#BTColumn – Promoting public-private partnerships

Traditionally public-private partnerships (PPPs) have been used in the delivery of infrastructure projects; however, there has been some recent movement in other areas including the provision of social services, education and financial services.

It has been posited by development practitioners that PPPs help to share risks and contribute to value creation for the partners involved. PPPs can potentially reduce public sector costs for providing services and unlock private sector capital to finance investment activity. 

Caribbean countries currently face a perfect storm of a climate crisis, compounded by a solvency crisis, while still recovering from the recent health crisis occasioned by the COVID-19 pandemic.

Countries like Barbados have limited fiscal capacity to finance the level of development needed to build resilience and position their economies to sustainable growth. PPPs can be a viable model for development.

The example of the climate crisis supports the business case for the use of more PPPs. Caribbean countries are amongst the most vulnerable to climate change. Natural disasters are more costly and more frequent in the Caribbean. For example, in 2017, the estimated cost of the hurricane season to Caribbean countries was US$93 billion, including Cuba (US$13 billion) and Puerto Rico (US$68 billion). Furthermore, ECLAC (Economic Commission for LAC) estimated that in 2017, damage and loss due to hurricanes in Antigua and Barbuda, The Bahamas, Dominica, and Saint Kitts & Nevis were in excess of US$1.5 billion. Total damage and loss costs to Dominica from Hurricane Maria alone (2017) were estimated at 226 per cent of 2016 GDP.

The average annual damage and loss attributed to hurricanes in the Caribbean has been estimated to be upward of US$800 million and it is projected that this could rise to US$22 billion by 2050 (IDB). The damage to infrastructure, agriculture, and housing due to the eruption of the La Soufriere volcano in St Vincent and the Grenadines (2021) may result in economic losses of 30 per cent of GDP (IMF).

These and other natural disasters are prevalent risks in the Caribbean; these risks have been the principal source of fiscal stress.

Other climate change-related extreme weather events, such as droughts, sea-level rise and flooding, have also fueled increased public debt in many Caribbean economies. Several countries in the region had an average debt-to-GDP ratio of just under 88 per cent in 2020 (increasing by 20 percentage points from 2019), with Barbados and a few others now carrying debt burdens in excess of 100 per cent of GDP. 

ECLAC reports that of the fifteen countries for which data is readily available, thirteen have a debt-to-GDP ratio above 60 per cent. For countries where the debt/GDP ratio is above 60 per cent, government debt is often costly and becomes unaffordable, leading to policy uncertainty.

The challenge therefore is the inability of most governments wanting to reprofile or refinance their debt to do so. The low associated country credit ratings ultimately impact businesses’ borrowing costs that are domiciled in the region. Resilience-building activities are sacrificed on the altar of fiscal capacity.

Traditional areas for PPPs have been transport, electricity, water, roads, ports, etc. These are key economic inputs as they provide important services to businesses and households. 

However, another area that governments should consider is a PPP framework that addresses the development of micro, small and medium enterprises – there is a social and economic case to be made. 

Caribbean Development Bank (2016) research indicates that MSMEs constitute 70-85 per cent of firms in the Caribbean; they contribute 60-70 per cent of GDP and account for 50 per cent of employment.

The ECLAC estimates that 34 per cent of formal employment and 27 per cent of GDP are generated in sectors strongly affected by crises like the global pandemic (June 2020, COVID-19 report). ECLAC estimates that 2.7 million formal businesses in Latin America and the Caribbean will close with a loss of 8.5 million jobs.

Although all businesses will be affected the report proffered that MSMEs will be hardest hit. They operate in the economic sectors most affected by demand shocks, such as accommodation, food services, cultural and creative sectors, wholesale & retail, etc. These businesses traditionally have low cash reserves and are often not resilient to economic shocks.

An example of a successful PPP to support MSMEs is the recent Central Bank/IADB partnership.

Following several studies that showed financing to be the major impediment to MSME growth, the IDB and the Government of Barbados through the Central Bank developed a Credit Guarantee Scheme. Specifications of the project include:

• US$35 million capitalisation

• Provision of partial guarantees to MSMEs, managed by the Central Bank and accessed through Intermediary Financial Institutions (all private sector financial institutions)

• Guarantee loans up to US$1 million, up to 80 per cent of the loan amount, up to 10 years 

• 89 beneficiary companies – services, energy, tourism, agriculture, construction, retail, manufacturing 

• Five financial institutions – three were commercial banks 

• US$24 million funds disbursed 

• Implementation of technology, working capital, expansion, purchase of equipment, etc.

This PPP is one example of a successful model in circumstances where governments need fiscal space to assist MSMEs. Recent exogenous shocks have exposed the Caribbean’s endemic structural challenges and rigidities. Due to the macroeconomic imbalances, low and declining productivity and competitiveness, and environmental vulnerability that exist, new strategies will be needed to unlock greater private sector investment. PPPs can be one such solution to achieve the transformation and growth needed while improving infrastructure and access to essential services by citizens and businesses alike. 

The Small Business Association of Barbados (SBA) is the island’s non-profit representative body for micro, small and medium enterprises (MSMEs). Connect with the SBA: https://www.sba.bb/sba/