Role of private sector in development under fire

Protestors dressed as businessmen eat an Africa-shaped cake to highlight the role of multinationals in development [Global Justice Now/Flickr]

Governments increasingly are turning to private investors to build infrastructure and deliver public services, but European anti-poverty groups question the benefits of relying on this financing tool to achieve development goals.

These projects, known as public-private partnerships (PPPs), are often very costly, the public sector takes on most of the risk, and secrecy often shrouds how PPPs are negotiated and managed, the Eurodad coalition of European non-governmental organisations said in a report released on Thursday (9 July).

Its findings come as the United Nations is proposing that PPPs play a key role in development finance at a conference in Addis Ababa next week.

EU countries and financial institutions, such as the European Investment Bank, are also financing and promoting PPPs in developed and developing countries.

Ahead of Addis, the EU is promoting the role of the private sector in development and PPPs as the right tool to finance the much needed infrastructure projects that developing countries are crying out for.

PPPs figure prominently in the UN’s draft proposal for that meeting, and are favoured by the World Bank and G7 countries.

But Maria Jose Romero, author of the report What Lies Beneath?, said that Eurodad’s review of academic literature and World Bank and International Monetary Fund (IMF) reports reveal that PPPs have a mixed track record, raising serious questions about their value.

“Our governments must take a step back during the Addis Ababa Summit and put development needs, and not the needs of private investors, first,” Romero said.

“This report shows that promoting PPPs in a non-critical way is a mistake. Governments and financial institutions should focus on developing the right tools at country level to identify whether – and under what circumstances – it is desirable to use PPPs.”

The amount of money invested in PPPs grew sixfold between 2004 and 2012 to €121.6 billion, with energy and transportation projects attracting the highest levels of investments.

Reliance on PPPs is expected to continue growing.

The World Bank estimates that $1 trillion  (€0.91 trillion) more is needed each year to keep up with growing demand for highways, ports and airports.

In addition, the new UN development goals designed to end extreme poverty and promote prosperity by 2030 will cost an estimated $2 trillion  (€1.8 trillion) to $3 trillion  (€2.7 trillion) to implement.

The report said that PPPs in most cases are more expensive than public projects, because private investors must borrow money at commercial rates rather than sovereign borrowing rates.

PPPs are complex to negotiate and implement, with 55% requiring renegotiation within two years of which 62% resulted in increased tariffs, according to an IMF report.

Contracts also frequently place a large share of risk on the public sector, while the private sector reaps most of the profits, Romero said.

While there is some evidence that private sector involvement can bring market efficiencies and improvements in service, the evidence is very limited and weak, she said.

Eurodad called on governments to take a hard look at the true costs of PPPs, and disclose documents to increase their public accountability.

  • 13 July: Third international conference on financing for development

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