PPPs in the developing world

It seems like everyone across the global development community is talking about the promise and power of public-private partnerships or PPPs these days. While the concept has been around for a while, the buzz was recently reignited when the United Nations General Assembly convened last September in New York for the High-Level Meeting on Non-Communicable Diseases. During an address to the assembly, U.N. Secretary Ban Ki-Moon emphasized the key role businesses play in solving global health problems. On the same day during the Clinton Global Initiative annual meeting, the U.S. Agency for International Development (USAID) announced its partnership with PepsiCo and the U.N. World Food Program for Enterprise EthioPEA – a PPP designed to scale up chickpea farming and production and promote agricultural sustainability in Ethiopia.

Just last week, USAID celebrated the 10th anniversary of its Global Development Alliance program during “Public-Private Partnerships Week.” The event highlighted the mutual benefit that the development community and business have in establishing PPPs and launched a new Office of Innovation and Development Alliances or IDEA. Officials at USAID are hopeful that the launching of IDEA and formal declaration of PPP week will help the global development community rethink and boost PPPs and provide more opportunities for businesses to work with the world’s largest bilateral donor agency. As of 2010,USAID reports having participated in 1,065 PPPs with 3,025 different partners and leveraging $13 billion in private partner resources. Some of USAID’s most notable partners include Chevron, Starbucks, IBM and Coca-Cola.

Other international development agencies are also leveraging PPPs. The German Society for International Cooperation (GIZ), for instance, has over 800 PPP projects globally and 250 in sub-Saharan Africa focused on economic development, health care, and agricultural development. In 2009, the U.K. Department for International Development (DfID) published a white paper which highlighted the private sector as an invaluable part of development. DfID committed to engage with the private sector to spur development. Under the program titled “Business Call to Action,” DfID launched a high-level initiative that challenged corporations to develop businesses that are mutually beneficial to the realization of the U.N.’s Millennium Development Goals and to the success of the business. Other agencies have followed suit and are promoting PPPs as a crucial element of their development regimes.

The World Bank defines PPPs as “arrangements between the public and private sectors whereby part of the services or works that fall under the responsibilities of the public sector are provided by the private sector, with clear agreement on shared objectives.” Yet because the definition of PPPs is so broad and encompassing, it is critical to better characterize these arrangements and understand how they can differ in structure and meaning in the developing world.

Private investment in developing countries has increased significantly in the last 10 years. According to data from the Organization for Economic Cooperation and Development (OECD), private financial flows from the OECD countries reached $455 billion in 2009, outpacing official development assistance (ODA) which stood at about $120 billion. Indeed, the decision of USAID, GIZ and other prominent development agencies to promote and utilize PPPs is an acknowledgement that businesses are increasingly moving their operations to developing countries and, on that basis, will and should engage in local development. At the same time, the private sector is recognizing that engaging in development initiatives can help achieve existing business goals and open new markets and that these initiatives are often better pursued in collaboration with like-minded public sector development organizations.

As private investors enter unfamiliar and emerging markets, engaging in development work and corporate social responsibility is becoming a necessary cost of doing business as opposed to an extracurricular activity. In rural sectors such as natural resources extraction and agri-business where the livelihoods and customs of indigenous peoples are often part of the picture, development activities and corporate social responsibility become even more of an imperative. These are the environments where public sector development organizations have the most credibility, skills, and experience.

Amid the global economic recession, private businesses appear to be realizing that building alliances with the public sector can result in gains that they could not achieve independently. USAID, for example, stresses that it lends an “authority and legitimacy” to private sector development efforts and that partnership “enables the sharing of resources, skills, and networks.” While various development agencies have different criteria for making these PPPs work, at a bare minimum a successful PPP requires two key elements: (1) shared vision, strategy, and goals as well as a willingness to share the risks and rewards, and (2) equitable contribution of cash or in-kind resources. This mutual commitment for mutual benefit is what will continue to drive PPPs.

Development PPPs are also addressing complex global issues such as public health. For example, the World Bank is one of the staunchest supporters of PPPs in development and is a partner of the Global Fund to Fight AIDS, Tuberculosis, and Malaria. The power of PPPs has also been realized in large, global organizations such as the GAVI Alliance. GAVI was first established through a seed grant from private entities, most notably the Bill & Melinda Gates Foundation, and is now funded by contributions from multiple public sector donors. Today, GAVI is one of the most formidable global health organizations in the world and draws considerable support from private foundations, financial institutions, pharmaceutical companies, and various research institutions. Other GAVI partners include the World Health Organization for policy expertise and the U.N. Children’s Fund as the main distributer of GAVI products.

None of this should be confused with the more technical and infrastructure-centric PPPs that are also increasingly being formed in the developing world and are sometimes backed by multilateral and bilateral development banks. These agreements between governments and private firms to support broader access to public infrastructure and services traditionally involve national and local government entities and private corporations jointly assuming roles and risks in the planning, financing, and operation of infrastructure projects. Essentially, private sector participation allows the governments of developing countries to leverage private capital, while freeing up budget resources to focus on other critical development areas such as poverty eradication and proper governance.

These PPPs are usually broken down into two major areas: (1) economic infrastructure such as the building of roads, bridges, and dams and (2) social infrastructure such as the construction of hospitals and schools. In the developing world, governments view them the same way an individual consumer views a mortgage – in the absence of the capital necessary to fully finance and carry out a large infrastructure project, developing country governments turn to the private sector for cash and technical expertise and pay a set rate that includes interest. In this sense, PPPs lie somewhere in between public provision of services – where the government maintains full ownership of the works – and privatization – where ownership of a public work or service is completely divested to a private entity (see World Bank chart below).

While infrastructure PPPs are common in the developed world, their potential is marred in emerging markets due to political, legal, and regulatory risks that can leave the private sector vulnerable. To mitigate that risk, multilateral development banks, such as the International Finance Corp., European Investment Bank and Asian Development Bank, can provide political risk guarantees and political insurance which transfers the risk burden onto their shoulders. This is most applicable in countries where bankers and insurers are reluctant to operate. Multilateral development banks also help liaise, structure, and implement PPP deals – working directly with national and municipal governments, as well as private sector partners. The IFC reports that since 1989 it has supported over 285 private-sector participation transactions worldwide.

Aileen Cruz contributed to this report.