While the PPP process can provide more information and additional analysis to inform project selection, the government remains responsible for choosing which projects to implement. This limits the extent to which PPPs can help improve project selection. PPPs may even distort investment priorities-low priority projects may go ahead simply because they are easier to do.
Foremost, PPPs do little to improve planning. Where PPP projects initiate from government, private companies can only respond by avoiding projects that do not appear viable, as described above. Where PPP ideas are generated by private investors, these often cannot overcome weaknesses in planning and coordination between sectors or across regional boundaries. For example, the HOT lanes project described in Box 1.5: Hot lanes in Virginia-An Example of Private Sector Innovation does not extend into Maryland, a neighboring state in which half of the beltway is located. Also, in generating project ideas, private firms focus in those that are financially viable, but may not propose economically beneficial projects that would require government contributions.
The inflexibility of PPP contracts may also exacerbate sector planning challenges. As described in the United Kingdom House of Lords' review of the PPP program [#248, pages 28-29], PPP projects constitute a long-term commitment, which can be expensive to change if needs change (or were misunderstood in the first place). Although changes in traditional public procurement also imply added costs, these are typically lower than under a PPP, since the absence of long-term contractual commitments allows easier recourse to the market and competitive pressure.
There are limitations on the extent to which PPPs can improve project analysis. First, the private sector is also not immune to optimism bias. The Standard & Poor's analysis described above shows lenders make more realistic assumptions than public agencies-nonetheless they still overestimate traffic forecasts. The more conservative traffic forecasts commissioned by banks still overestimate traffic by almost 20 percent- see [#25]. In Spain [#270], traffic estimates by concessionaires that were awarded several PPP toll road contracts have proven to be even more optimistic-revenue generated by the companies could barely cover the interest of the outstanding debt.
Secondly, where the private party to a PPP is not bearing traffic risk, or other project risks, the incentive for rigorous analysis is weaker. PPP structures can even weaken government incentives for rigorous analysis, by obscuring the costs and risks the government bears (see the pitfalls described under Section 1.3.1: Insufficient Funds.
Finally, PPPs can provide an opportunity for corruption, which may bias project selection. Where project selection is not based on analysis but rather influenced by corruption or pursuit of political gain, PPPs are also likely to be affected. Guidance on assessing corruption risk, and mitigating it, is provided in a series of World Bank sourcebooks on governance in the water, transport, and power sectors [#279, #280, #281].
The policies and processes presented in Modules 2 and 3 of this Guide, and in the references listed, can help governments avoid the planning and project selection challenges that can undermine the effectiveness of PPP projects.