Regional : Strengthening Fiscal Governance and Sustainability in Public-Private Partnerships

Finance / Infrastructure finance and investment funds

Public sector management / Public expenditure and fiscal management

High quality, fiscally sustainable infrastructure is a key driver of economic growth and poverty alleviation. The Asia and Pacific region suffers from significant infrastructure deficits, particularly in terms of quality, quantity, and accessibility. These deficits are particularly severe in energy, transport, and water and sanitation. Persistent infrastructure gaps have direct implications for human development and constrain growth for many countries. Improving infrastructure is an explicit goal of the 2030 sustainable development agenda. Substantial investment from public or private sources is required to address these infrastructure gaps. ADB DMCs will need to invest $26 trillion between 2016 and 2030, or $1.7 trillion per year, if the region is to maintain its growth momentum. Because the private sector is better equipped to manage key PPP-related risks, the public sector is increasingly turning to the private sector to explore the feasibility of PPPs as a means of developing and managing critical infrastructure.

While private sector participation in the development and operation of public service assets is becoming an increasingly viable infrastructure development strategy, in developed jurisdictions, DMCs in particular should be cautious about approaching it as a panacea. PPPs can be financially advantageous compared with traditional public procurement if the cost of transferring risks to the private sector is lower than the private sector's cost of finance. Pricing of risk and competitive tension become the critical determinants of relative efficiency in these partnerships, which can explain the difficulties and costly mistakes that most countries experience with PPPs, at least initially. International experience has identified many reasons why PPPs might not bring desired benefits. Such reasons include strategically wrong assumptions about future income streams and inaccurate estimates of risk transfers from the public to the private sector. Given the complexity of PPPs, DMCs need to build robust policy, regulatory, and financial frameworks and strengthen PFM and government institutional capacity. Prudent approaches to developing PPPs and sustained efforts to create dedicated expertise on PPPs in public institutions, supported by ADB TA, can be crucial to helping DMCs extract positive development impacts from PPPs.

Four factors can help DMCs have more success with PPPs. First, PPP development can only deliver its promise of value-for-money if it is integrated within effective public investment management frameworks. The positive impacts of infrastructure cannot be guaranteed by a 'business-as-usual approach that simply targets the quantity of infrastructure projects. Improved public investment planning and management are critical to enhancing the efficiency of public infrastructure investment, including through PPPs.

Second, stronger public investment management will result in more predictable, credible, efficient, and productive infrastructure investments that avoid the main sources of chronic renegotiation cycles: unsolicited proposals and opportunistic bidding (optimism bias). Strengthening institutions could close-up two-thirds of the public investment efficiency gap. Most countries must still benefit from building stricter oversight of PPPs and better integration of national strategic planning with fiscal budgeting and PPP planning. Only with a systematic approach can a country's pipeline of PPPs add value-for-money and produce the targeted fiscal advantages. Caution is advised to guard against advice that promotes PPPs as a fiscal magic bullet or a 'lifter of fiscal constraints. DMCs should look to avoid the frequent and costly mistakes of the first movers in the PPP space, and ADB needs to be at the forefront of this broad transfer of knowledge and reform effort. This will require a regional approach to ensuring effective sharing of experiences and lessons learned.

Third, fiscal risk management systems in DMCs that enter the PPP space must be established from ground-zero. For instance, regarding viability gap funding (VGF), many jurisdictions have either weak regulatory frameworks or limited experience in assessing the level of VGF required to ensure bankability. PPPs imply fiscal commitments (contractualized or not) that must be carefully weighed (from both a project proposal perspective and a consolidated fiscal risk management angle) prior to commencing negotiations on PPPs.

Finally, unstable local-currency markets in DMCs heighten fiscal risks and make it more difficult to attract private sector participation in infrastructure investments, especially from foreign investors. DMCs need to become more aware of fiscal- and financial-related preconditions needed for sustainable infrastructure development.

ADB experience. During 20092018, ADB approved 792 projects and TA interventions with PPP-related components (totaling $51.0 billion, including 435 TA grants totaling $660.0 million). In line with ADB's PPP Operational Plan 20122020, this TA will support ADB operations departments in advocating for a fiscally responsible approach to PPPs within DMCs (Pillar 1), and in nurturing the institutional and policy environment required to make PPPs an effective procurement modality (Pillar 2). The TA will also complement work under Pillar 3, coordinated by ADB's Office of PublicPrivate Partnership, on structuring PPP transactions to enable a flow of well-prepared and well-structured projects capable of drawing external finance.

Fiscal sustainability of PPP investments in infrastructure projects promoted in DMCs (ADB Strategy 2030)

Capacity to integrate fiscally sustainable PPPs improved in selected DMCs

Policy, legal, regulatory, and institutional frameworks for PPP development and management strengthened in DMCs

PFM and fiscal risk management for legacy and new PPPs strengthened in DMCs

Policy experience on creating fiscally sustainable PPPs disseminated to DMCs