Making public-private partnerships work for post-conflict countries

The World Bank
Jeff Delmon

In Bos Taret Village of Cambodia, these power lines bring much-desired electricity to rural farmers. Credit: Tyler Sprague

“The test of success is not what you do when you are on top,” as U.S. Army General George S. Patton Jr. famously said. “Success is how high you bounce when you hit the bottom.”

In the context of countries that need rebuilding, public-private partnerships (PPPs) can lend extra oomph to the bounce, boosting post-conflict countries in cases where:

• Government doesn’t have the money, skills, or people to deliver good services; or
• Even if it had the money, it couldn’t spend it well or fast enough, and/or
• Even if it could invest the money, any follow-up would be insufficient (see first bullet).

But once investors come to the table, operating in post-conflict countries still poses unique challenges. For example, laws and regulations are often weak or not enforced, leaving investors unprotected. In most cases, if government can’t afford to pay for services, neither can the people.

Wanted: crystal ball

Investors and lenders assess projects based on the current condition of the country in question. We all want those investors and lenders to believe in the prospects of the country, to bring skills and money to add bounce—that is, unless we are shareholders in the investor or lender companies, or if they are using our pensions or savings to make these investments. In that case, we want them to be conservative, cautious investors.

Classic approaches to PPPs result in investors pricing risk over the 20 to 30 year life of the project. Wishful thinking aside, the current condition of the country is the only real basis for such long-term analysis and the price of the risk will be accordingly high. But does anyone really want to lock a post-conflict nation into a 30-year PPP project that is priced based on its current troubles?

Walk first, then run

In most cases it is prudent for the post-conflict country to achieve stability before entering into the sort of long-term arrangement embodied in classic approaches to PPP. There are exceptions, however. Telecommunications, natural resource concessions, ports, and airports may provide foreign currency revenues and present business models that are either lucrative enough or insulated enough from the government and the domestic economy to justify long-term PPP investments. They may also facilitate revenue/refinancing gain sharing structures that will help tilt the benefits in the direction of the government later, when the country is no longer such a risky place to do business.

Another approach is shorter-term PPP arrangements that are focused on improving capacity. For example, private expertise can be brought in through management contracts, to reinforce domestic utility capacity. Then, once the utility is in a stronger position, a more comprehensive PPP can be considered. There are a variety of such PPP structures focused on capacity development, but without much private investment.

When a post-conflict country needs large capital investments, PPPs can be viable in cases where revenues are based on availability payments (bulk payments for services from—or guaranteed by—a creditworthy entity). For example, payments might come from a company that receives foreign currency revenues from natural resource exploitation; from the government (backed by a guarantee from a donor or IFI); or from a creditworthy foreign government (that promises to pay for the services for a period of time until the country gets back on its feet). After all, wouldn’t aid be better spent through PPP structures where the recipient government would be assured of service delivery and not just aid spent?

P(NGO)Ps?

NGOs will often agree to provide services to the government under a form of PPP. I say “a form” since NGOs are rarely run like private companies. If they are not run like private companies, then they may look for much lower rates of return and may provide grant funding. This can be an attractive option, and in many cases the NGO has the technical and social skills needed to deliver services in a post-conflict country—skills that the private sector might not have.

However, sustainability may be an issue. NGOs, like development partners, tend to focus on a problem, then move to the next problem when constituents’ attention shifts (when CNN broadcasts the next big issue). Also, NGOs may not have the skills to enter into a PPP arrangement, to understand the obligations, or negotiate the details. While they may have technical skills, their commercial/financial credentials may be lacking.

If an NGO is run commercially, and can approach a problem with the right technical skills and a focus on efficiency and sustainability, then other complaints will be raised—namely, that the NGO is squeezing out private competition.

Back to the bounce

It’s important not to get tangled up in definitions of what is PPP and what is not, especially in post-conflict countries. It may be more effective to use short term or more market responsive PPP structures, rather than a classic long-term PPP. Big may not be better; instead, create legal and regulatory space and provide seed funding for small scale solutions provided by the private sector. A good example would be mini-grids for electricity funded by communities or linked to large off-takers, such as in Cambodia, which allows tariffs based on local cost of delivery rather than a national fixed rate.

Community water schemes are another good model, such as those in Tanzania, which empower local communities when negotiating with private companies providing boreholes, pumps, and pipes. The perfect may be the enemy of the good; and the long-term may be the enemy of the now. It’s all about the bounce.