PPPs can achieve efficiency improvements in the delivery of infrastructure, as described above. However, creating the incentives to achieve efficiency gains, and ensuring the public and users reap the benefit, depends on the government effectively structuring, procuring, and managing the PPP project over its lifetime-to achieve competitive tension, real risk transfer, and ensure anticipated performance improvements materialize in practice. This can be difficult where low public sector capacity means that governments lack the resources and skill to structure and manage PPPs well.
Implementing a competitive procurement process for PPPs can be difficult. As described in detail in Module 3 of this Reference Guide, governments need to approach the market with a well-structured PPP project, under an appropriate tender process. Where this is not the case, bidders may simply not participate; or may make bids that are either incomparable with each other (as based on varying assumptions) or deliberately low, with a view to resolving uncertainties through post-bid negotiation. This can be a challenge even in countries with long PPP experience. For example, the House of Lords' Review of PPPs in the United Kingdom [#248, pages 20-21] describes how negotiations at the preferred bidder stage led to price increases in many PPP projects.
Guasch's comprehensive review of PPP experience in Latin America [#123] highlights a further challenge with achieving the benefits of competition-the incidence of renegotiation of PPP contracts. Of a sample of over 1000 concessions granted in the Latin America and Caribbean between 1985 and 2000, Guasch found that 10 percent of electricity concessions, 55 percent of transport concessions, and 75 percent of water concessions were renegotiated. These renegotiations took place an average of 2.2 years after the concessions were awarded.
Guasch suggests this high incidence of renegotiation soon after concession award may reflect flaws in the initial tender processes, weak regulation, or opportunism on the part of the private party or government. Most renegotiations were favorable to the operator-for example, resulting in increased tariffs, or reduced or delayed investment obligations. In these cases, the efficiency savings from cost discipline may not have been passed on to the public sector.
Abrantes de Sousa's review of the PPP program in Portugal describes a similar tendency [#1, pages 9-10]. Abrantes de Sousa notes that the government's apparent willingness to renegotiate contracts undermines the competitive process, with bidders engaging in strategic bidding to win the contract, in order to renegotiate it later without competition.
Moreover, effective management of a PPP transaction is only the start of the process. For a PPP to be sustainable over the long term requires a consistent level of commitment and capacity from the government and private parties over time. Where this is not the case, whether due to changing government priorities or external pressures, the PPP may ultimately fail-as described in Box 1.6: When PPPs fail-The case of the 1993 water concession in Buenos Aires.
Box 1.6: When PPPs fail-The case of the 1993 water concession in Buenos Aires In the 1990's Argentina implemented a major concessions program in the water sector. Water and sanitation concession agreements with private operators were signed in 28 percent of the country's municipalities, covering 60 percent of the population. The more widely known contract was the concession for public water and sewerage services for Greater Buenos Aires, signed in 1993 with a consortium led by the French firm Suez. The concession soon showed positive results-labor productivity almost tripled, service coverage increased, reliability and responsiveness improved, and the price of service fell. However, teething problems also appeared-poor availability of information to users and the public, lack of transparency in regulatory decisions, and the ad hoc nature of government interventions. Consumers were not reassured that their welfare was being protected, and the sustainability of the concession was in doubt. There is evidence that the private operator increased investment, and that it expanded access- Suez claims it extended access to water to 2 million people, and access to sanitation to one million people. In 1999 it started programs to provide access to slums-but soon the Argentinian economic crisis disrupted the plans. After the 2001 economic crisis, the Argentinian government froze water tariffs, condemning most concessions to renegotiation, and several of them to early termination-as was the case of the Buenos Aires concession, which was terminated in 2006. Source: Claude Crampes and Antonio Estache, Regulating water concessions: Lessons from the Buenos Aires concession, Public Policy for the Private Sector, Viewpoint Note n.91, September 1996; Omar Chisari, Antonio Estache and Carlos Romero, Winners and losers from utility privatization in Argentina, World Bank Policy Research Working Paper 1824, September 1997; Lorena Alcázar, Manuel A. Abdala and Mary M. Shirley, The Buenos Aires water concession, World Bank Policy Research Working Paper 2311, April 2000; Michael Cohen and Alexandre Brailowsky (eds.) Citizenship and governability: The unexpected challenges of the water and sanitation concession in Buenos Aires, The New School University, New York, 2004 |
Infrastructure assets are often under-maintained, as maintenance is poorly planned, or planned maintenance is deferred. Political consideration or pursuit of personal gain often biases infrastructure expenditure towards new assets over maintenance, as described in an IMF analysis of corruption in infrastructure [#225].
Inadequate maintenance increases lifetime costs, while also decreasing benefits. Regular maintenance is usually the lower-cost way to keep infrastructure assets at a serviceable standard, compared to the alternative of allowing quality to degrade until major rehabilitation work is needed. The World Bank's Africa infrastructure diagnostic study estimates that preventative maintenance for the roads sector in Africa could save $2.6 billion a year in capital expenditures rehabilitation [#106, page 15]. In South Africa, a review of road maintenance by the South African National Roads Agency indicates that delaying road maintenance for three years leads to increased costs of six times the original costs of preventative maintenance. If road maintenance is delayed for five years, costs rise to 18 times the preventive cost [#218, page 36].
The poor performance of under-maintained infrastructure can be costly for users. For example, an engineers' association report from the United States [#2, pages 1-4] estimates that poor road conditions cost motorists $67 billion a year in repairs and increased operating costs, while leaking pipes lose an estimated seven billion gallons of clean drinking water a day.