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The World Bank Group has some very clear (and very good) guidelines about what makes for a successful public-private partnership where governments contract service provision like energy supply or education from private firms. When it comes to World Bank financed operations in support of such partnerships, the rule is simple: use competition to award the contract. Sadly, the bank has been ignoring that rule recently. And that is a sign of a broader problem in donor-backed financing of public-private partnership deals.

Uncompetitive awards lead to problems…

The World Bank’s regulations regarding investment projects suggest only in “exceptional circumstances” will the bank agree to non-competitive public-private partnership selection. A range of other guidance to countries includes a strong presumption in favor of competition and methods to introduce competition when a country receives an unsolicited proposal from a private firm to provide services.

That preference for competitive selection is based in part on a record of expensive and ugly global experience with non-competitively awarded public-private partnerships. Take the case of electricity in Tanzania: Independent Power Tanzania, Ltd signed an agreement to provide electricity from a diesel/gas generation plant to the country in 1995, with the emergency of power outages used to justify a non-competitive approach. The project was mired in delay, produced ruinously expensive power that the distributor was obligated to purchase, and led to a major fraud scandal—alongside nearly a quarter century of legal battles. Subsequently, the Richmond gas power project, another unsolicited, non-competitive deal with the government, was to provide 100 megawatts of “emergency” power in 2006. The project was also delayed, once again the power was expensive and the distributor was obligated to purchase it, and an associated corruption scandal brought down the prime minister in 2008. (It is worth noting the World Bank opposed both projects.)

Competition is no cure-all. The competitively awarded Tata Mundra Mega Power Project in India not only ended up in courts around the world over the damage it caused to local ecosystems and livelihoods, but is also teetering on the edge of closure because the price of the coal it imports has risen, for example. But competition still helps for multiple reasons: organizing a competitive process ensures the project is being prioritized thanks to public sector priorities, whereas unsolicited bids appear because firms see an opportunity to make money from the government. The competition itself releases information about the project, increasing transparency. And it delivers lower prices for taxpayer-consumers and helps ensure the best firm, not the most connected firm, delivers the project.

…But they keep on being signed

Nonetheless, non-competitively awarded public-private partnership contracts continue to be signed worldwide. Take the Upper Trishuli dam in Nepal. The project was put together without a competitive process in negotiation between the government and a “special purpose vehicle” set up to build and operate the dam, the Nepal Water & Energy Development Company. (NWEDC is itself majority owned by Korean companies that aren’t free of controversial history.) While the Nepal Electricity Authority offers a standard published tariff rate to hydropower power producers, Upper Trishuli involved complex and bespoke negotiations, not least over the foreign currency risk faced by NWEDC—which is borrowing internationally to finance construction. The company also benefited from an extended tax holiday passed by the cabinet. This is not a straightforward case of an “open offer” with the same non-negotiable pre-set terms available to all producers (a feed-in tariff, primarily designed for small projects). It is an “unsolicited proposal” with all the risks inherent in such an approach.

What makes Upper Trishuli particularly concerning is that it is being built with the support of the World Bank—$103 million in subsidized finance from the bank’s soft lending arm, the International Development Association (IDA). The funding is being channeled through the IDA Private Sector Window—indeed it is the PSW’s largest investment announced to date. That means the project was developed by the International Finance Corporation (IFC), the World Bank’s private sector arm. IFC was involved from early in the process—taking a 15 percent shareholding in NWEDC back in 2013. And last year, the IFC doubled down on its support for Upper Trishuli using loans and equity totaling $115 million on top of the $103 million in IDA support.

‘Exceptional circumstances’ aren’t a good excuse

It may be that the Upper Trishuli project will turn out to be a big development win. But, in common with Tanzania’s “emergency” power projects, its original justification of meeting urgent domestic power needs has been overtaken by events. By the time it is built, the country will have considerably more electricity supply than demand. Once again, “exceptional circumstances” look to be a convenient excuse to ignore best practice rather than a good reason to abandon competition.

Meanwhile, the only other public-private partnership involving the IFC so far announced by the IDA Private Sector Window is another unsolicited electricity plant: the Mazar-e-Sharif Gas to Power project. That got $59 million in IDA support, and was awarded non-competitively despite the fact that Afghanistan’s National Public-Private Partnership Policy, developed with the help of the World Bank, says “As much as possible all [partnerships] will be subjected to a competitive process in order to obtain value for money and efficiency.”

This preference for the non-competitive fits with a broader IFC pattern. Looking at energy alone, according to data from the World Bank’s Private Participation in Infrastructure Database, the IFC was involved in 18 active, standalone electricity generation projects between 2015 and 2019 with a capacity of greater than 250 megawatts. Of those projects, only eight were awarded competitively.

So why doesn’t the IFC follow World Bank guidelines on public-private partnerships?

The simple answer as to why may be that the IFC is responding to client demand. For the IFC, the “client” is the firm it is investing in, and the IFC’s primary role is (and should be) to profitably finance that firm. Those companies do better if they close a deal without a competition. Without rules saying the IFC can’t invest in non-competitively awarded unsolicited public-private partnerships, it is reasonable to expect staff doing their job at the IFC would be keen to invest in just those partnerships.

This incentive problem spreads far beyond the IFC. Upper Trishuli, for example, involves a number of other development finance institutions, including the Asian Development Bank, the Asian Infrastructure Investment Bank, Proparco, DEG, FMO, and the Korean Development Bank. Apparently, nine multinational lenders offered loans of $631 million for the project—far surpassing the $453 million required. (You might wonder why there was a need to use IDA resources at all.) And looking more broadly, non-IFC bilateral and multilateral development finance institutions were involved in 28 large electricity projects between 2015 and 2018. Of these, 13 were awarded competitively. That leaves the IFC with a slightly worse performance than its peers, but only just.

The IFC and its partners should be fighting crony capitalism, not facilitating it by backing sweetheart deals agreed behind closed doors. Development finance institutions use safeguard policies to try to ensure that privately profitable but publicly harmful projects aren’t financed. They should add to those policies when it comes to unsolicited public-private partnerships and follow the World Bank line—development finance institutions should only invest in non-competitively awarded partnerships under truly “exceptional circumstances,” not as a matter of course.

And the World Bank Group in particular should be following its own rules when it comes to the use of its resources. If IDA-financed public-private partnerships have to be competitively awarded when that finance is provided via governments, IDA-financed public-private partnerships should have to be competitively awarded when that finance is provided via firms.

Disclaimer

CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.