Not AlwaysThe Best PPPs

While taking cognizance of the need to pursue policies that can protect or expand critical infrastructure through the many benefits of private participation in infrastructure it should be noted that in the context of relatively underdeveloped financial markets, this has meant reliance on foreign capital to finance growing needs, with the concomitant risk for the economies of unexpected devaluations and/or sudden reversals of those flows, as noted during the Asian financial crisis (Vives, 99). Closer to home, in Zimbabwe, the paucity of foreign private inflows in the infrastructure sector is a reflection of the ‘finnickiness’ and relative sensitivity of foreign capital within the ambits of the current global economic crisis.

Chen and Kubik, 2007, have been critical of the touted PPP approach to infrastructure development, following an assessment of the approach in India, Indonesia, and Philippines, noting that it has detrimental flaws and results in substantial resource wastage. More specifically, they postulate that the PPP approach leads to the ‘plum’ and ‘lemons’ problem first introduced by Akerlof (1970). According to the authors, the ‘plum’ problem arises when the bidder or firm providing capital (buyer) knows more about the quality and economic value of the project than the government agency (seller); while in the case of the ‘lemons’ buyers are disadvantaged because they have less information than the sellers about a projects value, risks, and costs. This will lead to severe agency costs and failures for large scale projects. Other challenges would include an inefficient bidding process, timeous negotiation process and political/policy risk. While acknowledging such weaknesses, the fundamental aspect in Zimbabwe’s case is the anticipated policy reforms and the attendant benefits for the financial sector, assuming that such reforms will level the playing field, deter political and policy risk and develop more efficient, transparent market mechanisms. The public sector should play the role of grantor, regulator and facilitator because it controls most of the rules of the game and its actions in either sector can make or break the relationship.

If properly structured, investments in infrastructure financial instruments should be attractive to local banks and pension funds. Nevertheless, infrastructure investment is an inherently risky activity which is, both because of its strategic inflexibility (it cannot be moved or used for other purposes) and the fact that it provides basic public services subject to political interference. In this regard, it is important to distinguish between investments in established firms that provide infrastructure services (treated as regular investments) and investments in new projects, which require special consideration in terms of the regulatory environment and financial instrument design.