UNCITRAL’s PPP Legislative Guide Must be Fit for Today’s PPPs

The United Nations Commission on International Trade Law (UNCITRAL) is expected to adopt in July an updated Legislative Guide on Public-Private Partnerships (PPPs). Absent a fundamental reorientation of the most recently available draft, the UN stands to miss a huge opportunity to help countries achieve Agenda 2030 and the Sustainable Development Goals (SDGs). Here is why.

The world needs a tried and tested recipe book on infrastructure investment. In many cases, governments look to long-term public-private partnerships (PPPs) with private companies to help achieve their infrastructure objectives. But managing risks and benefits in these relationships is challenging and the proper balance often elusive, even in developed countries that are well-equipped to structure and oversee them. Ideally, an infrastructure recipe would call for a number of recognizable ingredients to attract private capital, and straightforward methods to process it. The prized dish at the end could be much needed infrastructure, such as roads, energy, water and waste services, health and education. Hunger for this prize is particularly acute in developing countries.

And yet this hunger cannot be sated by volume of investments alone. Achievement of the SDGs requires quality infrastructure, not just quantity (addressed specifically by SDG 9). Countries need infrastructure that promotes economic development, jobs, and widespread public benefit. The finance ministers of Francophone low-income countries, for example, have articulated their needs in infrastructure PPPs, and they make it clear that they will not accept just any PPP – they want public investment projects which target universal access to services in sectors such as education, health, water and energy, with reduced costs and risks of PPPs. While value for money and management of fiscal and financial risks are essential, so is management of the nonfinancial risks of PPPs, such as environmental, social and governance risks.

What are the generally recognized key ingredients for countries to benefit from PPPs in infrastructure? The Economist’s Intelligence Unit (EIU) has been publishing select country rankings of PPP readiness since 2009 under the banner of Infrascope. To date, it reviewed 39 jurisdictions based on five key criteria (with 23 sub-indicators): enabling laws and regulations; the institutional framework; operational maturity; investment and business climate; and financing facilities for infrastructure projects. “Sustainability” is a key sub-indicator of enabling laws and regulations. The G7 and G20 also issued, in 2016, communiqués on quality infrastructure, each clearly mentioning environmental and social sustainability as a key ingredient.

This means that countries cannot focus solely on facilitating and strengthening processes and legal frameworks around procurement, and contract negotiation, implementation, and termination. They must also select and advance infrastructure projects in a way that minimizes all material risks, including sustainability risks, and maximizes economic, environmental and social sustainable development objectives, all of which must be supported and advanced by the PPP regulatory framework. These include the risks to people who must make way for a new infrastructure project through the eminent domain process; the risk that the needs of certain users, such as women and the poor, are not taken into account; the potential risks and disputes around the consequences of devastating climate change impacts on the project; and the risks that the investment framework and the preferred dispute resolution mechanism of investment arbitration is wholly unsuited to, and often undermines, the sustainable development objectives of governments (an issue currently being addressed by UNCITRAL’s own Working Group III on investor-state dispute settlement reform). PPP contractual relationships often last for decades so it is incumbent on governments to foresee these risks and benefits, to anticipate them, and to integrate them early on in any project. Any regulatory framework for PPPs must equip countries to do this.

UNCITRAL’s approach to its PPP Legislative Guide ignores this broader picture, which is incongruous given UNCITRAL’s status as a United Nations body with a mandate to contribute to the development of international trade law in pursuit of the objectives set forth in article 1, paragraph 3 of the UN Charter. Instead, UNCITRAL clearly considers that is it not the role of PPP law to do all of this, that PPP law should keep to the more traditional legal aspects of PPPs, whereas sustainability issues are someone else’s problem. While UNCITRAL’S Legislative Guide refers at the outset to the SDGs, and notes the rising public interest in PPPs, the operational part of the Guide retains a narrow focus on technical legal issues from the nearly 20 year old version of the document (launched nearly 15 years before the SDGs). The revised Guide does not account for two decades worth of empirical evidence on the substantial and wide-ranging risks PPPs have on sustainable development objectives and learned strategies as to how governments can mitigate these risks when implementing PPPs. It contains a few environmental pointers but shies away from the social dimension. There is no reference to climate change despite the critical role that sustainable infrastructure could play in advancing climate change mitigation and adaptation, as well its centrality to broader strategies to alter global energy systems. This does disservice to country clients of the Guide. We explain the serious and fundamental sustainability shortcomings of the latest draft chapters of the Legislative Guide in our submission to the UNCITRAL Secretariat.

Today’s PPPs are amazingly complex and command a multidisciplinary approach to succeed. The key ingredients list for PPPs has expanded and the prized dish must include sustainability factors. Considering the appetite for PPPs, a legislative guide to PPPs intended for use by governments must take a more holistic approach to better describe and help address the recurrent sustainability challenges that PPPs face. Any UN instrument that helps to enable PPPs must explicitly place PPPs in today’s world and not the world of 20 years ago. It must do its part to help countries manage the environmental and social risks and realize the sustainable development benefits of PPPs. UNCITRAL owes it to its member states to modernize the Legislative Guide to make it fit for today’s PPPs.

By: Motoko Aizawa, President, The Observatory for Sustainable Infrastructure, and Brooke Guven, Legal Researcher, Columbia Center on Sustainable Investment