B. Public-Private Partnerships for the Urban Environment: A Multi-Donor Initiative for Small and Medium Sized Investments

Peter Grohmann
UNDP
New York

In 1994, UNDP initiated the Public-Private Partnerships for the Urban Environment (PPPUE) Programme to promote collaboration between the public and the private sectors in order to address the most urgent urban environmental problems.

Programme Objectives

The overall development objective of the PPPUE is to increase the access of the urban poor to basic urban services, and to contribute to the creation of a healthy environment and the improvement of living conditions in urban and peri-urban areas in developing countries.

The PPPUE will achieve this objective by:

• Helping to articulate, guide and facilitate partnerships between the public sector, business and civil society;
• Supporting the development of sound policy frameworks for private sector participation;
• Strengthening managerial, technical and organisational capacities of municipalities;
• Helping to introduce environmentally sound concepts, practices and technologies; and
• Generating employment, training opportunities and lessons for the benefit of developing country city dwellers.

Programme Focus

The PPPUE will maintain a focus on facilitating partnerships in areas where UNDP can make the most effective contribution to reducing the impacts of urban poverty. PPPUE will therefore focus on the following areas:

1. Urban Areas
   Due to the rapid population growth of urban areas in developing countries, city governments at the turn of the century find themselves struggling to provide basic and essential services for their citizens. Most cities will be unable to meet the needs of a high percentage of urban residents. This will be especially acute in small to medium-sized cities that are growing at an even faster rate. PPPUE is devoted to finding solutions for these constituencies.
2. Environmental services
   Water supply and sanitation
   Waste management
   Sustainable energy services
   
   The lack of dependable water supply and sanitation and waste management services has a direct impact on the lifestyles of the urban poor. Without these services, communities are exposed to unacceptable levels of public health risks. These services also have a direct impact on the long-term security of water supply resources. Clean, reliable sources of energy will reduce urban air pollution while playing an indispensable role in driving urban economic development.
3. Small and medium-sized investments of up to US $25 million
   Investors and financial institutions have been mostly interested in large-scale, full privatisation. These types of grand investments capture economies of scale for sectors that involve large capital inputs and long-term amortisation of costs. Small and medium-sized investments are less attractive given the ratios between transaction costs and financial and political risks and actual investment. On the other hand, the highest demand for support is at the small and medium-sized scale.
   
   Pursuing smaller scale projects allows PPPUE to engage in the kind of collaboration that UNDP does best: forging partnerships with communities, NGO's, micro-financing institutions and local political leaders. It also allows PPPUE programmes to play a more direct role in poverty alleviation and to experiment with different modalities such as community-based service providers or joint ventures.

Programme Background

The first pilot phase started in 1995 with seed funding from UNDP and in collaboration with the World Business Council for Sustainable Development (WBCSD). Results led to the establishment of the PPPUE Trust Fund, which received about US$2 million in donor contributions in 1996. The core elements from 1997 to 1999 were the Project Development Facility (PDF) and a capacity building component initiated in collaboration with Yale University. Since then, the initiative has grown and facilitated collaboration between a range of organisations, including governments, business, non-governmental organisations and the scientific and academic communities in a number of countries in South and East Asia, Africa, Arab States, Latin America and Eastern Europe/CIS.

The Project Development Facility (PDF)

The Project Development Facility focused on the development of joint ventures between the public and the private sector on a "shared-risks", "shared-benefit" basis. The PDF intended to turn environmental problems into viable business opportunities by reducing risks and transaction costs, especially for small and medium-sized companies (requiring up to US $25 million in investment).

Capacity Building Through Collaborations And Knowledge Management

PPPUE established a capacity building partnership with Yale University in order to build on Yale's path-breaking research on international private capital flows and the environment. The UNDP/Yale Collaboration for the Urban Environment focuses on developing a "virtual learning network" that collects, organises and disseminates information to PPP practitioners around the world. The Programme has attracted new partners and has led to the establishment of the "PPPUE Global Learning Network" for best practices exchanges and lessons learned. With its focus on the analysis of practical experiences rather than theories, the Global Learning Network is today an important node in the network of PPP practitioners and experts, as well as the intellectual backbone of the PPPUE Programme that considerably influences the Programme's development.

Lessons Learned

The successes and lessons of the PDF activities and the discussions and findings of the Global Learning Network have built a strong basis for the development of the PPPUE Programme during the next several years. The redesign of the Programme includes features like: focus on Professional Development in combination with piloting, use of a menu of partnership options, focus on projects with poverty alleviation effects, participation of a wide range of private partners (including the informal sector, local communities, and so forth), building of local expertise, and promoting maximum ownership on the country level through the full involvement of UNDP Country Offices.

The PPPUE Approach

Use ODA to leverage private investments in urban services through risk reduction.

Historically, ODA represented the most reliable source of foreign investment for many developing countries, but this is changing. Foreign Direct Investment of private capital now far exceeds ODA investments and promises to be the most significant economic driving force for many developing countries in the future. However, foreign capital flows are not equitably distributed around the world; the majority of capital tends to flow to favoured "hot spots," while other countries continue to rely largely on ODA inputs. PPPUE recognises the need to work with the private sector to increase the flow of capital to the poorer countries in general and to their urban environmental infrastructure projects in particular. To achieve this, PPPUE applies ODA resources to establish the right frameworks for reducing the risks for private investment.

Combine integral Professional Development with pilot projects.

Governments are prepared to accept and support the development of PPP to differing degrees. Legal barriers, lack of decentralisation, governance problems and political obstacles hinder the involvement of the private actors in sectors that are so far managed fully by the public administration. Therefore, the first task of the PPPUE is to raise awareness of the pros and cons of PPP methodologies and to support governments in removing political, legal and institutional bottlenecks and create an enabling environment for public-private collaboration.

Enabling activities and capacity building will generate project opportunities and a demand for specific technical assistance (for financial structuring, technical options, marketing, for example). PPPUE Programmes will select a number of pilot projects for technical assistance that demonstrate innovative partnership arrangements.

Broker partnerships with all relevant stakeholders.

UNDP has a competitive advantage when it comes to brokering relationships between partners that are unaccustomed to working closely together because it can rely on the positive rapport that exists between UNDP Country Offices and local governments and NGOs. UNDP is highly regarded for being close at hand when problems arise.

PPPUE uses a broad definition of private sector, including local, national and international business, as well as informal enterprises and different actors of civil society like NGOs, Community Groups and research institutions. To meet the challenge of the need for basic services, all sectors of society are potential stakeholders, being investors, providers, regulators, users, or experts.

Provide advice on alternative options, not on a predefined agenda.

There is no single, correct structure for public-private partnerships. A full range of options is available to respond to different problems and situations: from informal cooperation and passive financing options, through service and management contracts and BOTs, to joint ventures and long term concessions. The PPPUE will support local governments by presenting a menu of partnership options rather than promoting one model. PPPUE helps to evaluate different options and to find the best arrangement for every specific problem or need.

Put local actors in the driver's seat.

PPPUE will confer the responsibility for the development of country activities to the UNDP Country Offices. A long-term goal of the facility is to build a pool of regional expertise for different aspects of PPP development (for example, legal and financial advisors). Programme outcomes can only be sustainable if an adequate number of sufficiently skilled consultants are available in each region, who can respond to the demand for technical assistance at an affordable price, combining expertise and local knowledge for finding creative solutions that are not copied from other cultural contexts.

Introduce PPP as a new opportunity in crisis situations

On the one hand, PPP very often get started in crisis situations. In the case of urban infrastructure, the substantial problems facing so many cities constitute crises: full landfills without viable replacement options, outbreaks of epidemics because of poor water quality and sanitation, energy shortages interrupting production cycles or damaging machinery, and so on. Faced with these situations and often severely limited resources, municipal governments are turning to the private sector to find new solutions.

Second, countries or regions in post-crisis situations constitute more severe cases for crisis in a broader sense. Reconstruction efforts following natural disasters or war situations are often constrained by a lack of resources and management skills that hinder long term sustainability. The public-private partnership approach is one of the most attractive options because it builds on the skills of all relevant stakeholders and facilitates the mobilisation of urgently needed resources.

To learn from others and feed the lessons back into a knowledge management system

The PPPUE Global Learning Network is an outreach mechanism of the PPPUE that supports country activities through the transfer of knowledge from other experiences around the world. This knowledge is used to inform PPPUE Programme managers of possible approaches and solutions to specific problems.

Institutional and Project Partnerships

Success will largely be determined by the effectiveness and complementarity of PPPUE's programmatic partnerships. PPPUE has already established partnerships with the following institutions:

• The Public-Private Infrastructure Advisory Facility (PPIAF), a recently established multi-donor initiative hosted at the World Bank which supports investments of a much larger scale. PPPUE and PPIAF have agreed on principles of cooperation between the two facilities to avoid duplication and to ensure synergies.
• Donor governments and their development agencies, several of which will be participating in the PPPUE Consultative Group;
• International private sector organisations, which can provide substantive contributions to the learning network and expertise for specific interventions at the municipal level.
• Academic institutions (for example, UNDP/Yale Collaboration for the Urban Environment, the University of Western Cape, South Africa, and the Centre for Environmentally Sound Technology Transfer, China), which are vital to the dissemination of learning experiences, best practices, and the expansion of the GLN.
• International NGO's (for example, Carl Duisberg Gesellschaft e.V. [CDG], Germany, and the International Development Research Centre [IDRC], Canada), with whom PPPUE collaborates to host training workshops, conferences, and learning exchanges.

These partnerships provide the framework for future institutional collaborations.

The PPPUE National Programmes

PPPUE National Programmes are the core activities of the PPPUE facility. Each PPPUE National Programme is designed in the Programme country according to the specific needs of that country, thus conferring maximum ownership to the partners in the Programme country. PPPUE National Programmes combine policy development, capacity building activities and piloting of innovative PPP arrangements. The emphasis lies in the development of policy tools and institutional capacities that allow local governments to arrange sustainable partnerships with the private sector.

Selection of countries for National Programme implementation

Although the PPPUE facility is open for support to all UNDP Programme Countries, present financing is available for developing seven National Programmes. This number will expand as more funding becomes available. To begin, the seven countries will be identified in Sub-Saharan Africa (4), Asia and the Pacific (2) and Latin America and the Caribbean (1). The selection of a country has to be approved by the contributing donors to the PPPUE Trust Fund on a no-objection basis. The criteria for the selection of PPPUE National Programme countries include:

• High level of political commitment of the central government to support private participation in infrastructure and services.
• Countries in post-crisis situations in which PPP can contribute substantially and with a great impact.
• A strong decentralisation policy in place, which gives local governments sufficient autonomy for PPP development.
• Existence of a national institution that has the capacity to execute the Programme with a very high standard of managerial knowledge.
• Potential for domestic and international private sector investments in infrastructure and services.
• Possibilities to link PPPUE National Programmes to ongoing or planned Programmes of UNDP or other UN agencies.
• Potential for cost-sharing arrangements with other UNDP resources, and government or donor funds on the country level.
• Potential to build on projects and agreements initiated during the previous experimental phase of the PPPUE Programme.
• Potential to introduce innovative PPP approaches, especially in less-developed countries.

Phases of the National Programme

1. The Preparation Phase

The main elements of the preparation phase are capacity assessment for PPP development in water, waste and energy services; definition of a programme strategy; and identification of implementation arrangement options. These activities should be carried out in a participatory process with all relevant stakeholders (government, private sector, civil society).

The Programme strategy functions at different entry levels (enabling environment, local government institutions, and others), depending on the specific needs of each country. However, the strategy should focus as much as possible on strategic entry points to achieve the highest impact given limited resources. The strategy formulation process should include the identification of synergies with other UNDP or UN Programmes and the formulation of agreements with these Programmes on the type of collaboration (close co-ordination, joint programming, cost-sharing, and so forth).

2. Policy Development/Capacity Building Phase

The objective of this phase is to prepare the groundwork for the actual implementation of PPP projects. The activities can aim at tackling bottlenecks for PPP development at the legal or political levels; raising awareness about the opportunities and risks of PPP in public services; building capacities to evaluate different partnership options; training on "how to" develop successful PPPs; finding the right partner, and so forth.

3. Piloting Phase

Each PPPUE National Programme should support the implementation of at least one PPP project. These pilot projects should demonstrate innovative PPP arrangements that have a high potential for replicability within the country or that are door openers for PPP development in general. PPPUE National Programmes can provide technical assistance to pilot PPPs only during the pre-investment phase. Activities can contain assistance in project selection (business opportunity), partner identification, evaluation of different PPP options, evaluation of technical options, financial structuring, design of regulatory framework, business plan development, and so forth.

4. Mainstreaming Phase On The Policy Level

The objective of this phase is to widely consolidate the PPP approach on the policy level. Drawing from previous experience, the PPPUE National Programme will advise national lawmakers and other decision-makers on ways to develop national legislation and institutional settings that both allow the formation of PPPs, and also introduce incentive mechanisms to actively promote PPPs.

The PPPUE Flexible Response Facility

The objective of the Flexible Response Facility is to provide specific expertise to ongoing initiatives, not full project development. In particular, it is an instrument that allows the PPPUE facility to cooperate in a fast, efficient and concrete way with related programmes in the area of urban management, water and waste, energy, or private sector development. The Facility has the potential to act as a door opener for future PPP development.

The Operational Guidelines will specify detailed criteria for the selection of support activities that can be funded under the Flexible Response Facility. In general, the following criteria apply:

• Projects should demonstrate new approaches and have an impact on the policy level.
• Resources are limited for inputs during pre-investment phase.
• The request should come from a municipality, NGO, or community.
• The input is related to a small or medium-sized partnership project with private sector participation in the three focus sectors of the PPPUE.
• The input is related to an ongoing project development process where all parties already have made visible commitments.
• The input is sufficient to bring the project to the next development stage.
• Actions following the input are well-defined and continued self-reliant development of the project is assured.

The PPPUE Global Learning Network

The PPPUE National Programmes and the PPPUE Flexible Response Facility are part of a dynamic feedback loop and PPPUE's broader effort to develop policy frameworks and promote learning through the Global Learning Network (GLN). The purpose of the GLN is to facilitate interactive and continuous learning among a dynamic network of institutions and individuals involved in public-private collaboration. The GLN analyses Country Activities and provides experiences from other parts of the world to enrich the daily work in those countries.

PPPUE Management Structure

The PPPUE Facility is designed to operate in a decentralised manner with a clear emphasis on activities at the country level.

PPPUE Management Unit

The PPPUE Management Unit is headed by the PPPUE Director. The Director of SEED oversees the interactions of PPPUE with PPIAF, representing UNDP in the PPPUE Consultative Group and in the Programme Council of PPIAF. The PPPUE Director is supported by the PPPUE Global Task Manager and a PPPUE Programme Specialist. The Management Unit is responsible for the design of the overall Programme policy, the development of general guidelines and standard procedures, quality control, the management of the Flexible Response Facility and the Global Learning Network, donor relations, and so forth.

The Consultative Group

The PPPUE Consultative Group (CG) will consist of donors to the PPPUE, the Director of SEED representing UNDP and a representative of the PPIAF. Additionally, representatives from PPPUE National Programmes, special advisors and potential donors can be invited to the meetings of the CG. The CG will deliberate overall PPPUE policies and strategies, endorse the work Programme, and review performance.

The Management Committee

The PPPUE Management Committee (MC) at UNDP headquarters will consist of representatives of UNDP Regional Bureaux and of all PPPUE relevant units of BDP. The Management Committee will review the PPPUE National Programmes and will meet when PPPUE National Programmes have been submitted for approval.

Contributions from PPPUE Programme components and partners

UNDP in general and the PPPUE Facility in particular will use the Global Learning Network as an efficient tool to interact between UNDP Programmes and the "world outside". The GLN will provide technical expertise in questions of policy development and best practice exchange. It will bring into the facility the knowledge of a variety of world-wide PPP projects and help foster the South-South exchange of experiences.

Home  |  About PPPUE  | Innovative Partnership Grant  |  Global Learning Network