The Role of Public-Private Partnerships in the Reactivation of the Economy

Luis A. Ortiz Zamora – BLP Partner
lortiz@blplegal.com

According to the latest Global Competitiveness Index published by the World Economic Forum (WEF), Costa Rica seriously lags in infrastructure compared to countries like top-rated Singapore. Indeed, in comparing ourselves to the other 141 qualified countries,  we rank at number 62 in infrastructure, 117 in quality of roads, 77 in airports, and 79 in seaports,

The reason for this mediocre showing is the evident lag between yearly GDP growth and project investment. Although the National Transport Plan 2011-2035 foresaw that investment in infrastructure should be 2.45% of GDP between 2011 – 2018, afterward increasing to 3.99% between 2019 -2035, the real investment figures indicate that, on average, during the years 2011 – 2017, 1.14% of GDP was invested and, as of 2018, on average only 0.965% has been invested, which is less than 25% of the amount that should have been invested between 2018 – 2019 (3.99% of GDP).

The yearly shortfall relates directly to the country’s competitiveness and the economic overburden of its inhabitants. For example, according to the State of the Nation Program, the cost of lost time for workers at dams in the Greater Metropolitan Area (GMA) represents 4.3% of the gross domestic product (GDP).  As a result, each inhabitant of the GMA spends, on average, between $2,000 and $3,000 a year on dams.

Now, if Costa Rica already had a severe problem of fiscal deficit and high levels of indebtedness before the crisis unleashed by the pandemic, what will it be like now that COVID-19 has consumed the little we had left of our meager budget to invest in infrastructure? The Costa Rican State can not provide the high-quality infrastructure and public services that are urgently required. Given this scenario, what alternatives do we have?

It is precisely to solve these problems that public-private partnerships (PPPs) emerged as a third way of collaboration and synergy between government, society, and the market. Indeed, a recent study by the Inter-American Development Bank has determined that close to 90% of container cargo is transported through ports developed through PPPs and that this private participation has increased the efficiency and productivity of the ports, reducing transportation costs and increasing trade and competitiveness. Likewise, estimates are that three out of every four air passengers use airports operated through PPP schemes, while in the case of highways, the rehabilitation and maintenance costs of roads developed through PPP are between 25% and 30 % lower than in traditional funding.

But what are the famous public-private partnerships that are so widely talked about? The public-private partnership is a genuine “umbrella concept” used to identify any development and financing technique, public and private, of infrastructure and/or public services, which implies significant financing from both sectors. It is not a monolithic figure, since there is no single model, but varies according to the concurrent circumstances and public interest needs. For this reason, at the international level it receives multiple names, depending on the country in question: Private Finance Initiative (PFI) in Great Britain; Public-Private Partnerships (PPP) in the European Union, India, South Africa, Canada, and Australia; Contracts of Coopération Public-Privé in France; Public-private partnerships in Portugal, Brazil and Angola; Public-private collaboration contract in Spain; Public-private participation contract in Argentina; and Public-Private Associations in several Latin American countries such as Chile, Mexico, Peru, Colombia, and Costa Rica.

However, the commonality of joint participation is that the State transfers most of the risks to the private sector in which a private partner is the one who finances, designs, builds, operates, and maintains the work. Such broad responsibility forces the private partner to make the project work optimally since the return on investment depends on it. Thus, the monetary interest of the private partner is aligned with the success of the project and, therefore, with the public interest involved, which seeks to satisfy the fundamental right of users to the proper functioning of public services. But, in addition, contrary to some malicious observations, in all these public-private partnerships, the State receives hefty fees, which usually correspond to a significant percentage of the project’s income.

In Costa Rica – despite the inexplicable reluctance to employ a proven alternative, even with the desperate infrastructure needs that we have – we already enjoy several successful examples of PPPs such as the Juan Santamaría International Airport, the Port of Caldera, Route 27, the Liberia International Airport and the Moín Container Terminal.

What would Costa Rica be without these works? Simply put, were it not for the PPPs, with confidence bordering on certainty our main airport would still be anchored in third world amenities such as old plastic waiting-area seating more typical of a spa than an air terminal, vacationers would have to detour through farm country to avoid stalled traffic to the Pacific Coast, and tourists would be unable to take international flights directly to popular areas, such as Guanacaste.

In short, faced with the fatal financial gap between what is required of the State and what it is capable of doing, we have to let go of ideological burdens and accept, once and for all, that the collaboration of the private sector is essential if we want to one day cease to be an emerging economy. PPPs, of course, must be at the very heart of the recovery from the crisis unleashed by the COVID-19 pandemic and help us, shortly, to close the infrastructure gap that does so much damage to the country’s competitiveness.

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