There are good reasons why privately financed infrastructure projects become significantly more expensive – and slower

As an old tale has it, there once was a competition between two pianists. After listening to the first pianist, the jury awarded the prize to the second. There was no need to listen further, because who could possibly be worse?

The same logic may seem to apply to public-private partnerships (PPPs) to provide infrastructure such as roads, power, water, airports or the development of major tourist areas. In fact, listening to both contestants, and assessing their strengths and weaknesses, is essential.

The first pianist is public provision, which faces two challenges: an incentive (or corruption) problem and a budget problem. The incentive problem stems from the fact that when governments procure a road project, the winning contractor may cut corners, because he gets to pocket the savings. He might even share those savings with the government officials supervising the contract. The budget problem stems from the fact that there is only so much that a government can safely borrow, because it will have to raise future taxes to repay the debt. As a consequence, many worthwhile projects must be postponed.

In comes the second pianist. Suppose the project is a highway structured as a toll road with a 20-year concession. This seems to solve both the incentive and budget problem. The contractor will be responsible for the increased maintenance cost if he cuts corners at the time of construction, presumably making him more likely to do high-quality work. He also would have an incentive to run an efficient operation, because he gets to keep the savings. In addition, because the project is financed by tolls, it need not be limited by fiscal constraints.

Liberating a project from budgetary and public debt constraints can work wonders. Some 73% of Liberia’s citizens have cell phones, but only 9.1% have electricity. This is because energy infrastructure is financed mainly with budgetary resources, whereas cellular telephony is provided privately. When projects are structured so that beneficiaries pay for them through service fees, markets can deliver them. When budgetary resources are needed, things move more slowly.

So, it would seem that the second pianist wins. But life is more complicated than the story, owing to the problems that may arise over the course of a project.

The first challenge that a project must address is whether it is a good idea. Answering this question requires an appraisal or pre-investment process that can be very expensive, and the outcome may be no better than a good guess, leaving many uncertainties.

For example, in the early phase of a highway project, the geology relevant for road design and construction, the amount of future traffic, the environmental impact, and the public response are unknown or only partly known. Most developing countries I know spend too little money devising good projects. When the private sector does, transforming ideas into bankable projects is often very difficult because many difficult-tocoordinate public-sector decisions or actions are involved.

So, let’s assume that a toll road project is approved, a concession contract is prepared, and companies bid on it. The bidders need to plan for two phases: engineering,