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Assessment of the first years

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Public-private partnerships

Assessment of the first years

By Tilman Altenburg and Tatjana Chahoud

After three years of partnership between official development cooperation and the private sector the BMZ commissioned an evaluation whose findings were presented last year. The picture that emerged was hardly pleasing. It was dominated by isolated projects which had little to do with the structural approach of the newer development cooperation, and by profit-taking effects. Tilman Altenburg and Tatjana Chahoud, the authors of the synthesis report, summarise here their findings and recommendations.

In terms of management, it is assumed increasingly around the world that private companies function more efficiently than the public sector. That is why contracts for more and more services which formerly were regarded as state tasks are being allocated to the private sector or public-private partnerships (PPP) entered into. This trend has also caught on in development cooperation. In 1999, the BMZ gave its then budget title 68611 a new designation, namely Promotion of German Trade and Industry Contributions Important for Development.

The new PPP facility was provided with a total of Û 56.4 million in the first three years. The second PPP stage began in 2002. The projects of private sector companies are promoted by funds from the facility. It is not about general promotion of direct foreign investment, but of specific additional measures aimed at improving the developmental impacts of investment in the partner country.

The facility is (with rare exceptions) available only to European Union companies. The private sector partner must contribute at least 50 per cent of the costs of a project, which should not run for more than three years. The facility has a pilot character. It is aimed at testing new forms of developmental cooperation with the private sector and provide experiences to show how PPP approaches can be anchored in bilateral Technical and Financial Cooperation.

It stands apart from the BMZs country quotas, so the projects are not part of the country programmes negotiated with the respective partners. But they are to be so in future. Whether a special fund will continue to be needed at the end of the pilot stage is still an open question.

Evaluation of the achievements to date

The PPP facility was evaluated in 2002 after running for a period of about three years. Four evaluation teams examined 36 PPP projects in seven countries (Romania, Albania, China, Vietnam, Thailand, South Africa and Uganda). Investment financing by the DEG, which the BMZ also defines as a public-private partnership, was not an object of the examination.

The evaluations aim was to assess the impacts of PPP measures and clarify how the PPP instrument could be anchored in bilateral development cooperation. The findings of the country studies were summarised1 by the authors of this article, who also analysed additional sources.

In its overall assessment, the evaluation concludes that the PPP instrument has in fact given German development cooperation new impetuses, intensified the dialogue with the private sector on developmental issues and mobilised extra funds for developmental tasks. In that respect, PPP is a useful supplement to the German development cooperation instruments without, of course, being able to replace core developmental activities (such as political consultancy and promotion of institutions).

However, the current PPP concept manifests considerable shortcomings. The challenge now is to eliminate them while maintaining PPP as a flexible and innovative instrument. Above all, the PPP idea should be integrated more in the context of bilateral development cooperation. That could blunt the main points of criticism of PPP which arise from the present perception of it. But this calls for a change in the country programming procedure.

Has the PPP instrument achieved its goals?

PPP pursues various goals. Besides those named in the PPP Guidlines,² many of the actors involved also expect the new PPP approach to make development cooperation more visible to the German public or promote German foreign trade. Most of these goals elude systematic scrutiny of them on the basis of verifiable criteria. In that regard, the appraisers can give only a personal assessment:

1. Whether PPP measures are more effective than the traditional development cooperation instruments cannot be answered on the basis of the evaluation. The latest evolution in development cooperation boils is about intervention at the meso or macro level in order to achieve structure-building effects and be widely effective. In contrast, the strength of the PPP approach lies at the company level. So PPP can possibly supplement structure-influencing measures, but not substitute for them. In most cases the project goals were achieved; some measures, however, were assessed as profit taking by the private sector side or rated as non-sustainable in economic terms.

2. The question of to what extent public promotion funds are saved by mobilising additional private capital also cannot be answered because the question of what is additional (how big is the proportion of the private sector investment which would not have been made without the subsidies of the development cooperation institutions?) cannot be clarified. In 2001, private sector investment within the framework of the PPP facility totalled Û 35.8 million. Assuming that half of that sum was mobilised additionally by the PPP concept, this would correspond to about 0.5 per cent of the German development budget.

3. The PPP instrument has produced many innovative initiatives that can have a model character for bilateral development cooperation. These include new forms of a division of tasks with companies which enable the linking of special skills of companies and development cooperation institutions. It has been proved that in individual cases of project design the PPP instrument enables the companies to be met half-way. In the first two years, however, the facility was still characterised to a great degree by small-scale project islands with minor structure-building effects. But in the meantime project acquisition is made more selectively from all implementing organisations.

4. The extent to which PPP measures influence business activities in the sense of developmental goals is not measurable. But the fact that the implementing organisations involved negotiate with more than 1,000 companies per year should be taken into account. According to the implementing organisations, the initiative for many additional developmental components arise first during this dialogue. As a whole, the participating German companies rate the experiences as positive. There were also companies, however, that were scarcely informed about the developmental concerns of the measure and classified it as subsidies for the firms.

5. Whether PPP has increased the German publics acceptance of development cooperation could not be examined systematically. In discussions with experts and by looking through relevant publications it was clear that PPP is a contentious subject among the professional development public, in the BMZ, in the implementing organisations and even in the private sector. There are considerable reservations in particular over the risk of profit-taking effects, the smallness of the projects scale and the poor participation of partner countries.

6. The dialogue with the private sector has contributed to the fact that in the BMZ and the implementing organisations understanding for the interests and organisational structures of the private sector has grown. This can also benefit the quality of customary development cooperation projects in private sector subject areas.

Some basic problems

The BMZÕs PPP concept has some basic problems. These concern primarily its small-scale approach. This could be different if it were integrated in bilateral development cooperation.

1. German development cooperation makes efforts to achieve greater significance by establishing priority areas. Development cooperation is to improve the general and sector-specific framework conditions and modernise the political-institutional system. This calls for the forming of priority areas and better linkage of single projects. But many PPP measures are anchored at the micro level and not linked with the rest of the development cooperation portfolio. This raises the risk that precisely the proliferation of small-scale single projects, which as part of the establishment of priority areas is currently being deliberately curbed, will emerge again.

2. The practice of taking the ideas of German companies as the starting point for projects results in a concentration of the measures on transition countries with considerable market potential and on relatively developed regions within those countries. This conflicts with the goal of focusing development cooperation on poorer countries, regions and target groups.

3. Neither the local stakeholders nor partner country governments have influence on PPP measures funded from the BMZ facility. This contradicts the partnership ideal of development cooperation and goes against international efforts to expand the self-responsibility of the partner countries.

4. Profit-taking effects can hardly be excluded, and may well have considerable significance in PPP practice. The use of development cooperation funds is justified if the public subsidy results in a developmental benefit which goes beyond what a company would have realised anyway. Also, the additional benefit must be greater than that achieved by alternative spending of public funds (such as financing investment, and TC or FC measures). To preclude profit-taking effects, the BMZ and implementing organisations would have to be able to make a realistic assessment with their cost-benefit analysis of the subsidy recipientÕs planned activities. In practice, that is extremely difficult.

5. In view of the great number of small-scale and thematically heterogeneous measures, there is a conflict between the goal of keeping the management costs per measure low while ensuring thorough scrutiny, steering and efficiency control. In both respects the result is hardly satisfactory.

6. The financing of PPP measures can cause distortions of the markets of partner countries to the cost of local competitors because European companies increase their competitiveness by means of state subsidies. In addition, the German side loses credibility if it ignores OECD demands for non-tied assistance. 7. Some institutional-organisational weaknesses were also identified. The German development cooperation offices abroad are in many cases not equipped to steer PPP measures in which often several (and, for development cooperation, unusual) partners are participating.

Should PPP be integrated in development cooperation?

The evaluation showed that as a rule PPP projects are more significant and develop a greater structure-building impact if they are acquired in such a way that they complement development cooperation priority areas. The usual initial procedure of seeking in dialogue with German or other European companies general investment projects relevant to development, and then integrating them ex-post in priority areas, results mostly in island solutions.

If PPP measures were to be integrated in the priority areas of bilateral development cooperation, financed from the respective country quota and steered by BMZ regional divisions, other weaknesses besides the significance problem could be countered:

1. The participation of the partner would be enhanced because the PPP measures would thus have to be included in the intergovernmental negotiations. True, on account of their long planning deadlines it is hardly possible to discuss single PPP projects in this setting. But a basic understanding could be established on employing PPP measures within the framework of the cooperation.

2. PPP within the context of bilateral development cooperation must of necessity also be open to local companies. In this form, PPP would be neutral in terms of competition.

3. If the demand that the measures of a development cooperation priority area should create synergies is to be taken seriously, the staffs of the German development cooperation offices abroad must anyway maintain contact with PPP measures. This could reduce the cost of monitoring and evaluation (M&E).

4. Integration of PPP in priority development cooperation areas would enable the specific expertise of the development cooperation institutions (such as knowledge of the risks specific to a country and experience in promoting institutions) to be brought in more systematically and make their mark as true partners of the private sector.

However, integrating PPP in bilateral development cooperation takes place only slowly. This is due partly to the protracted process of country programming. Among the TC and FC projects now being planned the share of PPP measures has risen significantly. The potential for meaningful PPP measures in bilateral development cooperation appears in no way to have been exhausted.

The evaluation recommendations

The PPP idea should be integrated more in the processes of bilateral development cooperation and the facility perhaps developed further into a special fund to promote strategic alliances with the private sector:
Integration of PPP in bilateral development cooperation presupposes that the country programming procedure is made flexible and that the dialogue on sector policies (above the project level) is intensified. The absence of time-consuming examination of and consultations on single projects would ease the workload of the BMZ regional divisions and the implementing organisations. The process could look like this

1. The BMZ and the partner country agree priority areas (or programmes) with clear definitions of goals and indicators for a certain period.

2. A sector dialogue is conducted on these priority areas in which the division of responsibilities between the public and private sector is discussed. At the same time, the two sides examine the question of what combinations of PPP and government development cooperation can best achieve the goals pursued by the key area. Also, for reasons of credibility there should be no ties to German or other EU companies.

3. Reserve funds are indexed which in agreement with the partner can be spent flexibly on further activities within the framework of the priority area, including as PPP measures. Steering can be flexible because it is based on pledges for priority areas and the division into traditional-state and private sector components can take place at short notice on-site.

As long as this flexibility is not achieved in the dialogue on priority areas, all offers of new projects or changes to existing ones should be examined systematically to determine what inputs can better be provided by the private sector. For PPP, this is pro forma already the case. However, apparently scrutiny is not carried out with the necessary thoroughness in all BMZ divisions.

Promotion of strategic alliances with the private sector. PPP should also serve to distinguish development cooperation as the partner of German commerce and industry and thereby heighten the German publics acceptance of it as well as sensitise companies to developmental subjects. In that respect there are certainly arguments in favour of retaining a centrally administered and flexibly deployable special fund for measures by German and other EU businesses. At the same time, however, the identified weakness of the facility, especially the problems connected with smallness of scale – such as poor structure-building effects, low visibility and insufficient possibilities of efficiency controls – should be avoided. Therefore we recommend a fund with the following features:

1. Fewer but larger measures in terms of the extent of their promotion which also are designed for longer periods. Instead of island solutions, integrated approaches with a programme character can be pursued. This would enhance significance and the multiplier effect.

2. In the selection of projects, preference is given to partnerships with various actors (besides companies, for instance, associations, trade unions and NGOs), or with several companies with similar interests. Applications can also be participated in by development cooperation institutions that contribute their know-how in qualifying implementing organisations and policy dialogue.

3. Funding decisions can (as it has proved itself in promoting German business) be taken by an expert body including representatives of government, commerce and industry, and civil society in a competition process based on idea outlines submitted by applicants.

1) BMZ (2002): Public-Private Partnership in der Entwicklungszusammenarbeit. Synthesebericht. Bonn (Public-private partnership in development cooperation. Synthesis report.)
2) See BMZ extranet

Dr Tilman Altenburg is Head of Department IV (Private Sector Development and State Reform) at the German Development Institute (GDI) in Bonn.
tilman.altenburg@DIE-GDI.DE

Dr. Tatjana Chahoud is a senior researcher in Department V (Globalisation) of the GDI.
tatjana.chahoud@DIE-GDI.DE