Typical macro-economic trends and policies that affect private sector interest and confidence are:
• size of budgetary deficits;
• levels of inflation;
• value of the local currency;
• employment trends; and
• state of a country's key economic and service delivery sectors.
The perception of economic instability severely undermines the confidence of investors, because it increases the risk around market demand, prices, costs, political stability and other such factors. This loss of confidence often starts a vicious cycle. It breeds greater loss of confidence, lower investment levels, and hence a worsening in many of the indicators. It is possible for countries to turn this around, as a number of developing countries have shown, but it takes time to rebuild confidence and thus to attract private investors. Overall confidence in the economy, and the vibrancy of the economic climate, thus shape investor perceptions and their propensity to invest in public services. Box 10.4 illustrates how the macro-economic environment in recent years affected Zimbabwe's ability to engage the private sector in service delivery. The challenges that face Zimbabwe often face other developing countries.
It is essential for municipalities to understand, in a timely manner, the implications of economic instability on the potential involvement of the private sector. A great deal of time and money is wasted by both the public and private sectors if municipalities pursue a partnership arrangement that is not viable. International economic advisors and multilaterals such as the World Bank are well placed to provide municipalities with assistance to ensure that partnerships are compatible with economic conditions, and that the management of economic risk is placed centrally in the decision- making framework from an early stage. But this is not to say all PPPs are doomed in unstable economic contexts. Many of the partnerships described in this book are still relevant. One option is to establish private sector arrangements that promote skills and management inputs but not investment. Another is to make arrangements with national private firms that are less concerned about repatriating profits and less cautious about the economic environment. Municipalities could also involve the local small-scale private sector.