PPPs IN LAC: OPPORTUNITIES, CONCERNS AND THE ROLE OF MDBs
From 2006 to 2015 the LAC region had investments of US$361.3 billion in around 1,000 PPP infrastructure projects, highly concentrated in Brazil, followed at a distance by Mexico and Colombia.
PPPs are a tool that can help reduce infrastructure gaps in the region. However, while potentially useful, infrastructure projects pose many risks: technical, construction, operating, financial, force majeure, regulatory/political, project default, environmental and social.
Multilateral Development Banks (MDBs) can play an important role in supporting the development of suitable environments to attract private investment, in providing independent project preparation assistance, and in helping close financing gaps.
LAC PPP investment in infrastructure by sector
PPPs, predominant way of supporting private infrastructure investment in LAC, 2006-2015
THE EVALUATION: REVIEWING A DECADE OF IDBG EXPERIENCE
Our evaluation reviews IDB Group’s support to infrastructure PPPs at three levels: enabling environment, project preparation, and financing, and also the experience of other MDBs.
It analyzes case studies of projects in five countries: Brazil, Dominican Republic, Guyana, Peru and Uruguay. These case studies are representative of the two most important sectors – energy and transport – and included all IDB Group PPP operations approved between 2009 and 2012.
OVE also conducted a case study on Colombia, focusing on enabling environment operations.
IDB GROUP: LAC’S LARGEST PPP-FINANCIER AMONG MDBs
During 2006-2015 IDB Group approved 145 PPP operations for US$5.8 billion, focusing on financing PPP projects, with only limited support for project preparation.
IDBG has focused on improving the enabling environment in countries with developed PPP capacity. However, IDBG did not provide substantial support to some nascent countries where it financed or planned to finance PPP projects.
PPP activity has increased in recent years but it varies greatly across the region. The rate of contract renegotiations has been high and many were a consequence of poor project preparation .
The IDB Group provided 35% of total MDB project financing in the region, though its support was relatively small compared to the LAC PPP market.
IDB Group’s support to infrastructure by type of environment
IDB and MIF support for enabling environment
FINDINGS: IS IDB GROUP MAKING PPPS WORK?
ACTIVITIES AND RESULTS
Objectives related to the enabling environment were mostly achieved, but projects focusing on financing had difficulties in countries with weak enabling environments. Basic conditions for successfully delivering infrastructure services through PPPs were absent in half of the projects in the sample. Yet the approach was not to consistently first build prerequisites – IDB Group often only engaged at financial closure of the projects.
When different parts of IDB Group acted independently, inefficiencies were likely to increase, and the opportunity to provide overarching solutions was missed. Additionally, value for money analyses were not routinely conducted in early decision-making processes, which led to the pursuit of objectives that did not maximize IDB Group’s potential to add value.
ADDED VALUE AND SUSTAINABILITY
IDB Group added value in a few countries (most notably Colombia and Uruguay) by having long-term engagements with governments, being flexible and adaptable to changes in context, and working in new areas with high potential.
Providing a recognized “seal of approval” early in project preparation and applying IDB Group environmental and social safeguard standards (often more rigorous than national ones) are other areas where IDB Group can add value.
The longer-term sustainability of IDBG support was often uncertain. Improving disclosure practices in PPP projects is key to increasing transparency, mitigating corruption risk, and raising public awareness about the benefits.
Additionally, although long-term local currency financing is essential for PPP sustainability, in many LAC countries capital markets are concentrated, small, and not very deep. PPP projects sometimes also have difficulty managing environmental and social risks, which are often high for this kind of project.
Practically all MDBs have redesigned their approaches towards PPPs, some of them drawing on evaluations of their experience. The main lessons include the need for a clear and focused PPP strategy; a critical mass of PPP skills and expertise; a coordinated and collaborative approach across all parts of the institution involved, with an appropriate incentive framework; and an adequate set of PPP-related instruments (including knowledge, policy, and financing).
IDB Group can learn from the experiences of other MDBs. Though several strategy documents mention their importance, IDB Group does not yet have a clear overarching PPP strategy, and country strategies have not adequately guided the Group’s PPP activities. Staff working on PPPs is dispersed, without a focal point that could help in making decisions and sharing lessons, and initiatives have been undertaken on a case-by-case basis.
While some important knowledge products have been developed, PPP knowledge is not optimally managed and IDB Group has not used project preparation facilities to their full potential.