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Infrastructure Challenges and How PPPs Can Help

Infrastructure is critical for economic development, reducing poverty and inequality, creating jobs, and ensuring environmental sustainability. Infrastructure generates high social returns and is welfare enhancing. Governments are ultimately responsible for the provision of public services and the infrastructure required for their delivery. Infrastructure investment is often part of the social compact between a government and its citizens.

Inadequate infrastructure is a constraint on growth and impacts quality of life, particularly in developing countries. When the demand for infrastructure services outstrips supply, congestion or service rationing occurs; the quality of service delivery is low or unreliable, and some areas are simply not served. As of 2016, it was estimated that:

  • Over 2.4 billion people lacked access to improved sanitation
  • At least 663 million people lacked access to safe drinking water
  • Over one billion people lived without access to electricity
  • At least one-third of the world’s rural population was not served by an all-weather road

Degradation of infrastructure also implies that actual economic growth will be lower than forecasts, as forecasting methodologies typically assume stable infrastructure performance.

Infrastructure investment poses pervasive challenges to governments. First, agency problems involving different actors and taking different forms throughout the project cycle require complex governance arrangements. The agency problems are compounded by the fact that infrastructure projects typically involve large sums of money and are therefore susceptible to corruption and bribery. For example, the politicians and public servants who decide on project selection and implementation as agents of taxpayers and users may be tempted to buy votes with the promise of new infrastructure, even if this means following unsustainable fiscal policies. Gains from the announcement of a project are immediate, whereas the pain will only be felt by electors long after they have cast their vote. Flaws in the incentive framework, and more generally, the rules governing agency problems throughout the project cycle, are a major reason why infrastructure projects often fail to meet their timeline, budget, and service delivery.

Second, most countries are not spending enough to provide the infrastructure needed to reach universal access and meet the Sustainable Development Goals (SDGs) (UN SDG) as defined by the United Nations. Moreover, the quality of infrastructure delivery is often disappointing—construction of new assets costs more and takes longer than expected, and service delivery is poor. Finally, infrastructure assets are often poorly maintained, increasing costs and reducing benefits. These issues are discussed further in the report on Barriers to Infrastructure Service Delivery in Sub-Saharan Africa and South America by Castalia (Castalia 2014).

How PPPs can help

PPPs can help overcome some of these pervasive challenges, as illustrated in The Challenges with Infrastructure and How PPPs Can Help. For example:

  • Under the right circumstances, PPPs can mobilize additional sources of funding and financing for infrastructure.
  • By subjecting potential projects to the test of attracting private finance, PPPs can enhance project selection.
  • The incentives of the private sector can be aligned with the interests of the contracting authority throughout the entire life cycle of the project, including the implementation phase. This alignment occurs by tying-in the private operator’s revenue to a set of pre-agreed performance indicators and by requiring the latter to invest significant, long-term capital.

Thus, the incentive framework embedded in PPP contracts can foster efficiency gains and those gains should outweigh the additional cost of private finance. When the decision to implement a PPP is based on the government’s perceived inability to deliver the service by other means, the PPP route will at least ensure that the service is delivered—but at a higher cost than under efficiency conditions (see Assessing Value for Money of the PPP). The PPP may still be effective, though not efficient.

Countries with relatively long PPP histories have found that PPPs manage construction relatively better than traditional public procurement, with projects coming in on time and on budget more often. This is because of the incentives created by the PPP structure, which give the private party more control over project design and implementation while simultaneously preventing the reward of cost overruns.

The long-term investment horizon of PPP contracts can also help ensure that assets are maintained in a good, serviceable condition.

In fragile and conflict-affected states (FCS), PPP-like structures can help attract private investment and increase service delivery. This is discussed in greater detail in Infrastructure in Fragile and Conflict-Affected States.

The Challenges with Infrastructure and How PPPs Can Help
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The mechanisms by which PPPs can improve infrastructure delivery are often called value drivers—that is, instruments to maximize value for money. These value drivers—as described in PPP Value Drivers are often integrated into PPP policies.

PPP limitations, pitfalls, and complementary measures needed

There are problems that PPPs cannot solve, or that PPPs may exacerbate. First, PPPs may appear to relieve funding problems more than is the case, as government's fiscal commitments to PPPs can be unclear. This can lead to governments accepting higher fiscal commitments and risk under PPPs than would be consistent with prudent public financial management, particularly when PPPs are treated as off-balance sheet. While PPPs can contribute to better project analysis and adoption of innovative solutions that foster efficiency, responsibility for planning and project selection remains primarily with the public sector—moreover, the unclear fiscal costs and contractual inflexibility of PPPs can render these tasks more delicate. The advantages of private sector participation in constructing and managing infrastructure, including improved incentives to carry out regular maintenance, also depend on effective PPP contracting and procurement by the government.

These limitations mean that PPPs are not a panacea or a remedy for all infrastructure performance problems. The Challenges with Infrastructure and How PPPs Can Help highlights important ingredients for improved infrastructure delivery. Sound public decision-making based on comprehensive analysis and a governance framework fostering transparency and accountability are prerequisites for successful public investment projects. Evidence suggests that improved management can reduce infrastructure shortfalls by making better use of existing infrastructure facilities and more efficient use of public resources on greenfield projects. Ultimately, many governments may need to commit more resources to deliver quality infrastructure projects.

The four problems with infrastructure project implementation shown in The Challenges with Infrastructure and How PPPs Can Help will be described in this section as well as whether and how PPPs may be able to help, and PPP limitations or pitfalls that may exacerbate the problem.

Key References

Infrastructure Challenges and How PPPs Can Help - Problems with Infrastructure