G20’s plan for infrastructure financing poses serious challenges to developing countries
Maria Romero, Eurodad | One of the three priorities of the 2015 Turkish presidency of the G20 is “investment for growth”. The aim is to “lift the global growth potential” through increasing the financing available to respond to growing infrastructure needs. As Eurodad pointed out, this means a radical change in the way infrastructure is financed by trying to draw in private finance. The preparatory work of this year’s Summit, which will take place next weekend (14-15 November) in Antalya, Turkey, suggests that public-private partnerships (PPPs) will feature prominently in the discussions.
As a key legacy of the Australian G20 presidency in 2014, G20 leaders are focused on implementing growth strategies and will present the first progress report at the Antalya Summit. They are committed to “boosting investment.” To do this each country has to present an investment strategy mainly focusing on infrastructure, small and medium-sized enterprises, and the investment environment. On infrastructure, the draft report on investment strategies showed that most of the actions are focused on using public resources and other public support to leverage private finance, and that PPPs are very high on the list of priorities. Surprisingly, there is almost no public discussion about the investment model being submitted to the G20.
This trend is likely to continue as infrastructure investment unites G20 countries and is in line with the economic growth strategy of the Group. There are strong domestic incentives for China to encourage infrastructure investment as part of its own priorities for the G20 presidency in 2016 – beginning in December this year. After all, China has been very active in promoting this agenda in partnership with the World Bank Group (WBG) and through the setting up of the two new multilateral banks: the BRICS’s New Development Bank and the Asian Infrastructure Investment Bank (AIIB).
Are countries getting the right tools?
In order to inform G20 countries’ investment strategies the G20 has requested inputs from international organisations, including the WBG, the OECD and others. One of the objectives has been to provide inputs on “how to develop and implement successful PPPs in infrastructure projects.” Among the many documents submitted in August to the G20 Investment and Infrastructure Working Group, the WBG and the OECD delivered a “Project Checklist for PPPs”. This checklist seeks “to provide public policy makers and managers with a tool that can help them ensure that the key requirements in projects are fulfilled.” Although this work was welcomed by the G20 Finance Ministers in their meeting in early September, one could question whether PPPs are the right tools to finance infrastructure and, even more, whether this “Project Checklist” is what governments need before entering into the complex and risky business of PPPs.
As a Eurodad report showed earlier this year, PPPs are a very risky way of financing for public institutions. The historical experience of several countries in the developed and developing world – Portugal, Hungary, Lesotho, Ghana, Tanzania, Uganda, among others – shows that PPPs can pose a huge financial risk to the public sector. The fiscal implications of PPPs come from non-transparent contingent liabilities (or risk of debts in the future) and the fair expectation of the public that the state should ensure the public provision of services. If a project fails – and this is not infrequent – the costs are shouldered by the public sector, which most of the time has to rescue the PPP project, or even the company, resulting in private debts being shifted to the public sector. This is possible because current austerity measures and accounting practices create perverse incentives in favour of PPPs. Through PPPs, governments can create infrastructure projects where costs are “off balance sheet”, i.e. their cost is not registered in the government’s budget balance sheet, which means that the cost of the project is hidden. This is a way to circumvent budgetary constraints and debt limits (such as those of the EU’s Fiscal Compact or the IMF’s debt limits policy). It is worth stressing that the fiscal risks of PPPs are also highlighted by the International Monetary Fund, although it seems to be failing to get its voice heard at its sister Bretton Woods Institutions, the WBG. The Fiscal Affairs Department of the Fund acknowledges that “in many countries, investment projects have been procured as Public Private Partnerships (PPPs) not for efficiency reasons, but to circumvent budget constraints and postpone recording the fiscal costs of providing infrastructure services.”
The “Project Checklist for PPPs” – basically a long list of questions organised around four broad categories: a) politics; b) law and institutions; c) economics and finance; and d) execution – aims at “public sector decision-makers involved in assessing the robustness and readiness of projects”. Under the category “economics and finance”, there are many relevant questions, one of them being: “Is there a clear process for accounting treatment of PPPs in terms of classification as on- or off –balance sheet assets/liabilities of government and reporting of government commitments to PPP projects that can be applied to the project? Does the chosen option ensure a prudent approach?” But unfortunately the checklist does not address what happen if this is not the case. The authors of the checklist recognise that “it may often be the case that the authorities will not be able to meet some of the criteria outlined in the checklist (…) in such situation, the impact of the absence of some features on a country’s ability to implement PPP may need to be assessed carefully.” Therefore, the checklist does not help at all to prevent one of the key problems with PPPs.
Stop hiding the true costs of PPPs
Eurodad and its partners are calling on countries to stop hiding the true costs of PPPs. As PPPs are an expensive form of debt, sensible accounting practices should be adopted, for instance:
• By including PPPs in national accounts, i.e. they get registered as a government debt, and therefore are part of debt sustainability analysis, rather than being off balance sheet; and
• By explicitly recognising the risk of hidden contingent liabilities should the project fail, through adequate risk assessment.
Countries should select the best financing mechanisms, including examining the public borrowing option, on the basis of an analysis of the true costs and benefits of PPPs over the lifetime of a project, taking into account full fiscal implications over the long-term and the risk comparison of each option. Until countries get the right tools and their implementation is properly monitored, PPPs will cause more harm than good.
This article first appeared on Eurodad website. Maria Romero is Policy and Advocacy Manager, Private finance and DFIs at Eurodad.
Photo: Dar es Salaam port, WB Photo Collection, Flickr