KIN Journal: Engaging the Private Sector | April 2015
Strategic Collaboration to Create Public-Private Partnerships
Public-private partnerships are an important way to fund and sustain infrastructure projects and public services. They can be quite complicated to complete, with numerous conceptual and structural issues to resolve. Millennium Challenge Corporation’s business model, because it is so tightly focused on timing and funding, does not provide the flexibility to do all of the preliminary work that is often necessary to lay the foundation for successful completion of public-private partnerships. Strategic collaboration with other investment partners enables MCC to create opportunities for private sector participation in infrastructure and public services in its programs. Partnering with the World Bank’s Public-Private Infrastructure Advisory Facility (PPIAF) and the International Finance Corporation (IFC) has proven particularly fruitful.
Because of limited resources, governments around the world are looking to the private sector to help supply transportation, power, water, sanitation, public health, and other services. There is a recognition that partnerships with the private sector may be able to deliver, operate and maintain such services more efficiently than governments alone. Accordingly, working with the private sector in public-private partnerships (PPPs) is an important part of Millennium Challenge Corporation’s mission to foster economic growth and reduce poverty and represents a strategic priority for MCC. Through PPPs, MCC seeks to mobilize the capital, expertise and efficiency of the private sector to deliver faster, better and affordable services and generate more sustainable development outcomes.
MCC Support for PPPs
PPPs are not a panacea, nor are they a one-size-fits-all solution. When compared with the public sector, PPPs—under the right circumstances and a well-designed contractual structure—can offer value for money due to efficiency in investment, including through shorter construction periods; deliver better quality service; and allow for greater innovation, transfer of skills and more efficient operations and maintenance.
Private sector participation can involve an assortment of contracting modalities with a wide range of levels for the delegation of service responsibility, risk allocations and reversibility of asset-ownership, as summarized in Diagram 1.
Such market-based approaches can better balance the risks and benefits between the public and private sectors. In this way, PPPs represent legally enforceable contracts between the public and private sectors in which the private business provides a service traditionally furnished by government. Under a PPP, government remains accountable for service delivery, but it delegates responsibility to the private sector according to a contract that transfers key risks such as design, financing, construction, and operation. This is in exchange for payments dependent on meeting specified service quality and performance standards as well as penalties or liquidated damages for failing to deliver the relevant contractual requirements. With these sorts of PPP arrangements, the role of government shifts from asset owner and operator to that of supervisor and regulator.
Where involving the private sector makes sense, MCC can provide support to its partner governments to deliver public services through PPPs, including providing capital for construction 1 as well as technical assistance and capacity building for sector institutions such as utilities, line ministries and regulators. Table 1 shows how MCC can support private sector participation throughout the PPP project cycle.
|Type of Support||Timing of Support|
||Throughout the PPP cycle|
Collaboration is a key success factor for MCC
PPPs require certain pre-conditions at both the country and project levels. At the country level, these include: having a clear legal and policy framework, credible regulatory arrangements, institutional readiness to supervise PPP arrangements, and a favorable investment climate. At the project level, these include: strong partners, a secure and adequate revenue stream, and efficient allocation and management of risks.
For PPPs to succeed, governments must demonstrate political commitment, good governance and the ability to manage complex contracts. Putting these conditions in place and then executing the PPP transaction can take years, sometimes beyond the typical MCC compact development period plus five-year implementation horizon period. It also requires highly specialized skills and experience. This is particularly true in the challenging operating environments of MCC partner countries.
At an operational level MCC collaborates with other development partners based on their respective institutional comparative advantages to create these enabling conditions and implement the deals, while balancing public policy objectives with the needs of private sector sponsors and project lenders. To this end, the World Bank’s Public-Private Infrastructure Advisory Facility (PPIAF) and the International Finance Corporation (IFC) have proven to be particularly valuable partners in promoting PPPs in many compact countries where MCC works.
PPIAF’s comparative advantage is on creating the upstream enabling environment for PPPs, while IFC’s advantage is on downstream transaction advising, structuring, tendering, and financing. PPIAF can also assist sub-national entities such as power and water utilities to improve their creditworthiness to access capital markets without sovereign guarantees, which helps mobilize infrastructure financing. For MCC, collaborating with these development partners can facilitate compact development and implementation by bringing PPP transactions to market that deepen the sustainability of MCC investments.
For example, PPIAF’s assistance early in the compact and threshold program development processes for El Salvador, Ghana and Honduras provided important operational and financial benefits by generating actionable due diligence information to help inform MCC’s program design efforts. PPIAF’s early involvement also accelerated the program development process, compared with MCC’s typical process where project preparation activities are funded by a grant (so-called 609(g) funding) that can take several months to activate.
In compact implementation, PPIAF is currently supporting MCC investments in Cabo Verde and Zambia, and has developed a pipeline of potential further activities to strengthen the performance of water and power utilities in various MCC partner countries.
Meanwhile, on the downstream side, MCC and IFC have collaborated closely on developing PPPs to leverage MCC’s portfolio, including the container terminal in Benin’s Port of Cotonou and MCC’s health sector investments in Lesotho. In addition, to support the second compact with Ghana, MCC retained IFC to define possible options for introducing private sector participation in the country’s two power utilities, the Electricity Company of Ghana and Northern Electric Distribution Company. The PPP options analysis considered the technical, operational, and financial conditions of each utility, and projected their long-term performance based on a financial model that assumed an efficient operator.
With an optimal risk allocation between public and private stakeholders, PPPs can improve development outcomes by:
- Accelerating infrastructure and public service delivery;
- Reducing life-cycle costs for projects;
- Improving quality of services;
- Leveraging private sector competencies and knowledge transfer (e.g., management, technology, innovation);
- Introducing effective means for ensuring accountability, transparency and separation of roles between policy makers and productive functions; and
- Promoting local sources of financing.
In addition to collaborating with PPIAF and IFC to deliver on this vision, MCC welcomes the opportunity to partner with other private and public sector organizations to promote and deliver on PPPs going forward.