The recently released Productivity Commission report declares that the ability for the public sector to undertake a greater level of risk-taking is of paramount importance in achieving medium, and long-term policy outcomes. This theme is reoccurring globally, with a clear focus not on increasing risk, but identifying ways for the public sector to share risk, particularly between the public and private sectors. One example, is the need for innovative financing to meet the 2030 Sustainable Development Goals.
It has been estimated that there is an annual investment gap of $2.5 trillion to meet the goals globally. Once considered the exclusive responsibility of governments, the UN has clearly declared that the private sector has a critical role to play in meeting the investment gap.
Public-Private-Partnerships (PPPs) pioneered in the UK in the 1990s provided a benchmark for medium and longer-term sharing of risk and reward between the public and private sector, enabling each party to bear the risk they are best placed to manage.
More recently, momentum continues to build for the sharing of risk and reward through a range of models such as ‘blended finance’ arrangements and other products, such as social impact bonds and environmental impact bonds. Perceptions of risk that had previously prevented investment are overcome through these financing models by allowing public and private sector partners to better balance risk and reward, and as a result, facilitate investment. Such models are being used to help close the investment gap for the 2030 Sustainable Development Goals.
Whatever the form of partnership, the priority must remain on the effective use of capital to deliver the intended impact. This requires clarity on the outcomes being sought including clearly defined metrics that allow for evaluation to occur. Whether delivering on the 2030 Sustainable Development Goals, or a single government program, the ability to share risk will enable the more effective delivery of projects that, over time, ensure we make progress towards longer-term policy goals.
They can use public funds strategically to provide, for instance, de-risking instruments; these instruments can incentivize private finance for investments with strong social and development benefits that would otherwise not materialize due to higher actual or perceived risk.