Fixing Fraud in Public-Private Projects

Submitted by Leonard McCarthy on Thu, 04/18/2013 - 20:15

What’s a cash-tight government to do when it wants to modernize a hospital, build a railway, or expand the power grid to reach underserved areas? It might explore outside, private sources of financing—that’s where public-private partnerships (PPPs) come in. The acronym has a promising ring to it, yet going back to the 1970s, its impact has been mixed. At their best, PPPs can provide rapid injections of cash from private financiers, delivery of quality services, and overall cost-effectiveness the public sector can’t achieve on its own.

But at their worst, PPPs can also drive up costs, under-deliver services, harm the public interest, and introduce new opportunities for fraud, collusion, and corruption. Our experience at the World Bank Integrity Vice Presidency is that because PPPs most often are geared toward providing essential public services in infrastructure, health and education, the integrity risks inherent in these sectors also transfer to PPPs.

On April 17, the Integrity Vice Presidency convened a public discussion on corruption in PPPs (pdf) bringing together finance, energy, and fairness-monitoring perspectives. Looking at the landscape, in the last eight years, 134 developing countries have implemented PPPs in infrastructure, and in the last decade the World Bank has approved some $23 billion lending and risk guarantee operations in support of PPPs.

Opening the event, World Bank Managing Director Sri Mulyani recounted examples from her previous life as Indonesia’s Minister of Finance. She reminded the audience that while fraud in PPPs can seem abstract, the quality, safety, and human costs are very real—such as when a bridge crumbles after only five years, though it was supposedly built to last 15.

CBS News State Department correspondent, Margaret Brennan, moderated the discussion and did not let panelists get away with being too polite. She tried to pin panelists (pdf) down on which countries consistently faced the biggest corruption problem, and how we can fix it. As my colleague Rashad Kaldany, Vice President and COO at IFC said, “This happens everywhere in the world, all countries, bar none.” The problem is global, which is why the solutions also should be similarly global and applicable in diverse situations.

If there was a theme to the discussion, it was the desire to level the playing field with global standards on PPP transparency. Roger Bridges, president of Knowles Consulting in Canada, suggested the World Bank design a certification system for transparency and governance. Receiving that certification would be completely voluntary, but also demonstrate a credible commitment and capacity for internal governance. Roger said that ultimately the certification could be rolled into an overall grading system for PPP participants. Participants might, for example, receive 10 out of a possible total of 100 points for being certified. A carrot—not a stick.

Rashad suggested an initiative in the integrity area modeled on the Equator Principles. Start with a few, major international players who agree to standardized practices and principles in PPPs. Once established, media and civil society groups can help mobilize others to sign on, gradually expanding adherence to the principles until they become a broadly accepted norm of conduct.

Establishing new norms sounds like it could take forever, but attitudes and norms can change faster than you think—Paul Clifford said in the past 8 to 10 years he has seen “difficult conversations” with clients about conforming to the Equator principles’ environmental and social standards become accepted as “automatic.”

Corruption is deliberate, serious and bad business. Based on the discussion yesterday, I believe there would be broad support for what I like to call Global Integrity Principles. PPPs are inherently opaque and risky because they are often long-term, complex financial arrangements. Those risks can be reduced if the terms, costs, and benefits are made more understandable and accessible to governments, private parties, and consumers.

The questions we want to address at the World Bank are, specifically: How should integrity due diligence be adapted for PPPs? What do integrity principles in national PPP laws look like? What should regulators do to review concession and other related arrangements for red flags? Are additional disclosure requirements needed to flush out politically exposed persons? And finally, how do we obtain more effective public scrutiny of PPP deals throughout the PPP project cycle?

No doubt, we have a number of difficult and complex issues to sort out. The way forward is to embrace optimism, even though in 1911 Ambrose Bierce described it as an intellectual disorder.