Private Sector


The IMF and PPPs: A master class in double-speak

4 April 2019

IMF Managing Director Christine Lagarde. Photo credit: IMF

While the IMF cautions against the fiscal risks of public-private partnerships (PPPs), the institution is simultaneously backing them at a country programme level and advocates austerity measures that push governments towards expanding PPPs through constrained budgets.

The fiscal risks of PPPs

As far back as 2004, the IMF’s Fiscal Affairs Department (FAD) published a paper stressing that “one particular concern is that PPPs can be used mainly to bypass spending controls, and to move public investment off budget and debt off the government balance sheet, while the government still bears most of the risk involved and faces potentially large fiscal costs.”

Concerns over the fiscal risks of PPPs have also underpinned the work of the IMF to quantify the macro-fiscal impact of PPP projects. It has, for example, designed tools such as the Public Investment Management Assessment (PIMA), and the PPP Fiscal Risk Assessment Model (P-FRAM). However, it is not clear how these tools influence programme design at the IMF.

On the one hand the IMF recognises the fiscal risks associated with PPPs in its policy advice, while on the other there is a continued push for fiscal austerity measures, which has paved the way for the introduction of PPPs in many countries.María José Romero and Gino Brunswijck, Eurodad

More recently, in October 2018, the IMF published a note on controlling the fiscal costs of PPPs, which aimed at offering advice to policy makers. Building on a growing body of literature including its own economists, as well as academics and civil society organisations, the note raises concerns over the costs, risks and lack of proven efficiency gains of PPPs. It notes that, “while in the short term, PPPs may appear cheaper than traditional public investment, over time they can turn out to be more expensive and undermine fiscal sustainability.” The same note states that “the fiscal risks of PPPs are sizeable” as the average fiscal cost of PPP-related contingent liabilities that materialised during 1990-2014 was about 1.2 per cent of national GDP of countries where PPPs had been contracted, and according to the authors, “with the increasing use of PPPs by countries, the size of associated risks is likely to grow, too.”

The note also raises a red flag when it comes to the inflexibility of PPP contracts: “While spending on traditional public investments can be scaled back if needed, spending on PPPs cannot. PPPs thus make it harder for governments to absorb fiscal shocks, in much the same way that government debt does.”

Saying one thing, doing another

Despite these concerns, the IMF’s preference for fiscal adjustment measures drives countries towards PPPs. Recent Eurodad research found that IMF programmes in 2016-2017 have predominantly pushed for austerity in 23 out of 26 borrowing countries.

Strict budgetary requirements tend to squeeze government budgets, limiting options for public investment. Confronted with a curtailed capacity for public service provision, governments might well be forced to turn to PPPs, because fresh capital can be provided by the private sector. However, risks will be assumed by the public sector. While the IMF recognises the fiscal risks associated with PPPs, its policy advice and conditionality in certain countries do not allow for increasing and improving public financing of economic and social infrastructure and even include calls for advancing the legislative frameworks for PPPs.

For instance, in its 2015 Article IV report for Tunisia, IMF staff “regretted delays in the final approval of the PPP law, currently in parliament, as the framework would mobilise significant private resources for public infrastructure investment.” Subsequently, the IMF loan for Tunisia in 2016 attached a specific conditionality calling for the implementation of a comprehensive PPP law together with a package of austerity measures. The law is intended to encourage greater private sector participation in infrastructure investment.

This points to the role of the IMF in the global promotion of PPPs, which is problematic given that there is a lack of evidence that PPPs can deliver in the public interest. All in all, the advice of the IMF seems to lack coherence when it comes to PPPs. On the one hand the IMF recognises the fiscal risks associated with PPPs in its policy advice, while on the other there is a continued push for fiscal austerity measures, which has paved the way for the introduction of PPPs in many countries.