly negotiated deals statistically lead to costly renegotiations.
• Wide publication of calls for tender, reasonable deadlines, equitable access to information, structured dialogue with bidders.
• The fight against corruption: the credibility of a country's PPP programme is built, or lost, on its first projects.

2.9Rigorous contract management over the long term

Signature is not the end of the process but the beginning of a twenty- to thirty-year relationship:

• A dedicated contract monitoring team on the public side, equipped with the skills to monitor performance indicators, apply penalties and assess requests for amendments.
• Structured renegotiations: permissible, but under rules defined in advance and subject to the oversight of an independent body.
• Anticipation of contract expiry: condition of assets, transfer of skills, transition.

2.10A supportive overall macroeconomic and legal environment

• Macroeconomic stability, currency convertibility and freedom to transfer income and repayments.
• A reliable judicial system and effective enforcement of arbitral awards (accession to the New York Convention and to ICSID).
• A functioning land registry and security of land tenure.
• A domestic banking system and local financial market capable of participating, even partially, in the financing, thereby reducing foreign exchange risk.

Causes of failure to avoid

By way of reminder, the most frequently observed errors:

• Projects launched for political reasons without a serious feasibility study.
• Transfer to the private partner of risks it cannot control (demand, land), paid for in a risk premium and subsequently renegotiated.
• Direct negotiation, or unsolicited proposals, without an adequate framework.
• Under-estimation of contingent budgetary commitments, revealed at the next crisis.
• Weakness of the public side in the face of experienced private advisers.
• Unrealistic tariffs imposed for social reasons, with no budgetary compensation provided for.
• Absence of post-signature monitoring, and drift in performance.
• Instability of the legal or tax framework during the life of the contract.

The most suitable sectors

• Energy: independent power production (IPPs), in particular renewables; transmission; rural electrification.
• Transport: ports, airports, toll motorways, railways, logistics platforms.
• Water and sanitation: desalination plants, treatment plants.
• Telecommunications and digital: fibre infrastructure, data centres.
• Social infrastructure: hospitals, universities, housing, under availability-payment structures.
• Urban infrastructure: public transport, waste management, street lighting.
• Agriculture and irrigation: irrigated perimeters, cold chains, wholesale markets.

The role of a global PPP project platform

All of the conditions for success described above run up against a single obstacle: information asymmetry. Governments struggle to bring their projects to the attention of anyone beyond the usual circle of donors; investors, particularly those without teams dedicated to emerging markets, are unaware of projects that would nonetheless match their criteria. In between, intermediaries flourish whose added value is not always commensurate with their cost.

A global platform, listing with the consent of governments all PPP projects in preparation or under procurement, meets this need:

• Visibility: a single point of entry, structured by country, sector, stage of development, size and payment model.
• Reliability: systematic referral to the official sources for each project (PPP units, contracting authorities), guaranteeing the authenticity of the information.
• Direct connection between public authorities, developers, investors and financiers, with no imposed intermediation.
• Support on demand: access to experts for structuring, negotiating and concluding balanced agreements, and then for launching operations.
• Dissemination of good practice: comparison of legal frameworks, risk matrices and the guarantee mechanisms available country by country.
• Broader competition: more informed bidders means better offers for governments.