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WHY THIS PRINCIPLE?

To bridge the infrastructure financing gap
There are important and growing gaps in infrastructure development, in both developing and developed countries. To support a future global population of 9 billion people, the OECD has estimated the global infrastructure gap to be US$70 trillion by 2030, and that this gap will continue to grow. Neither governments, nor multilateral development banks, can finance large global infrastructure needs on their own, so greater private sector investment is needed (G20, 2014).

To benefit from private sector’s expertise and financing
Governments should look to private actors, financing institutions and banks for more than just financing. Their involvement can strengthen capacities of governments and bring expertise through better ex ante assessment of projects, improved analysis of the market and credit risks, and identification of cost-effective projects.

To develop public-private partnerships at the sub-national level, with careful consideration of the risks involved.
Careful consideration of private engagement includes informed consideration of public-private partnerships at sub national levels of government in particular for small municipalities. Wrong financial decisions by sub-national governments to develop PPPs, for example to hide bad financial health off balance sheet, can have significant financial impact over the longer term. PPPs should be treated soundly in the budget process, with proper accounting and disclosure of all costs, guarantees and other contingent liabilities.

To enhance new or innovative financing arrangements for sub-national public investment.
To address the financing gap, new or innovative financing arrangements such as loans, bonds, specific investment funds, tax arrangements, or market-based mechanisms may be useful to finance infrastructures and green investments. Sub-national governments should use innovative financing instruments with an understanding of the capacities needed, as in some cases they could severely compromise local finances and cause risky dependence vis-à-vis financial markets.

IN PRACTICE

• Create specific agencies for joint borrowing (municipal bond banks) (sub-national level).
  
  
• Mutualise capital funding or guarantee funds to facilitate access to finance (all levels).
  
  
• Use PPPs with strong care of potential adverse effects and be consistent with OECD recommendations on the Governance of Public Private Partnerships  (all levels).
  
  
• Base decisions about PPPs on value-for-money compared to traditional procurement (all levels).
  
  
• Properly account for and disclose all costs, guarantees and other contingent liabilities of PPPs in budget documents (all levels).
  
  
• Ensure financing arrangements reflect capacities for effective public investment management at sub-national level (in particular small jurisdictions), with bottlenecks identified and clear guidance on steps to address them (all levels).
  

PITFALLS TO AVOID

• Develop sophisticated financial arrangements, with no guidance for sub-national governments which will not be able to use them.
  
  
• Use PPP as a way to hide bad financial health off balance sheet.
  
  
• Mobilise private actors for just financing and not for bringing expertise.

GOOD PRACTICES

‌‌‌‌	See real life examples on how countries have been putting this principle into practice. Read more

COUNTRY PROFILES

SELF ASSESSMENT QUESTIONS