Delivering urban development: PPPs and other procurement options for urban infrastructure and services

There are a wide range of options for the provision of urban infrastructure and services. These range from direct public provision by state employees – as seen in Addis Ababa, for example, where large public buses are operated directly by Anbessa, a state-owned company - to private provision such as matatu minibus services in cities in Uganda and Kenya which are regulated by government. In between these are different types of public-private partnerships (PPPs), where governments and private partners work together to manage and deliver such projects. PPPs have been instrumental in the delivery of a water treatment plant in Kigali, for example, as well as a bus rapid transport (BRT) system in Dar es Salaam.

Across countries, cities use a mix of these delivery mechanisms, and each of these comes with different trade-offs. While profit motivation can mean private companies are more efficient in the delivery of services, private providers may also be unwilling or unable to provide certain goods at the quantity that would be best for all citizens, as these would be unprofitable. Public involvement can overcome these concerns and help coordinate investments, but projects can also become politically motivated, require significant public investment or borrowing, and can be subject to limited oversight and maintenance over time.

Public-private partnerships (PPPs) have become an increasingly popular policy option, with the promise of leveraging private sector finances and expertise towards projects that are in the public interest. Under these arrangements, the government will contract some or all aspects of financing, design, construction, and operation and maintenance of infrastructure and services to private companies for a particular period.

PPPs have strong appeal: they can allow the costs of public infrastructure projects to be financed by the private sector rather than through government budgets, while also tapping into private sector efficiencies in overall project design and delivery. A study in India found that roads built under PPPs were of higher quality and lower cost over their life cycle. The possibility of involving private capital is particularly important given mounting infrastructure deficits: the African Development Bank estimates that infrastructure investment gaps on the continent are now at over US$ 100 billion a year.

However, evidence on the effectiveness of PPPs is mixed. While private involvement can lower certain costs, private finance is often more expensive, and private partners need to be further compensated for the risk they take on in project management. Without adequate public oversight, private companies can also prioritise cost minimisation over quality, reducing the social benefits of public infrastructure. 

Both developing ‘bankable’ PPP projects and effectively monitoring quality over the project life cycle requires significant state expertise, which usually goes beyond the capacity of city governments alone, particularly in low-income countries. At the same time, PPP contracts are often renegotiated, typically at the government’s expense. In Latin America, 69% of all transport PPPs were renegotiated between 1988 and 2004 — to benefit private sector partners.

Crucially — PPPs do not reduce the overall financial burden of public infrastructure projects on governments in the long run, as these projects must eventually be paid for through government transfers, or by foregoing revenues from user fees (which the private partner will collect instead). If governments face budgetary constraints in delivering infrastructure, addressing this head on will be necessary – PPPs are not a solution to a borrowing problem.

PPPs are therefore by no means a silver bullet for infrastructure and service delivery for developing countries. Instead, they are a tool that can be used well – or badly. Evidence suggests that success depends on a range of factors, including the selection of appropriate projects for this type of arrangement, strong regulations and institutions for designing and monitoring PPPs contracts, appropriate risk-sharing between public and private parties, and the inclusion of clear and reasonable terms for renegotiation in the contract itself.

Whether governments choose to undertake PPPs or traditional procurement, effectively working with private partners relies on a transparent and competitive tender process. Clear rules for awarding bids, along with separate management of project evaluations, can limit opportunities for wasted public funds. The level of discretion that can be afforded to procurement agencies is closely linked to the ease with which public agencies can engage in corruption.

This paper considers procurement options for the delivery of urban infrastructure and services. Section 2 outlines trade-offs associated with different options for the delivery of infrastructure and services, while Section 3 provides evidence on best practice in the use of PPPs at different stages of the project life cycle. Section 4 discusses cross-country evidence on promoting value for money in managing private project bids, and Section 5 concludes.