Coursework: Partnership Involving the Private Sector and the Public Sector
Governments globally have progressively focused on giving infrastructure contracts to the private sector. These services are in power, energy, transport, water and communication sectors. Originally, provision of these services was carried out by the public sector, but in the recent past, governments have been involving the private sector. This paper will mainly focus on the reasons for partnership involving the private sector and the public sector. It will also study the advantages and disadvantages of private provision. Finally, this paper will look at what privatisation and outsourcing are, what is the role of management consultants and why there is a growing inequality in the industry, among other important factors in public private partnerships.
Reasons Why the UK Has Turned To PPP Partnerships
There are several reasons why the government in the UK has resulted to giving services through the private sector. The main reason is a growing need for improved efficiency in operation and project delivery. The private sector is often efficient and thus projects are completed on time[footnoteRef:1]. Another factor could be that the private sector has additional resources, which may not be the case in the public sector. These resources help in meeting the ever growing needs of services in infrastructure investment. The private sector also has access to technology that is advanced. There is also a need for sustainable development, especially in the provision of infrastructure services and facilities. [1: Chris Lonsdale, ‘Post Contractual Lock-In And The UK Finance Initiative (PFI) ‘, Public Administration, 2005. 85]
Since 1992 the United Kingdom has embraced a new type of partnership, involving both private and public sectors[footnoteRef:2]. It is known as the Private Finance Initiative (PFI). When designing PFI projects the best suited company to manage risk and projects is chosen. PFI contracts offer significantly improved practices in comparison to practices used in the past. Risks are better determined, unlike in the old days. The success though depends on the amount of risk shared between both sectors. This project considers accounting difficulties, presented by such projects. [2: Philip Cerny, ‘ The Competition State Today: From Raison Du Monde’. Policy studies, 2010. 31]
Private finance initiative could be regarded as a partnership involving, both the public and the private sectors. Therefore, the public sector usually purchases capital items from the private sector. There is a way of contracting out; in simple terms, the private sector is offered a contract to provide public services[footnoteRef:3]. Normally, in convectional procurement, the government contracts a builder to develop an asset that is designed by the government. The government then can operate the project or may then contract another provider or the same provider for operation. The problem with this kind of arrangement is that playing no role in the designing stages, the service provider finds that it is limiting hence services cannot be delivered efficiently. This lack of flexibility is what increases the cost of the asset, which typically takes about 25 to 30 years. [3: Mathew flinders, The Politics Of Public-Private Partnerships’ The British Journal Of Politics & International Relations, 2005. 7.]
PFI is different from privatisation. In the former, a big role is played by the public sector, especially in purchasing of services or enabling the project. It is also different in that, it does not contract out, because the services as well as asset capital are provided by the private sector. In many forms of PFI, the private sector builds finances, designs projects, and conducts operations in line with the specifications, which are determined by the public sector[footnoteRef:4]. The public service requirements may not be framed as input specifications that are precise but rather as outputs specification, which define the kind of services required. Once the contract ends, ownership may remain with either of the sectors. [4: CBI, Creative Ideas For Challenging Times: A CBI Public Services Board 2009 Campaign Review , London, CBI, 2010. 34.]
PFI projects may be small or big. The small ones include a schools’ infrastructure; the largest construction project in Europe (the channel Tunnel link) is worth about 4 billion Euros. The sector that has used public finance initiative is the transport department. This department accounts for more than 20 % of the PFI projects[footnoteRef:5]. [5: David Parker, The Official History Of Privatization: Volume 1 The Formative Years, London, Routledge, 2009. 8.]
The treasury of the UK stated that among the main objectives of PFI was to basically transform the bodies in the public sector form operators and owners of assets and instead become purchasers of those services from the private sector. PFI contracts generally take a long time, hence involving expenditure over the years; 30 and above. The public sector could lack funds to cater for the capital costs at that time but they can be paid later. The disadvantage is that the payments will be much higher and also the same, as projects are conventionally financed. Sometimes the costs can be higher.
The market economy as well as other economy sectors seems to be favoring public-private partnerships (PPPs), especially in the infrastructure development. The private participation can be viewed as a new addition to the existing relationship between the private and public sectors. Each country has its own way of implementing the PPP model so as to suit its administrative arrangements and systems, social, legal systems to help the country achieve its political objectives.
In PPP arrangements, each partner has responsibilities. They are shared through a contact(s) that is legally binding or a mechanism considered appropriate by both parties. The parties’ responsibilities are concerned with the project operation and implementation as well as its management. This kind of partnership or collaboration is usually built on each of the partner’s expertise, which must meet the public needs, which are clearly defined. The public needs make allocation of resources, rewards, risks as well as responsibilities possible. The terms and implementation details such as contract obligations, termination, payment arrangements and disputes resolution are usually negotiated and agreed on by both parties.
Advantages of PPPs to government
PPPs are attractive to the UK governments because they see it as an off-budget mechanism to develop infrastructure[footnoteRef:6]. This is because most of the times the arrangement does not require immediate cash spending. This is because projects, such as those of infrastructure, require huge amounts of money that the government may not have at the time the project is being started. [6: Harvey feigenbaurn, Shrinking The State: The Political Underpinnings Of Privatization, London, Routledge 1998. 56.]
The public sector benefits from PPPs in a number of ways. They include being relieved off the burden of designing and construction costs, sharing of risks between the two, the expectation that the project will be designed, operated and constructed better than if it was only one party, since there is sharing of knowledge and skills as well as experience.
The private sector usually considers the most favorable the whole time during which the project will exist, when calculating costs the project will take. This enables the government to get good value of the funds invested on the implementation of projects. In the conventional procurement, which was used by the public sector, the above was not possible, because different agencies take different roles. For example, one agency would take designing, another construction, while another is involved in the project operations and maintenance. This, in the end, increases costs.
There are many advantages in a PPP project than in the conventional construction. This is because the former is viable and can be developed to a robust business. PPP also focuses on giving specified services, which are well defined in the contract, as opposed to delivering a certain class of assets. They are preferred, because they have many advantages; PPP projects generally have better structure and are better designed[footnoteRef:7]. The feedback is got from potential providers interested in the project, especially during the procurement and project development stages. It also allows for projects to be screened thoroughly, therefore avoiding failures. A project, if it is bad, will not succeed, even if it is implemented by the private sector. [7: Wall, Tony. Public-private Partnerships in the Usa: Lessons to Be Learned for the United Kingdom. New York: Routledge, 2012.]
Misconceptions people have on PPP
PPP, being a relatively new concept, has been plagued with many misconceptions. Most of these arise as a result of lack of correct information. A common concern among the people is that the government does not have any stake in such projects. The government, contrary to the misconceptions, always has a stake[footnoteRef:8]. It may not participate directly, but it is always involved. It could be either through regulation of the processes, and other measures, including the legal procedures. The government is retaining some forms of control, which means that the public sector controls happens to the project in different ways. [8: Morton, Alastair. “Ppp Infrastructure – the Public Purse in Partnership with Private Sector Capital and Management.” (2002). 12.]
Other people are of the opinion that PPP is privatization, but it is not. This is because, privatisation means the full ownership of the project. This however is among the many PPP models and is rarely applied.
Disadvantages of PPP
Though PPPs are the solution to infrastructure development, it is not feasible to meet all the infrastructure needs through the mechanism. This is because of the limitations the method has. It has often been said that PPPs may be affordable but not always, especially if borrowed finance’ high cost is not offset through gains[footnoteRef:9]. [9: Ascher, William, and Corinne Krupp. Physical Infrastructure Development: Balancing the Growth, Equity, and Environmental Imperatives. New York: Palgrave Macmillan, 2010. 16.]
Depending on the type of the project, the poor may not benefit directly, though that basically depends on how the same project is designed. Sometimes, it may be cheaper for the government to implement the project than it would cost if the same was done through PPPs; this is especially true for small infrastructure projects.
Another major disadvantage is that PPP contracts take a long time as compared to a construction contract. As such, problems arise because of the long tenure. The relationships between the government agency that is contracting and the private provider may be strained and become very hard to manage. Good relations are important for success of the project.
The difference between PFI and PPP
PFI and PPP are very much alike. PFI could be described as a certain method, in which the private sector finances a project. In such a case, they build, design, operate and finance facilities. PPP is basically a term used to explain partnerships, which involve operating services or facilities and financing methods that are more flexible.
Partnerships date back in the 1950s and the 1960s when local governments and construction companies partnered to eliminate slums by providing subsidies in building of prefabricated high-rise buildings. In such partnerships these days, financers and contractors are usually guaranteed of being repaid, they manage their own facilities and can generate income through the use of a third party.
What Governments are doing to promote PPPs
The high growth of general economies in the recent past has led to unmatched requirements for services in infrastructure. PPPs, therefore, have become important alternatives in providing infrastructure services, whose demand has been growing rapidly. This is informed by the fact that traditional sources of funding infrastructure projects are insufficient to finance needs of these sectors. Availability of such funds from the private sector is not the only criterion that should be used before a government settles for such a project. This is because there are extra costs associated with private financing. Contingent liabilities and basic fiscal costs of PPPs on the implementing governments may arise either immediately or thereafter. There are also important social, economic, legal, administrative and political aspects that need to be assessed before any PPP can be approved[footnoteRef:10]. [10: Levy, Sidney M. Build, Operate, Transfer: Paving the Way for Tomorrow’s Infrastructure. New York: J. Wiley & Sons, 1996. 54.]
How the Government Justifies PFI/PPPs
The government admits that borrowing from the private sector is more costly. Nonetheless, it asserts that PFI/PPPs give more than just compensation by giving better money value because: one of the reasons is the innovativeness of the private sector in their designs, maintenance and construction during the contract life. Some people have also claimed that the private sector gives greater synergies and efficiencies between operation and design. There have been claims that PFI/PPPs usually result in much better services, better value and time for money as well as efficiency savings[footnoteRef:11]. The private sector also invests in providing only the best quality services and materials in the assets because that way it is cheaper to maintain such a project and operating costs are reduced. The market place discipline also ensures that risk is better managed by the private sector. [11: Judith Clinton, Francisco comic Daniel diaz, ‘Privitising Public Enterprises In The European Union 1960-2002: Ideological, Pragmatic, Inevitable. Journal of Eropean public policy, 2006. 13.]
There are limitations of PPPs, which include:
For different reasons, all projects may not work with PPPs. This is because the project may sometimes not be commercially viable, legal procedures may stall the process as well as because of different political interests.
Big projects that have high risks may not interest the private sector. This is because it may be too risky or the sector may lack the kind of resources required for such a project. The government may also find a certain project too expensive due to the high financing and transaction costs. This is true, especially if such costs are not off-set by the efficiency gains.
Ownership change of a certain infrastructure asset is not a guarantee that will improve the economic performance of the same if other necessary conditions are not met. Conditions, such as an appropriate sector and market reforms, are important in performance rating and improvement of that project. Changes in the management and operational practices in infrastructure operation among other factors need to be effected for change to be felt. Most often than not, a PPP`s success depends on the regulatory efficiency of a country.
Nonetheless, there are still advantages of using PPPs; governments of the majority of the countries view them as a striking off-budget mechanism that can deliver infrastructure services. Most governments, therefore, are promoting PPPs as an element of their strategy. In view of this, many countries have created an environment that is enabling such regulatory regimes, enacting necessary legal regimes and reforms in different sectors. Counties have also streamlined their administrative procedures and have come up with policies that promote PPPs. It is as a result that rail systems, new highways and ports have been built as a result of public-private partnerships to improve infrastructure[footnoteRef:12]. [12: Tony Bovaid, ‘Developing New Forms Of Partnership With The Market In The Procurement Of Public Services’, public administration, 2006. 84.]
For PPPs to work, a contract management system that is long term needs to be put in place. This is because a mechanism for administration is required as well as special skills to implement and develop PPPs projects in government. Power plants, airport facilities, telecommunication systems, sewerage and water systems are being built up as well as gas pipelines and the existing ones are being upgraded. This is because there is a demand for better systems. The monetary value of such projects ranges from several hundred thousand to over one billion Euros or US dollars. The PPPs projects are being implemented at all government levels: local, provincial or national. The energy and telecommunications sectors have led to growth of the private sector. This is then followed closely by the water and transport sectors.
In conclusion, governments worldwide are turning to PPPs. The major reason is that of accessibility of added resources and improved efficiency in terms of project delivery and operations through PPPs among many other factors. They are preferred, because they have many advantages; PPP projects generally have better structure and are better designed. This is because there is feedback from potential providers interested in the project, especially during the procurement and project development stages. It also allows for projects to be screened thoroughly, therefore avoiding failures. A project, if it is bad, will not succeed, even if it is implemented by the private sector.
PPP projects go through screening and as such, the best choice of technology selected for each project is based on being life-cycle costing. PPP projects are delivered with expertise and precision, especially if payment is based on performance. There is also a chance that most of the work will be completed by the set deadlines, because the private sector avoids excess costs; hence completion within the stipulated time and money, budgeted for the project, is guaranteed.
PPPs hold risks of default. Some risks can be turned to be government risks, especially if the project support was not crafted carefully. The slow progress of adoption of PPPs in many countries is due to misunderstanding of the requirements as well as the capacity constraints, found in the public sector. There are also many uncertainties in the approval of the processes. An unfavorable legal and policy regulatory environment does not foster the development of PPPs projects either. Consequently, in spite of a large number of possible projects, the deals could not be possible in many countries.