Privatized Development Aid: A Path to Nowhere

9. Mai 2019

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Public-private partnerships (PPPs) are becoming increasingly popular in the field of development financing. PPPs are agreements between private parties and the public sector to provide, fund, or operate public services. Institutions like the UN, the World Bank, and the EU promote PPPs, particularly to finance infrastructure projects, including the construction and operation of schools, hospitals, or highways. The assumption behind PPPs is that private actors have the financial capacity to invest in infrastructure while states are often constrained by empty public coffers. But is the private sector the right actor to implement development projects, given that its primary aim is to generate profits? A growing body of evidence questions the efficiency and appropriateness of PPPs.[1]

PPPs started gaining ground in the late 1990s, during the “private turn” in development cooperation.[2] Official development aid decreased slightly between 1991 and 2014, while facilitated investment rules led to a surge in private investment during the same time period. Official funds started being used to leverage private funds for development investments. This shift is prominently reflected in the 2015 SustainableDevelopment Goals (SDGs). Confronted with an investment gap created by insufficient official funding, the UN started calling for private investment flows to be channeled to SDG funding in a move that became known as “shifting the trillions.

There are many reasons, however, to doubt the appropriateness of PPPs for development purposes. The narrative of closing the investment gap implies that PPPs can exploit new sources of funding – but the source of these funds is unclear. Firms finance themselves on the capital market by taking out loans, just as states do. The difference is that they usually pay higher interest rates on their loans because they have a higher risk of not being able to pay them back. They also need to generate profits for shareholders and future investments. They require higher returns on their investment as a result.[3] This contributes to higher costs of PPP investment expendituresvis-à-visstate-only financed projects.[4] The increased costs of PPPs are either paid by the state as the client or by citizens themselves, for example through user fees. In the end, states and their citizens may not only pay for the project itself, but also finance the profit required by the private sector.

In the context of development financing, the structural flaws of PPPs have even worse consequences. Development goals should arise from humanitarian concerns, not because they are deemed economically profitable. But PPPs require profitability. Sustainability and inclusiveness often get lost in the tension between profit expectations and humanitarian goals. When the Ghana Water Company Limited (Ghana’s national water company) was split when it was restructured: one part covering the capital, Accra, and the other the rest of the country. This division made sense for the private investors since it was only profitable for them in Accra, but it prevented previous cross-subsidies for poorer parts of the country.[5] The outcomes of the privatization were so bad, in fact, that the government ended the cooperation in 2011 after only five years.

PPP efficiency depends on the public administration’s capacity to shape them, to determine the right degree of risk sharing, and to balance interests of the different stakeholders. Yet even developed countries like France or Germany repeatedly fail to achieve cost-effective PPPs. For example, Germany’s Federal Audit Office found that six PPPs for highway construction were €1.9 billion more expensive than those under conventional financing.[6] Sustainable development goals such as zero hunger or eradicating poverty require investment in developing countries.[7] These countries often lack institutional capacity, making PPPs more expensive and less advantageous for the state.[8] Given that even developed countries with highly developed public administrations struggle with designing PPPs efficiently, developing countries seem predetermined to fail.

Supporters of PPPs argue that international organizations provide guidelines and frameworks to help with the successful implementation of PPPs. A large variety of such guidelines aiming to help developing states with the implementation of PPPs exist, but most lack comprehensiveness.[9] They rarely provide information as to when governments should refrain from implementing PPPs, reflecting a naïve approach towards these partnerships.[10] International organizations should pursue real capacity building to enable administrations to decide and negotiate PPPs.

PPPs are also structurally susceptible to corruption.[11] PPPs offer lucrative, long-term contracts for companies, increasing the risk of corruption at the allocation stage when the public procurement process takes place. Private actors can also gain a lot during the design stage by manipulating PPP contracts. A company might, for example, exaggerate the number of potential users of a bridge to raise the price for the state.[12] Secrecy and non-disclosure of compensations and other payments to companies can also open the gates for corruption as the public and NGOs are not able to subject the process to public scrutiny or compare it to similar projects elsewhere.

Based on the evidence against PPPs, European states should use their influence in international organizations such as the UN and the World Bank to stop the unconditional push for PPPs. The potential of PPPs to increase value for money is severely limited and sometimes outright harmful, especially for development projects. Public development aid should instead be stepped up to enable developing states to finance long-term infrastructure projects by themselves. In 2015, only seven countries reached the longstanding goal of an ODA/GNI ratio of 0.7%, with most developed countries still lagging behind their commitments.[13] Sustainable development needs to take priority if the goals set by the UN are meant to be more than just castles in the sky.

Attempts to hide the costs of development by implementing long-term PPPs will cost more than they benefit the local population. When development projects are implemented by the state, sustainability and inclusion can, in principle, be better assured and projects contribute to the capacity building of institutions. States moved towards private development aid in the belief that this would increase the efficiency and amount of funds. Seeing that this is not the case and that PPPs can have harmful effects, a return to and increase of official development funds is the best option to realize sustainable development.

References:

Picture by Saad Salim

[1] Compare research by European Court of Auditors, Hall and the IMF.

[2] Elisa Van Waeyenberge, The private turn in development finance, (FESSUD Working Paper Series No. 140, 2016).

[3] María José Romero, What lies beneath? A critical assessment of PPPs and their impact on sustainable development(Brussels: European Network on Debt and Development, 2015), PDF, https://eurodad.org/files/pdf/55cb59060d9d4.pdf.

[4] Jomo KS et al, Public-Private Partnerships and the 2030 Agenda for Sustainable Development: Fit for Purpose? (New York:Department of Economic and Social Affairs, 2016), DESA Working Paper No. 148, PDF, https://www.un.org/esa/desa/papers/2016/wp148_2016.pdf

[5] David Hall, Why public-private partnerships don’t work, (Ferney-Voltaire: Public Services International, 2015(2014)), PDF,
 http://www.world-psi.org/sites/default/files/rapport_eng_56pages_a4_lr.pdf.

[6] Bundesrechnungshof, Bericht an den Haushaltsausschuss des Deutschen Bundestages nach §88 Abs. 2 BHO über die Infrastrukturabgabe für die Benutzung von Bundesfernstraßen (Bonn: Bundesrechnungshof, 2015), PDF, https://www.bundesrechnungshof.de/de/veroeffentlichungen/produkte/beratungsberichte/langfassungen/langfassungen-2015/2015-bericht-infrastrukturabgabe-fuer-die-benutzung-von-bundesfernstrassen

[7] European Court of Auditors, Public Private Partnerships in the EU: Widespread shortcomings and limited benefits (Luxemburg:European Court of Auditors, 2018), PDF, https://www.eca.europa.eu/Lists/ECADocuments/SR18_09/SR_PPP_EN.pdf.

[8] James Leigland, “Public-Private Partnerships in Developing Countries: The Emerging Evidence-based Critique,”The World Bank Research Observer33, no. 1 (February 2018): 103–134, https://academic.oup.com/wbro/article/33/1/103/4951689.

[9] CompareWorld Bank (2015), UNECE (2016) or OECD (2012).

[10] Motoko Aizawa, A scoping Study of PPP Guidelines (New York:Department of Economic and Social Affairs, 2018), DESA Working Paper No. 154, PDF, https://www.un.org/esa/desa/papers/2018/wp154_2018.pdf

[11] Elisabetta Iossa, David Martimort, Corruption in public-private partnerships, Incentives and Contract Incompleteness (Munich: Center for Economic Studies, 2014), CESifo DICE Report 3/2014, 14-16, PDF, https://www.cesifo-group.de/DocDL/dicereport314-forum3.pdf.

[12] Bent Flyvbjerg, Mette Skamris Holm, and Søren Buhl, “Underestimating Costs in Public Works Projects: Error or Lie?,” Journal of the American Planning Association 68, no. 3  (2002): 279-295.

[13] The ODA/GNI ratio refers to the ratio of official development assistance (ODA) to a donor’s gross national income (GNI).

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Tom Josten

Tom was responsible for partnerships and recruitment in the 2018/19 team project based in Paris. He is currently pursuing a dual master’s degree in international public management and political sciences in Paris and Berlin. His research interests include political economy, international trade as well as international institutions.