Essay on Public Private Partnership (PPP) | Infrastructure | Finance

In this essay we will discuss about:- 1. Models of PPP 2. Main Criteria for PPP 3. Need 4. Frameworks 5. Constraints in Implementation 6. Applicability 7. Reasons for Popularity 8. Criticism. 

Essay # 1. Models of PPP:

There are various types of PPPs, established for different reasons, across a wide range of market segments, reflecting the different needs of governments for infrastructure services. Although the types vary, two broad categories of PPPs can be identified: the institutionalized kind that refers to all forms of joint ventures between public and private stakeholders, and contractual PPPs.

Concession Model:

Concessions, which have the longest history of public-private financing, are most associated with PPPs. By bringing private sector management, private funding and private sector know-how into the public sector, concessions have become the most established form of this kind of financing. They are contractual arrangements whereby a facility is given by the public to the private sector, which then operates the PPP for a certain period of time.

Oftentimes, this also means building and designing the facility as well. The normal terminology for these contracts describes more or less the functions they cover. Contracts that concern the largest number of functions are ‘concession’ and ‘design, build, finance and operate’ contracts, since they cover all the above mentioned elements: namely finance, design, construction, management and maintenance. They are often financed by user fees (e.g. for drinking water, gas and electricity, public transport etc. but not for ‘social PPPs’ e.g. health, prisons, courts, education and urban roads, as well as defence).  

Public Finance Initiative (PFI) Model:

In contrast to the concession model, financing schemes are structured differently. Under PFI schemes, privately financed contracts for public facilities and public works cover the same elements but, in general, are paid, for practical reasons, by a public authority and not by private users. For example, public lighting, hospitals, schools etc. come under such scheme.

There are a range of PPP models that allocate responsibilities and risks between the public and private partners in different ways.  

Essay # 2. Main Criteria for PPP:

The major criteria for entering into PPP collaborations are as follows:

1. A PPP represents collaboration, defined by contract between the public and private sector.

2. Co-existence of public and private sectors. The chief criterion of a PPP is that here both public and private sectors function together.

3. The partners’ contributions complement each other in a way that enables both to achieve their goals more efficiently within the given PPP than on their own.

4. Each partner formulates clear goals and communicates them to the other partner.

5. It is operated both by price system and the government directives.

6. Government regulations and control of both public and private sectors.

Essay # 3. Need for PPP:

Why would we invite the private partners into public services/government services/government owned enterprise? Why should we consider public private partnership.

These are:

1. Faster economic growth of the country

2. Providing basic infrastructure and encourage private sector participation in infrastructure provision

3. Providing policy stability to businesses to encourage investment and growth

4. Due to inefficiency, overstaffing and low productivity in government services and government-owned enterprises (GOEs)

5. Poor quality of goods and services in public services

6. Continuing losses and rising debts of for-profit government enterprises

7. Lack of managerial skills or sufficient managerial authority

8. Insufficient funds for needed capital investment

9. Under maintenance of facilities and equipment

10. Under utilised and underperforming assets

11. Increase in theft and corruption in Government Departments

12. Creating employment opportunities by developing the services sector.

Essay # 4. Frameworks of PPP:

a. Effectiveness:

1. Success in meeting the PPP objectives

2. Effectively managing and monitoring the delivery of the program

3. Scalability/Replicability

b. Efficiency:

1. Return on investment analysis

2. Affordability (public sector support)

3.  Reduction of economic inequalities

4. Developing and implementing a regulatory mechanism

c. Equity and political considerations:

1. Equity (access for poor and rural populations)

2. Political/trade union resistance

3. Contingent on wider public sector reform

4. Monopoly control

5. Consumer’s sovereignty protected.

d. Sustainability:

1. Economic returns to the private sector (within the medium to long-term)

2. Financing risk (within a long-term arrangement)

3. Private sector capability

4. Local stakeholders buy-in.

PPPs are now a central feature of ongoing efforts to modernise public services and infrastructure. Some sectors like power, ports, roads and urban development have done very good progress compared to limited success in other sectors.

Essay # 5. Constraints in Implementation of PPP:

The problems attached to the implementation of PPP strategy involves:

1. In the present financial scenario sufficient instruments as well as the ability to undertake long-term equity cannot be provided by the market.

2. It also calls for a conversion and regulation of the existing policies suited to the PPP structure. To achieve the desired results, active participation of various state projects is essential.

3. With the introduction of IFRS how these ownership arrangements will be dealt with is another area of concern.

4. Substantial support on the part of the stakeholders in favour of PPP is essential for its full fledged implementation.

5. It was also found by some experts that although maximum part of the risk associated with the project was borne by the public sector, the private investors obtained a higher rate of return than the Government’s bond rate.

Essay # 6. Applicability of PPP:

PPPs can be successful if the responsibility and risks shared between the public and private partners bear a high degree of complementarity, thus creating opportunities for profitable activities for all partners involved. It has also been found that public-private partnership is not always beneficent to the nation.

The PPP will be appropriate when:

1. There is a significant opportunity for private sector innovation in design, construction, service delivery, or use of an asset.

2. Clearly definable and measurable output specifications can be established suitable for payment on a services delivered basis.

3. An opportunity exists for the private sector partner to generate non-government streams of revenue, to help offset public sector costs.

4. Some risks can be transferred to the private sector.

5. Projects of a similar nature have been successfully developed using a similar method, and

6. The private sector has sufficient capacity, expertise and availability to successfully deliver project objectives.

Essay # 7. Reasons for Popularity of PPP:

The reasons for popularity of PPP are as follows:

1. The Millennium Development Goals represent clear objectives with regard to reducing world poverty and have thus increased the pressure on all countries to present positive results.

2. Limited governmental finance means require mobilising additional resources.

3. Improve cost-effectiveness. By taking advantage of private sector innovation, experience and flexibility, PPP can often deliver services more cost-effectively than traditional approaches.

4. Generate revenues, both by setting assets and then by collecting taxes.

5. Reduce public sector risk by transferring to the private partner those risks that can be better managed by the private partner.

6. Transferring risk to the private sector can reduce the potential for government cost overruns from unforeseen circumstances during project development or service delivery. Services are provided at a predictable cost, as set out in contract agreements.

7. Service delivery and customer satisfaction is important today. PPP initiate or expand a service quickly and improve service delivery by allowing both sectors to do what they do best.

8. Private sector partners are motivated to use facilities fully, and to make the most of commercial opportunities to maximise returns on their investments. This can result in higher levels of service, greater accessibility, and reduced occupancy costs for the public sector.

9. Private sector partners can profit from PPP by achieving efficiencies based on their managerial, technical, and financial and innovation capabilities. They can also expand their PPP capacity and expertise – or their expertise in a particular sector – which can then be leveraged to create additional business opportunities.

10. Reduce government debt, for instance, through debt-equity financing.

11. Public-private partnership reduces government’s capital costs, helping to bridge the gap between investment and development.

12. By collaborating with the private sector, the state can make use of technical know-how otherwise not available.

13. The collaboration with the private sector will lead to increased project sustainability and efficiency.

14. Supply of infrastructure or other facilities that government cannot otherwise provide.

15. In view of the worldwide opening of markets, developing countries are interested in forging contacts that will allow them to gain access to the international market.

16. Large corporations are often pressured to restore public trust into the private sector and improve their image.

17. Decentralise the economy and broaden the ownership of economic assets.

18. Show commitment to economic liberalisation and increase business confidence.

19. Many companies have invested in developing countries – e.g. with the aim of reducing production costs and have continued to play an important role in these countries.

20. Other companies are seeking to open new markets and are, therefore, interested in sharing the knowledge and networks of development agencies.

21. Public-private partnerships accelerate economic development.

22. Satisfy foreign lenders and attract foreign investment and encourage return of flight capital.

23. Improve living standards.

Essay # 8. Criticism against PPP:

The need for the private sector to take on more responsibility in the fight against poverty is widely acknowledged. For economic development and rural development, PPP promotion is compulsory in today’s life. Despite of its benefits, there are many constraints which required to be overcome by the government.

These are:

1. It is hardly possible to reconcile the interests of the private sector in profitability and income maximisation with the governmental objectives of poverty reduction and sustainable development within a single project.

2. Opposition by workers, public officials and bureaucrats – private participation in public services opposed by workers, public officials and bureaucrats.

3. Loss of Jobs – Workers and officials fears for loss of job and opposed the private participation.

4. Loss of Control – Government may loose control due to private participation.

5. Most sectors face a lot of hindrance in enabling a regulatory framework as well as a consolidated policy.

6. A PPP contains the risk that governmental funds are misused to subsidize private interests.

7. PPPs enable companies to externalize social and ecological costs (to the public partner).

8. PPPs can lead to preferential treatment of certain companies and can thus cause a distortion of normal trading conditions.

9. Particularly in the basic service and infrastructure sector (energy, water, health) PPPs are problematic, as they may lead to selling off the basic public services and neglecting the interests of the poor.

10. Fear of foreign ownership.