Infrastructure is vital to the development of an economy. The availability of essential infrastructure such as water, sanitation, transport, electricity, telecommunications and health services are not only important to the living conditions of the people in the economy, but they are also necessary conditions for investment in and development of the economy. For this reason, the United Nations and other multilateral institutions (including, for example, the World Bank) have recognised that the development of infrastructure is the central issue in poverty alleviation if the Millennium Development Goals of halving extreme poverty by the year 2015 is to be achieved.1
Historically, projects to build infrastructure have been in the domain of the public sector. Today, the public sector increasingly relies on the private sector to finance and construct the infrastructure projects. PPPs (also known as Private Finance Initiatives or PFIs) have in recent years become the way to finance infrastructure projects in developed economies as well as in developing economies.2 At the national level, PPP projects are usually structured using a Build-Operate-Transfer (BOT) model or various forms of this. Examples are Build-Own-Operate (BOO), Build-Own-Operate-Transfer (BOOT), Build-Operate-Lease-Transfer (BOLT), Build-Lease-Operate-Transfer (BLOT), Build-Transfer-Operate (BTO), Build-Operate-Renewal (BOR), Build-Rent/Lease-Transfer (BRT or BLT), Design-Build-Finance-Operate (DBFO) and Rehabilitate-Operate-Transfer (ROT). All these different forms of BOT are variations of the same theme, and will not be considered separately in this guideline.
The reasons governments have undertaken PPP projects are:
• Finance. Typically, construction of infrastructure requires large capital resources. Governments lack the finance resources to undertake necessary infrastructure projects (or it may have been decided that the financial resources were better spent in other ways). The private sector may be in a position to provide funding for projects where the government does not otherwise have funds available, or to enable government to use its budgets for other purposes.
• Expertise. Governments may also lack technical expertise and resources to design, build and operate infrastructure projects. The private sector may have more experience than the public sector to design, construct or operate the project. This is because the private sector may be more efficient than the public sector, or because the private sector has access to technology and know-how that the public sector does not have. Typically, the private sector may be responsible for any or all of the design, build, engineer, operate or maintain functions of the project.
The lack of finance and expertise in the public sector are constraints to the development of infrastructure, more so in developing countries (where such infrastructure is badly needed) than in developed countries. Hence many governments in developing economies have come to view private investment as critical to ensure that much needed projects take place.
At present there is, nevertheless, a pervasive sense of caution and disillusionment with regards to PPP infrastructure projects. Many PPP projects during the period of remarkable growth in PPP projects in the 1990s have failed to deliver the results promised. Most PPP projects have needed to be renegotiated and some have had to be cancelled or re-nationalised.3
Rather than move away from PPP projects altogether, the lessons from these experiences is to do PPP projects better. Lenders and sponsors of infrastructure projects assure us that funding and resources are available, but only for projects that are well conceived, have a reasonably predictable revenue stream, and where risks are manageable, in other words (to use a financial jargon) for projects that are "bankable."
With the aim of doing PPP projects better, countries such as the United Kingdom and Australia have allocated considerable resources to designing know-how and guidelines for PPP projects.4 These guidelines, while extremely detailed and useful, may not be equally applicable in the developing countries' context. For example, the emphasis on issues such as "bench marking" and "market testing" for PPP projects in developed economies such as United Kingdom and Australia are understandable where PPP often involves the privatisation of infrastructure sector monopolies. For developing economies with perhaps little experience in PPP projects and where the market is largely untested, the focus of such guidelines may be different.
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1 See, for example, comments by Ms Nemat Shafik and Mr Richard Uku from the World Bank's Private Sector and Infrastructure Network in a conference "Making Infrastructure Work for the Poor" dated 19 February 2002.
2 See eg, UK, Australia and Ireland.
3 Clive Harris, Private Participation in Infrastructure in Developing Countries: Trends, Impacts, and Policy Lessons, World Bank Working Paper No 5, 2003, 1-2.
4 For example, Standardisation of PFI Contracts developed by the Office of Government Commerce, United Kingdom; and various guidance developed by Partnerships Victoria.