PPP is an acronym for ‘Public-Private Partnership’ which means at the simplest, the collaboration between the public and private sectors towards a defined goal. According to the World Bank, ‘PPP is a long-term contract between a private party and a government entity, for providing a public asset or service, in which the private party bears significant risk and management responsibility.’
The above definition by the World Bank points at a number of things: first, that there are two primary actors in PPP that is a public actor – which could be a government ministry, department or specialised agency; and a private actor which is often a company, corporation or business. Second, PPP is a contract that is, both the public and private sectors have come together to formalise an agreement to partner. Given the nature of contracts, it further indicates that there would be a period of negotiation where both parties commit to a set of terms and obligations in order to formalise the agreement. Third, the definition indicates that the nature of PPP is that they are often and largely long-term thus, the contract can be in operation for a number of years.
To understand PPPs, it is important to highlight that they do not exist in a vacuum; rather, they are born out of necessity towards a goal or to meet an objective. The objective(s) for the partnership would have been the subject for negotiation between both parties and would be detailed in the contract. Although PPPs vary depending on the contract and the set of objectives being pursued, a primary objective for PPPs is to finance, build, and operate large-scale projects and initiatives especially infrastructure assets and services.
Governments and public institutions by and large have limited resources to meet competing development priorities. The government by itself is often unable to shoulder the totality of development costs on the national budget especially where there is a mismatch between revenue and government expenditure. To this end, PPPs allow governments to combine resources with the private sector towards building infrastructure assets and services.
Fundamentally, PPPs help to mobilise funding and investment for infrastructure development. Bearing in mind that Africa faces a significant infrastructure financing deficit of about $130 – $170 billion per year, PPPs can help the government access private capital and investment to finance infrastructure projects. Suffice to say that infrastructure projects are capital intensive. A good example is the Mozambique LNG project in 2019 to boost energy security in Mozambique which costs $20 billion. The financing required for the project couldn’t have been single-handedly raised by the government of Mozambique however, the project finance was raised by key export credit agencies, development finance institutions and international commercial banks.
Beyond access to capital, PPPs combine the skills and expertise of both the public and private sectors. In particular, the government can tap into the technical expertise of the private sector to ensure quality and timely delivery of projects. This is not far-fetched, a major complaint expressed about the government often revolves around the level of bureaucracy which slows down decision-making as well as reduces efficiency. It somewhat explains why government contracts may take an unnecessarily long duration to be executed or construction projects delayed beyond the timeline for its delivery. The private sector on the other hand is motivated by profit hence prioritises efficiency to save costs, minimise risks and deliver to time all of which will increase the overall value of the project. With PPPs, the private sector can bring along the technology, innovation and skills the government needs to urgently deliver on infrastructure projects.
Furthermore, one of the biggest advantages of PPPs to infrastructure development is risk sharing which is simply allocating risks between both the public and private sectors. Infrastructure projects are complex and long-term undertakings, numerous risks may arise over the years of executing the project some of which may not have been foreseen at the beginning. The nature of some of these risks go beyond the capacity of either sector to mitigate alone. As part of the contract, there could be a risk matrix which identifies all potential risks and allocates them to the party that is best suited to handle them. For instance, regulatory and political risks may be assigned to the public sector whereas operational risks associated with day-to-day project activities may be assigned to the private sector. Each risk owner brings a different skillset to the project which therefore increases the likelihood of success.
Like every relationship, PPPs although present numerous opportunities, they are not without challenges. The challenges associated with PPPs are rife, this blog examines three of them which are interconnected.
As previously stated, PPPs are contractual relationships between the public and private sectors – as such, challenges may arise as a result of the enabling contract including but not limited to non-performance of contractual obligations which may result in legal disputes or contract termination thus jeopardising the project entirely. As PPPs are a contract, the success of the project depends on each party keeping to their end of the bargain. Typically, this is straightforward as each party is incentivised by different objectives – the private sector is out to make profit while the public sector is concerned with the project delivery in order to perform its primary function of providing public goods and services therefore, each party would strive to perform their obligations.
In addition, political instability is another critical challenge of PPPs. An obvious problem is the level of bureaucracy involved with government relationships but a bigger challenge has to do with the lengthy timeline of infrastructure projects which can span beyond the electoral mandate of one government. For example, the Lagos-Ibadan 127.6 km-long expressway cutting through Lagos, Ogun, and Oyo States has taken more than a decade to deliver the project. The project was initially signed off by the Jonathan administration in 2013 continued into the Buhari administration (2014 – 2023) and the acclaimed 94% completion of the project as of the third quarter (Q3) of 2023 is within the first year of the Tinubu administration (2023 – till date). A change in government during the project lifecycle often result in delays, setting back the expected project completion date.
Again, whilst PPPs are useful for mobilising financing to meet infrastructure demands, this in itself can be a challenge in the sense that the private sector may not be able to generate the required capital or attract sufficient investment for the proposed project. As a matter of fact, the economic environment plays a huge role as currency-foreign exchange fluctuations and interest rates might affect availability of funding for the project. According to a 2009 World Bank cross-country analysis, there are excessively high interest rates which discourages or limits private investment in infrastructure projects in Africa.
Nevertheless, the situation is not completely hopeless. In fact, the challenges of PPPs are opportunities in disguise for African governments to embark on public policy reforms to strengthen the institutional capacity of government to deliver on long-term projects irrespective of electoral cycles as well as improve the business-economic environment to unlock private sector investment for infrastructure projects. To this effect, the public sector must ensure that macroeconomic policies support private sector participation.
Finally, fostering collaboration between public and private sectors, PPPs can drive sustainable infrastructure development. There are associated challenges but at the same time, there are opportunities especially for African governments with relatively low capacity and resources to build infrastructure assets and services alone. African governments via PPPs have an incredible opportunity to tap into private sector expertise to build Africa’s infrastructure future.