Why Public Private Partnerships should not be an excuse for government getting back into economic production
When I was recently informed by a Municipal official that the Municipality was engaging in Public Private Partnerships (PPPs) for LED, I did not expect the type of project he was referring to. The Municipality was starting up economic production enterprises to be run jointly with the private sector. The rationale was that such projects would both generate revenue for the Municipality as well as create local jobs.
While at first glance you may think "well what's wrong with that?!", consider the following example. After community consultations, one Municipality perceived the need for a local dairy processing factory, given an abundance of livestock in the locality and the lack of processing facilities. The rationale was that if dairy products could be processed locally, they could satisfy local market demand and sell to other areas. However, Municipal capacity was low in undertaking sound market research or feasibility assessment for the project before investing in it. The result was that after building the factory, the Municipality has been unable to attract a private sector operator to equip and run it. The factory therefore remains shut and un-operational to this day, having wasted significant public funds.
Such examples were common in the country in question, leading a variety of stakeholders to criticize the capacity of Municipalities or to doubt the potential of the private sector to contribute to LED.
The main issue in my opinion, however, is whether public private partnerships should be focused on local governments starting up and engaging in economic production in the first place? The historical experience of socialism highlighted the inefficiency and low productivity associated with state control of productive enterprises. This led to conventional wisdom in economic policy prescribing privatization of government owned enterprises, which is being implemented at the national level throughout African countries. It is surprising, therefore, that local governments are often reversing this trend by acquiring or starting up new productive enterprises.
It is true that there is sometimes a case for government investment because the private sector is not taking up a genuinely feasible business opportunity due to market failures such as the lack of information, or because social returns outweigh private returns.
A distinction should, however, be made between government investment in projects that create public goods such as environmental, infrastructure or skills training projects, and between investing in pure business ventures such as the dairy factory example above (which in my opinion are better left for the private sector to invest or not invest in). Local government can by all means publicize the presence of investment opportunities and incentivize private sector actors to come to the locality, but if this fails to attract them, there is usually a good reason and government should not waste precious public funds on ventures that are likely to fail.
This issue needs debate, however, as PPPs has become an often used and yet unclear concept, while local governments need more precise guidance based on good and bad practice experiences. There is no generally accepted definition of PPPs in the context of LED. While most definitions focus on either the private sector performing a function usually carried out by government such as maintaining a road or providing electricity, or acquiring state property for commercial purposes, they do not preclude government acquisition of equity in productive enterprises.
Given the current lack of clarity on what PPPs should and should not entail, I think a safer bet for local governments would be to focus on projects that increase public goods i.e. improve infrastructure, develop human skills, provide services to local businesses or attract inward investment. Local government would be well advised to stay out of productive enterprises that would compete with other businesses in the locality or in other localities as they are less knowledgeable in such ventures and should not distort local markets.