IIED | 30 January 2018
Public-private partnerships and aid’s ’private turn’: addressing the investment law dimensions
by Lorenzo Cotula and Celine Tan
Public-private partnerships (PPPs) are emerging as important vehicles for achieving the Sustainable Development Goals (SDGs). Their legal and financial implications must be carefully considered.
The ’private turn’ in development finance
It is generally thought that achieving the SDGs requires an unprecedented increase of financial resources available to low and middle-income countries – from the ’billions’ currently provided through aid, to the ’trillions’ (PDF) needed to advance the ambitious 2030 Agenda.
In the context of shifting policy on the role of business in development processes, many donors have responded by redeploying public resources to catalyse private investments.
This ’private turn’ in development policy (PDF) has included injecting capital into traditional development finance institutions (DFIs) and creating new financial instruments, such as blended finance, to encourage private investment.
PPPs are also becoming increasingly popular arrangements. They involve governments partnering with businesses to provide public goods and services across different sectors – from agriculture to energy, health, education, and water and sanitation.
PPPs and the regulatory framework of foreign investment
This private turn brings development finance into closer contact with global economic governance instruments typically associated with commercial activities. It creates new challenges for the interface between development policy and the law governing foreign investment, ultimately affecting the extent to which public action can advance the SDGs.
For example, PPPs aim to generate additional resources and shift financial risk to the private sector. But the legal arrangements underpinning them do not necessarily place sustainable development centre-stage and could create unanticipated legal and financial obligations for states.
These issues have been widely debated in relation to PPP-based infrastructure projects. Investor-state contracts for these projects have formed the object of both guidance and critique. Activists have pointed to public interest being poorly incorporated in the life-cycle of many PPPs (PDF), and to arrangements shifting oversight from the public to the private sphere.
Where PPP projects turn sour, governments could be exposed to arbitration claims under applicable investment treaties, leading to substantial financial liabilities if tribunals find against them.
Depending on the circumstances, businesses could seek damages for state conduct in public tenders, contracting processes or project implementation – for example, claiming that authorities frustrated the investors’ ’legitimate expectations (PDF)’ or took regulatory measures having effects equivalent to expropriation (PDF).
Beyond projects: PPP-based cooperation frameworks
Besides facilitating specific projects, PPPs can also take the form of global, regional, national or subnational policy frameworks to promote private investment at scale. These ’PPP frameworks’ are complex multi-stakeholder initiatives that link aid, development policy and private investment. They raise difficult yet unexplored questions about how they fit with investment law.
Take PPP frameworks to develop commercial agriculture. These policy frameworks typically aim to catalyse ’responsible’ private investment through multi-stakeholder dialogue, commitment and standard setting at national, regional and/or global levels.
For example, in 2012 the G8/G7 launched the New Alliance for Food Security and Nutrition to boost agricultural development in Africa. As part of this initiative, country cooperation frameworks enlist specific commitments from participating African governments to reform policy, from donors to provide aid, and from companies to invest.
At the meso-level, agriculture-related PPP frameworks may be linked to spatial development initiatives (PDF) involving diverse combinations of infrastructure development, regulatory reform and business catalysts – including agricultural development corridors such as SAGCOT in Tanzania.
PPP frameworks and investment treaties
While PPP frameworks have both supporters and critics (PDF), any government participation would need to be mindful of international investment law. Under the New Alliance country cooperation frameworks, participating African governments make specific commitments to implement or reform policies within given timeframes – for example, to revise seed legislation and address land issues in Mozambique and Tanzania.
Investment law issues seem rarely factored in, yet they raise significant questions. For example, what happens if policy shifts or capacity constraints delay or prevent promised reforms? Could the governments’ policy commitments be deemed to have created legitimate expectations, the frustration of which would enable businesses to seek damages via arbitration under investment treaties?
Given the large amounts that tribunals have awarded in compensation, and the considerable costs of arbitral proceedings, the reverberations for the public purse could be substantial, and these questions deserve public scrutiny.
On the other hand, the emphasis that PPP frameworks place on ’responsible’ investment has few equivalents in investment treaties, which tend not to link investment protection to compliance with responsible business standards.
Some recent treaties innovate in this area, as part of wider investment treaty reform efforts, and raise questions about how to ensure the new clauses have legal bite. But there is still considerable scope to better align investment treaties with key parameters of PPP frameworks.
Taking a closer look
PPP projects and frameworks highlight the investment law dimensions of the private turn in development finance, and the need for more joined-up policymaking. As governments and development agencies look to private investment for delivering the SDGs, there is a need to unpack and address those dimensions through more detailed research and inclusive policy dialogue.
Warwick Law School’s GLOBE Centre and IIED, through its ’Legal tools for citizen empowerment’ programme, are setting out to explore this agenda through a new initiative – Regulating Aid Investments in Development (RAID). If the theme resonates, we would be delighted to hear from you.
Dr Lorenzo Cotula ([email protected]) is principal researcher (law and sustainable Development) at IIED, visiting professor at Strathclyde Law School and visiting research fellow at Warwick Law School’s GLOBE Centre.
Dr Celine Tan ([email protected]) is associate professor at Warwick Law School and the director of the Law School’s Centre for Law, Regulation and Governance of the Global Economy (GLOBE Centre).