The world needs more and better infrastructure. Demand for infrastructure investment has risen and is expected to grow due to many competing pressures. For example, economic growth globally and advances made through technology, along with needed investments to address climate change, urbanisation and demographic changes will require more and better designed climate resilient infrastructure investment. Infrastructure investment is a shared responsibility across levels of government, with subnational governments playing a crucial role. Many key areas of infrastructure – from water to sanitation to transportation to education – are often the responsibility of regional and local governments.
The OECD estimates that approximately USD 95 trillion in public and private investments will be needed in energy, transport, water and telecommunications infrastructure at global level between 2016 and 2030 in order to support growth and sustainable development, equivalent to approximately USD 6.3 trillion per year over the next 15 years.
Public sources of funding are insufficient to cover the investment needs in cities and regions and will remain insufficient if appropriate actions are not taken. The magnitude of the needs and the tight fiscal context for governments imply that mobilising private sources of financing will be crucial. Public Private Partnerships (PPP) could help narrow the infrastructure gap. However, PPPs are complex and sometimes risky arrangements, and there have been many examples in recent years of PPP failures or misuse, which call for caution in their use, in particular at the subnational level.
Despite a growing proportion of infrastructure services that have been delivered through PPPs in the last decade, current levels of infrastructure investment taking place through PPPs are still moderate. Most OECD countries (83%) report that between 0% and 5% of public sector infrastructure investment took place through PPPs in the last three years. IMF estimates indicate that infrastructure investment via public private partnerships is still less than a tenth of public investment in advanced economies and less than a quarter of public investment in emerging market and developing economies.
Although the average value of PPPs is generally higher at the national level, the number of PPPs is higher at the subnational level. In France, for example, subnational governments granted 79% of the contrat de partenariat between 2005 and 2011. In Australia, about 90% of PPPs occur at the (subnational) state level. In Germany, subnational PPPs constitute approximately 80% of PPP investment in terms of volume. In the United Kingdom, local authorities acted as the contracting authority for the majority of Private Finance Initiative (PFI) projects.
PPPs present pros and cons to the public sector. Generally, PPPs are justified when they are affordable and produce greater value for money than delivering public services or public investment through traditional means. Governments expect that private sector engagement will enhance government capacity to achieve its objectives by tapping the resources (money, technology, and knowledge) of the private sector. Gains are expected to result from benefits of risk transfer, private sector incentives, know-how and innovation. However, PPPs are not risk-free. Maximising the benefits and minimising the downsides of PPPs requires substantial public sector capacity, in particular at the subnational government level.