Submitted by Darwin Marcelo
Does experience in implementing Public-Private Partnerships (PPPs) reduce a country’s chances of contract failure?
In a recent study entitled Do Countries Learn from Experience in Infrastructure PPPs, we set out to empirically test whether general PPP experience impacts the success of projects—in this case, captured by a project’s ability to forego the most extreme forms of failure that lead to cancellation.
We learned from individual country and project-based cases that many factors play a role in increasing the likelihood of project success: familiarity with the complex arrangements inherent to PPPs; government experience with contract negotiation and oversight; and early learning about the implementation of PPPs in the local-specific legal, financial, regulatory, economic, and physical contexts.
Indeed, the results of this study confirm that experience does help guide a project to completion.
But our research led to another, less intuitive finding: the benefits of learning are typically concentrated in the first few PPP deals. The cancellation rate drops dramatically after only five to 10 PPP deals, indicating that the learning curve, though steep, is fast and effective.
We observed the following cancellation rates of PPPs based on project experience and region:
Here is a brief explanation of the data set: our analysis considers 3,400 PPP projects with at least a six-year history from the Private Participation in Infrastructure (PPI) Database. Project duration is important, as contract cancellation may be underestimated if projects with very short durations were included. While data shows that 6%, or 191 PPPs, were cancelled, econometric models revealed the likelihood of a project’s cancellation is significantly reduced if the country has had even only a few PPPs during the decade preceding the project.
If countries learn very quickly from only a little PPP experience, is this experience similar across all infrastructure sectors? As suspected, the answer is no. The impact of experience varies depending on the sector. In a country with no PPP experience, water PPPs already face higher rates of project cancellation than energy or transport projects; water projects in no-experience countries have a 27% probability of being cancelled, compared to 17% and 11% for transport and energy projects, respectively.
What this study shows, more interestingly, is that learning through early experience—while important across the board—is more immediately impactful in the transport and energy sectors than in water, particularly with respect to reducing the likelihood of cancellations. After 20 contracts of country experience in the sector at hand, the probability of cancellation for water PPPs is reduced by 63%, whereas the reductions are higher for transport (70%) and energy (74%), with more rapid reductions after only a few deals.
The conclusion is that while the water sector may require more careful, lengthy preparation, the experience remains highly beneficial to subsequent success. Cancellation rates by sector may also be attributable to the very local and political nature of the water sector, where reforms are subject to the unique urban and geographical conditions as well as local customs, beliefs, and politics. As with many development initiatives, country context matters. Water sector projects also tend to transfer demand risk to sponsors, whereas transport and energy projects often isolate revenues or payment streams to a single paying entity—a government ministry or agency.
So how do the findings help?
First, the findings indicate that multilaterals and other PPP proponents can deliver more to countries with less, rather than more, PPP experience. From a regional perspective, this includes most of the African and Central Asian countries and some of the Central American and Caribbean nations. That said, multilateral development banks should support governments willing to create a PPP-enabling environment, which includes institutional and legal reforms that underpin functional contracts, fair arbitration, and healthy financial markets. Also, building in adjustment mechanisms in early PPPs and encouraging lesson-drawing to inform future deals can help prevent costly cancellations and potential service interruptions.
We should also add that 0% cancellation is not the target. Countries with high levels of PPP experience across all sectors have a cancellation rate of approximately 4%. And sometimes, it is necessary to terminate a project. However, project terminations are expensive and disruptive. Based on the econometric results, an estimated $1.5 billion per year could have been saved if interventions and support were targeted to reduce the cancellation rate to 5% in less experienced countries.
The findings of our analysis lead us to more questions. For example, does knowledge-sharing of lessons learned by centralized PPP units help future projects succeed, and how? What lessons are transferable across sectors and geography? What PPP factors are inevitably local and unique, demanding customization, and what can be more readily transferred from international experience to inform new markets?
These are topics to be explored in the future. In the meantime, please read the full report here.