PPPs can offer a host of benefits, such as private funding, innovation, and reduced risk to governments for cost overruns and delays. Another benefit often cited is the possibility to build local capacity and expertise, with the cost advantages that can bring particularly for smaller projects, and to build a domestic capacity that can work alongside foreign investors or bid in its own right for projects. In fragile and conflict states and in municipal or smaller projects, it may also be hard or costly to attract foreign sponsors and domestic options may need to be found.
PPPs are often complex or very large or prequalification criteria are set such that it is hard for small and medium local enterprises (SMEs) to compete in the market. This is particularly the case in developing countries. Governments can provide a number of incentives to SMEs to flourish, such as through tax or financing incentives or capacity building. In this section, the PPPIRC presents some legal/ policy mechanisms that various countries are using to promote or prescribe the involvement of SMEs in PPP, including:
- legal requirements for including SMEs or local partners in Public Procurement/ PPPs or as sub-contractors
- incentives in bidding documents and contractual provisions for SMEs to bid in a PPP project
- policies encouraging the integration of existing SME operators into new PPP projects.
A key consideration is the need for governments to balance the desire to build and use domestic capacity with the interests of good quality service delivery. It is also important to be realistic about the capacity of SMEs in the relevant market to participate in more complex projects.
Further Reading includes discussion of the potential use of SMEs in PPP projects and some capacity building initiatives applied by government for building capacity of domestic private sector in developing countries.
Similar issues are also raised in:
- Gender inclusion – discussing the need for women to participate in the benefits of infrastructure development
- Small scale water projects- in which many small scale water projects use local SMEs as operators
- Sub-national and Municipal PPPs- which tend to be smaller in scale and more localized
The role of SMEs on PPP projects has been analyzed from different sectors. Below are some documents on how pro-SME PPP regulations and policies have worked in practice.
Performance of the Transport Infrastructure Sector (Desempeño del Sector de Infrastructura del Transporte - original document in Spanish), August 2015 by the Superintendence of Corporations of Colombia, shows the results of a study done on the Colombian transportation infrastructure´s economic and financial situation, particularly indicating the special role of the SMEs in the sector. The research indicates, as one of the conclusions, that 78% of the companies from the construction subsector are SMEs, with an operational revenue of $4.9 trillion Colombian pesos by 2014.
Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries, 2014 by InfoDev/ World Bank Group, examines the role of SMEs in the climate and clean technology revolution. The study finds that there is $1.6 trillion worth of investment opportunity for SMEs in developing countries in the coming decade in climate and clean technology. The SME opportunity is largest in the wastewater treatment sector, with small hydro, water treatment, onshore wind power, solar PV, geothermal and bioenergy the next largest SME opportunities. The study looks in particular at solar energy in India and at bioenergy in Kenya. It gives practical advice on how governments can help support SMEs in the clean energy sector.
The engineering SMEs and their role in the transport sector (Las Pymes de Ingeniería y su Papel en el Sector Transporte) (in Spanish): This article highlights the role of the engineering SMEs in Colombia, especially in the development of the secondary and tertiary network, and maintenance of the country's infrastructure. Research done by the Asociación Nacional de Instituciones Financieras - Centro de Estudios Económicos for the Cámara Colombiana de Infraestructura (CCI).
Public-Private Sector Partnerships to Promote SME Participation in Global Value Chains: This is James Zhan's intervention at the Expert Meeting on Assessing the Impact of Public-Private Partnerships on Trade and Development in Developing Countries in Geneva, 2013. It highlights issues related to the promotion of SME in global value chains by the collaboration between the public and private sector.
Overcoming political risk for SMEs through infrastructure investment: This article explains the importance of the infrastructure sector for the economy of a country, and how SMEs can benefit from it, either by improving their businesses, or by leveraging their inherent local advantage (ie they would not face certain non-commercial risks as the direct foreign investors would.)
Recommendations of the Working Group on Engineering SMEs –Vice Presidency of Colombia. (Recomendaciones de la Mesa de Trabajo sobre PYMES de Ingenieria) (In Spanish): This document summarizes the recommendations of a working group that the Colombian Vice-President Germán Vargas Lleras created -composed of the Colombian Chamber of Infrastructure, National Agency of Infrastructure, Road National Institute, and the Vice-presidency of Colombia- in order to devise public policies that boost and promote construction and consultant SMEs in Colombia's infrastructure development. The recommendations aim to strengthen SMEs' industrial activity by opening the doors to "bigger and better work opportunities, in a wide market that offers equal options to all suitable bidders that want to participate in public bids". The recommendations target changes in the legal framework of the public procurement regarding the TORs in the public bidding, and in the contractual provisions and enabling requirements of the bidders, by giving precise and exact suggestions. For example, the recommendations include improving engineering SMEs’ access to financing, and other creative payment structures.
National Contractor Development Programme Framework - South Africa: This Contractor development framework aims to create opportunities for emerging contractors to build capacity, capability and sustainability to play a meaningful role in infrastructure development. It also promotes empowerment to redress historical imbalances.