Solutions for Public-Private Partnerships
By: Paola Moreno, Senior Consultant, Latam Energy Advisors
Public-private partnerships (PPPs) have become a common practice among Latin American and the Caribbean Countries. The need for infrastructure and the lack of public funds are the main reasons for governments to use this structure. Although, investments in the region represent around 3.5% of the GDP, this value is below the level recommended in order to close the infrastructure gap in the region.
Advantages of PPPs in Latin America
PPPs have several advantages. With them, governments not only meet infrastructure needs, but also generate a high social rate of return and improve well-being. Insufficient infrastructure represents an obstacle for economic development and the detriment of people’s quality of life. In addition, PPPs are an effective way to introduce technology and innovation to public services. They bring creative planning during construction and efficient management during maintaining infrastructure as well.
Nevertheless, PPPs require not only government willingness, but also a solid legal framework. This law establishment is crucial for PPPs since it means political commitment and establishes rights and obligations for all stakeholders, as well as minimal technical standards. Some countries in the region have laws either for PPPs or concessionaires (both are similar figures).
Other countries like Argentina, Brazil, Colombia, Costa Rica, Ecuador, Honduras, Paraguay, and Uruguay have laws for both PPPs and concessionaires. Inter-American Development Bank (IDB) recommends having not only PPPs/concessionaries laws, but also specialized public bodies responsible for the promotion and management of PPP projects.
Sound Consulting Advice is Key to Project Execution
We recommend that governments contract private consultant companies with technical capacity in order to design and structure PPPs. These third-party companies would set procedures and conditions, and plan bidding processes as well.
Another key recommendation is for bids to be published at least 90 days in advance. Bidders must also demonstrate through our rigorous due diligence process that they have technical qualifications along with financial, physical, and human resources.
Other requirements such as managerial capability, experience and reliability are also required. In general, most of the countries in the region have diverse mechanism to accomplish designing, bidding and procurement processes.
Monitoring and Compliance Considerations
Monitoring and regulation are other two important steps when contracting PPP projects. This requires that an independent verifier analyzes whether performance standards have been achieved. This independent party compares private entity’s performance with pre-established key performance indicators (KPI’s). It also monitors contract execution, quality of the services, and terms accomplishment.
Most of the countries in the region have clear mechanisms to monitor and regulate PPPs, However, the kind of supervision and regulation mechanisms varies across countries, and in several occasions monitoring and control are not well performed, affecting performance, timing, budget, and goals for projects.
Another critical but ineffective aspect is transparency. Since the public nature of PPPs projects, all procedures are susceptible to public scrutiny. All information must be shared, and stakeholders must act in an open manner. Transparency is very important since ensuring an attractive environment for future investors and other potential partners. It also eliminates conflicts caused by incomplete or distorted knowledge.
Unfortunately, Latin America and the Caribbean countries have had unsuccessful results in this area. Although most of the countries in the region have guides, instruments, and communication mechanisms to guaranty transparency, they tend to be omitted or intentionally misused. In the last few years, many corruption scandals have broken out in several countries, affecting negatively public perception about PPPs.
We Maintain a Positive Outlook for PPPs in Latin America
In general, Latin American countries have an appropriate legal framework to carry out PPPs. Most of these projects are in the transportation sector, and they are bringing technology and innovation to the region. However, deficient monitoring and transparency issues have countered some PPPs benefits such as efficiency and effectiveness. This has slowed down the achievement of infrastructure goals and economic development.
We are positive that countries in the region will overcome these PPPs difficulties and polish a legal framework to improve control and transparency. This will take time, but in the meantime, governments should take advantage of all the innovation that private sector can bring to the region, as well as maximize all PPPs benefits.