Recommendations for PPPs in Latin America

Recommendations for PPPs in Latin America

Although public-private partnerships (PPPs) can accomplish almost any policy goal, there are several areas where they are most effective. PPPs excel at providing support functions, such as private companies that can maintain infrastructure for public institutions while reducing costs. Another crucial role of PPPs is to fill in the gaps in public services. That is particularly true in Latin America, where insufficient local tax revenues frequently prevent full public funding. In many of these cases, PPPs provide a practical solution to the problem of the second best.

Transportation and Water Infrastructure Benefit Most from the PPP Structure

Services are well-suited to public-private partnerships, most notably transportation. For instance, Chile used PPPs to build urban highways. Unfortunately, the less affluent often cannot afford to use highways. However, PPPs could increase the number of buses available, making public transportation more accessible and affordable. The use of hubs for buses would also reduce travel time, especially for mixed transportation uses, such as bike-sharing.

Other promising areas include water and sanitation. PPPs have also been effective in bringing energy-efficient lighting to many Latin American cities, including Santiago in Chile, Mexico City, and Fortaleza in Brazil. Healthcare services often benefit when PPPs provide support functions. Finally, PPPs also play a role in education. For example, the city of Belo Horizonte in Brazil worked with the International Finance Corporation (IFC) to improve its preschools and elementary schools.

Stable Legal Frameworks are Necessary to Attract Investors

A clear legal framework is essential to ensure private participation. In Latin America, national governments often establish PPPs first, so local programs can usually be modeled along national lines. However, large cities often face additional problems not covered by national programs. In these cases, national laws should be flexible enough to account for local differences and innovations.

Tax revenues are sometimes more difficult for local governments to obtain in Latin America. Municipal governments in Latin America often receive property tax revenues from higher levels of government rather than collecting them directly. This situation makes it more important to coordinate laws regarding PPPs.

Risk Allocation is Vital to Project Success

In any situation involving interactions between the public and private sectors, it is crucial to align risks and rewards. The main issue for the private sector is ensuring that governments will continue to supply public funding, even as revenues and politics shift. That can be challenging because local governments in Latin America have less direct control over revenues.

PPPs face political risks at both the national and local levels if they become too associated with one political party. The creation of independent institutions to administer the public side of the partnership is a way to build confidence and maintain continuity.

From a public sector perspective, there is a need to make changes within long-term commitments. Most notably, cleaner and more efficient power sources often become available while private companies are working on projects. There must be a way to cancel or amend agreements by providing adequate compensation to private firms.

Integration is an Essential Ingredient for Success

All PPPs must coordinate with other public projects to some extent. Latin America has more issues than most regions with overlapping jurisdictions, and PPPs can further complicate that picture. The most significant problems occur when separate organizations for PPPs and conventional projects cannot communicate. Ideally, a single entity with an understanding of the PPP model would be able to develop a fully integrated urban plan. At the very least, specific individuals should be responsible for communications between organizations, and someone should have the authority to resolve most disputes.

Maintaining Public and Private Interest

Every public-private partnership must have capital inflows from investors and support from the public. Private investors often want hedges against possible currency fluctuations, which is an issue for Latin American countries with smaller economies. Most importantly, investors need assurance of continued public commitment, as mentioned previously.

Public support can be maintained by ensuring that the benefits of the PPP are visible to the public. To that end, private companies must provide high-quality services and use new technologies as they become available. Public-private partnerships only thrive when all parties continue to act in good faith and build trust.