How PPPs Can Rise from the Ashes

PUBLICPRIVATE PARTNERSHIPS WERE INTRODUCED A DECADE AGO BUT HAVE NOT WORKED AS INTENDED. BETTER PLANNING AND KNOWHOW AND MORE POLITICAL COMMITMENT ARE BADLY NEEDED FOR NEW INVESTMENT IN INFRASTRUCTURE

by Veronica Vecchi, SDA Bocconi School of Management
Translated by Alex Foti

Public works have traditionally been a way to sustain economic growth and employment. However, rising government debt and concerns for higher efficiency in public spending call for a growing role on the part of private capital. And infrastructure investment is an asset class favored by long-term investors, such as pension funds, insurance companies and sovereign funds. Public-Private Partnerships (PPPs) are the vehicle of choice to channel private funds and know-how in public investment projects.

In Italy, this type of agreements have existed for more than ten years, with disappointing results. However it’s not PPPs that should be blamed, but the way such a complex tool was improperly used. These contract arrangements have not worked, because they were usually seen as a way to soften financial constraints and make up for the lack of public funds, and because they followed a bureaucratic approach. This has prevented Italy from seizing the potential of PPPs and from providing incentives to the private sector, so it can find more effective business models to meet public needs by integrating the expertise of public administrations with corporate know-how. Italy now needs to turn the page and became a reliable partner for industrial operators and large investors alike. In order to attract these investors, certain gaps need to be filled.
 
From the World Bank to the Italian Code of Contracts
There is definitely a gap in planning that needs to addressed, by putting a number of projects in the pipeline that can be started in few years, and having the best managerial knowledge in the public and private sectors intersect, by attaining benchmarks of excellence, and generating corresponding asset classes that can develop the market. For this, PPPs are needed as policy tools to build and manage complex projects, rather than as the only game in town when a public work is not adequately funded by government or regional agencies. There is also a knowledge gap on the part of public authorities that leads to suboptimal selection of private partners. PPPs need to attract the best managerial talent, but spending reviews have strongly limited the scope to do so. Unfortunately, standard contracts are now said to be best way to address the dearth of government know-how. This can work only if they set basic standards and they can then be tailored for specific projects. A signal in this direction comes from the World Bank, one of the main stakeholders in the PPP market. Whereas before the Bank provided standard contracts for various sectors, it now offers massive online courses and certification programs to select experts that are structuring PPP projects around the world.
 
On April 19, the Code of Contracts passed in Italy, which embodies EU directives on public procurements and sourcing of public administrations. The Code contains a section devoted to PPP operations, which maintains the orientation of the previous 2006 law by seeing PPPs as a way for off-balance sheet accounting of public investment. The new norm is an important ingredient, but in order for Italy to bridge its gap in infrastructure and sustain the competitiveness of its firms, more is needed. There is the urgent need for strong policies and strong political commitment, without which PPPs will remain relegated to local experimentation by few brave managers without ever becoming scalable. Many private entrepreneurs would like to boost PPPs through unsolicited initiatives, without having to go through an open selection process. In the medium term, this could destroy the market, by diminishing the quality of services, increasing costs, and reducing competitiveness of Italian economic actors.