PUBLIC PRIVATE PARTNERSHIP:Origins, The Desired Outcomes of PPPs

<< HUMAN DEVELOPMENT & ECONOMIC GROWTH (1975 TO 2003):

PRINCIPLES OF PUBLIC PRIVATE PARTNERSHIP (PPP):Situation in Pakistan, >>

Human Resource Development (HRM-627)

Lesson 38

PUBLIC PRIVATE PARTNERSHIP

Public-private partnership (PPP) is a system in which a government service or private business venture is

funded and operated through a partnership of government and one or more private sector (Ferlie et al., 2005).

PPP is also defined as a contractual agreement formed between public and private sector partners, which allows

more private sector participation than is traditional. The agreement usually involves a government agency

contracting with a private company to renovate, construct, operate, maintain, and/or manage a facility or

system while the public sector usually retains ownership in the facility or system, the private sector will be given

additional decision rights in determining how the project or task will be completed.

The above description of PPP emphasizes following points:

1. Sharing of responsibility between public and private sectors

2. Risk sharing between the two partners through sharing responsibilities and resources

3. Reward sharing arising from the same arrangement of responsibilities and resource sharing.

Typically, a private sector consortium forms a special company called a "special purpose vehicle" (SPV) to

build and maintain the asset. The consortium is usually made up of a building contractor, a maintenance

company and a bank lender. It is the SPV that signs the contract with the government and with subcontractors

to build the facility and then maintain it. A typical PPP example would be a hospital building financed and

constructed by a private developer and then leased to the hospital authority. The private developer then acts as

landlord, providing housekeeping and other non medical services while the hospital itself provides medical

services

Origins

Pressure to change the standard model of Public Procurement arose initially from concerns about the level of

public debt, which grew rapidly during the macroeconomic dislocation of the 1970s and 1980s. Governments

sought to encourage private investment in infrastructure, initially on the basis of accounting fallacies arising

from the fact that public accounts did not distinguish between recurrent and capital expenditure.

The idea that private provision of infrastructure represented a way of providing infrastructure at no cost to the

public has now been generally abandoned, interest in alternatives to the standard model of public procurement

persisted. In particular, it has been argued that models involving an enhanced role for the private sector, with a

single private sector organization taking responsibility for most aspects of service provisions for a given

project, could yield an improved allocation of risk, while maintaining public accountability for essential aspects

of service provision.

Initially, most public-private partnerships were negotiated individually, as one-off deals. In 1992, however, the

Conservative government of John Major in the UK introduced the Private Finance Initiative (PFI), the first

systematic program aimed at encouraging public-private partnerships. The Labor government of Tony Blair

elected in 1997, persisted with the PFI sought to shift the emphasis to the achievement of "value for money"

mainly through an appropriate allocation of risk.

Early problems

Because of the focus on avoiding increases in public debt, many private infrastructure projects in the early

1990s involved provision of services at substantially higher cost than could have been achieved under the

standard model of public procurement. The central problem was that private investors demanded and received

a rate of return that was higher than the government's bond rate, even though most or all of the income risk

associated with the project was borne by the public sector.

A number of Australian studies of early initiatives to promote private investment in infrastructure reached the

conclusion that, in most cases, the schemes being proposed were inferior to the standard model of public

procurement based on competitively tendered construction of publicly owned assets. One response to these

negative findings was the development of formal procedures for the assessment of PPPs in which the central

focus was on "value for money" rather than reductions in debt. The underlying framework was one in which

value for money was achieved by an appropriate allocation of risk. These assessment procedures were

incorporated in the Private Finance Initiative and its Australian counterparts from the late 1990s onwards.

Later Developments

Public-Private Partnerships (PPPs) combine the resources of government with those of private agents

(businesses or not-for-profit bodies) in order to deliver societal goals (oxford handbook). Historically, in Asia,

130

Human Resource Development (HRM-627)

the notion of PPPs is difficult to translate to societies whose cultural and political traditions do not easily

accommodate the western distinctions between private sector and state (Common, 2000). PPPs in sub-

continent, Africa, and Latin America are associated as much with meeting basic needs through small-scale

initiatives as reforming large state owned enterprises in the light of internationally directed structural

adjustment policies (Batley and Larbi, 2004).

Governments have the option to realize societal goals either directly, through their own employees and

collectively controlled facilities, or indirectly by means of private businesses and not-for-profit organizations

(Osborne and Gaebler, 1992; Williamson, 1996). It's crucial to realize that PPPs should not be treated as a fad

or as a matter of whim and fancy. They are to be treated as institutions rooted in the specific political, structural

and social setup of a particular country.

Five different forms of PPPs can be distinguished in the literature and are described briefly below while the

distinction between these forms in terms of time scale, financing, and partner relationships is shown in Table 1.

Forms of Public-Private Partnerships

1. Public Leverage: This form of PPP occurs where governments use their resources, mainly legal and

financial, to spur economic activity. For example, the use of subsidies to stimulate a particular sector of

economy like Agriculture is a form of public leverage where the need for government itself to develop

and manage the services is avoided.

2. Contracting-out and Competitive Tendering: In this case government defines what services are to be

made available and to what standard, and then contracts out the provision to a business or not-for-

profit organization. The process of contracting-out the services is a logical outcome of a competitive

tendering process. Since government can specify the nature of services it wishes to be delivered

through competitive tendering, the process results in improved service quality. There are, however,

enduring problems in defining the qualitative aspects of a service, especially where service users are ill-

defined (as in the case of a street cleaning service), are not able to offer an opinion (such as those in

receipt of a medical service). The ability of contracting-out to realize its benefits is dependent on two e

conditions of market competition and government capacity in terms of procedures, staff skills, and

cultures that must be transformed from the typical governmental hierarchical mode of supervising

direct service provision to that of service design and contract management. The literature indicates that

the reality of contracting-out for public services is more complex than what the theories indicate and

opportunism, information asymmetry, and complex principal-agent (government-contractor) chains,

compound the problem (oxford). The complexity of contracting-out increases further as one moves

away from basic municipal services into professional, health, and other social welfare provision, where

short term approach is not productive for the public good.

3. Franchising: In this case government awards license to a business or not-for-profit organization to

deliver a public service in which the service provider's revenue is in the form of user fees. In both

franchising and contracting-out, government is the arranger and a private organization is the producer,

but the two modes differ in terms of payment to the producer, in case of contracting-out, government

pays franchised services. The potential providers of service were required to bid a cash value to acquire

the franchising of train services in Great Britain after denationalization. The customer revenue stream

flowed to the franchise holder, but there were also public subsidies to maintain services on socially

desirable routes. Franchising provides a means of transferring operational responsibility to the business

sector, with government taking on the role of a distant public-interest regulator.

4. Joint Ventures and DBFO Partnerships: According to management literature joint ventures, "result in

the creation of a new organization that is formally independent of the parents, although the parent will

have some control" (Daft, 2001). The joint ventures are managed through a partnership agreement or

a separate corporate entity and are now used extensively to realize public goals for infrastructure

provision and renewal, including schools, public transport, hospitals, roads, air traffic service,

economic sectors, and prisons. They are typically referred to as public-private partnerships in the

European context and Private Finance Initiative (PFI) in the UK. The generic nomenclature is DBFO

(design-build-finance-operate). DBFO involves government starting its intentions in terms of output

and then entering into a long-term contractual relationship with a company or consortium of

companies who undertake to design, finance, and build the facility, and manage and deliver some of

the services associated with it. DBFO joint ventures offer potential benefits to the government in the

form of reduced debt, innovative solutions as specified by the government and, the transfer of risk of

the project to the private partner.

131

Human Resource Development (HRM-627)

5. Strategic Partnering: This type of arrangement between public and private agents involves a situation in

which there is boundarylessness in terms of distinction between the constituent parties and where

there are overlapping organizing practices intended to yield mutual beneficial outcomes, mostly in the

urban settings. As opposed to contracting-out, trust-based relationships cement the collaborative

endeavor between the organizations and replace the primacy of legal instruments and public suspicion

of the contractor guile. But strategic partnering has the potential to regress to the traditional

contracting-out approach because the institutional norms of government are not naturally suitable for

this style of working.

The Desired Outcomes of PPPs

As mentioned earlier, PPPs do not emerge as a matter of whim or fancy and at particular moments they seem

to offer solutions to public policy issues. Therefore, it is imperative to understand the overall benefits or

outcomes attained through proper utilization of the concept. Some of these broad beneficial outcomes are

briefly described below:

1. Cost Impact: Contracting-out, as studied in the American, British and Australian contexts, confirms

20, 30, and 40 percent cost reductions when compared with previous in-house provision. These

reductions arise from the following specific outcomes of contracting-out:

a. Reduction in staffing

b. Improved employment conditions

c. Reduction in administrative overheads

d. New management practices and regimes

2. Innovation Impact: The evidence on PPP as a stimulus to innovation is mixed. But there are studies on

schools and prisons where PFI schemes identified innovative solutions in relation to construction and

the control and monitoring of prisoner movements.

3. Impact on Quality: The impact of PPPs on service quality are much more difficult to monitor and

there is a paucity of research studies measuring the quality impact of PPPs. However, some

conclusions can be drawn:

a. Problems of information asymmetry, limited government capacity and regulatory capture can

lead to quality shading

b. The use of contracting-out, franchising, and joint ventures reduces the vertical integration of a

service as organizational matters and issues are placed under different management structures

4. The Public Governance Impact of PPPs, Hybridity: In the strictest sense of organization theory, a

hybrid structure is the one that combines characteristics of various approaches like functional,

divisional, geographical, or horizontal structures to take advantage of the strengths of various

structures and to avoid some of the weaknesses (Daft, 2001). In the context of PPPs, business models

are imported into the public sphere and the new organizational forms that emerge are hybrids

organizational arrangements that use resources/and or governance structures from more than one

existing organizations. It is frequently easier to define hybrids by exclusion (not government, not

private sector) than by inclusion. The issue of tension within a hybrid between public accountability

and commercial acumen will be highlighted later in this report.

5. Stronger working relations between the partners building long-term trust and mutual cooperation.

6. Faster delivery of services due to the involvement of private sector and its way of working.

7. Reduction of financial constraints as private funds are made available to be used in delivering services

to the public.

8. Integration, in terms of design, construction, maintenance and operation between the partners

9. Greater choice available to either design or build (DB), design/build/operate/maintain (DBOM),

design/finance/operate/maintain (DFOM). These choices increase the options available to the

partners to chose, as per their own strengths and expertise.

10. Increased sense of competition due to the involvement of private sector

11. Risk sharing and better risk management for the partners because the responsibilities, resources and

rewards are also shared.

From Public Private Partnership (PPP) to Public Social Private Partnership (PSPP)

The name "public social private partnership" (PSPP) is a development of Public Private Partnership (PPP).

PPP is one expression of a strong trend towards privatization, which in some European countries has arisen as

132

Human Resource Development (HRM-627)

a result of more difficult economic conditions in recent years and the associated structural crisis in the public

sector. The growth in PPPs as a way of fulfilling public tasks in partnership between the state administration

and private enterprises must be seen in this context.

The term PPP has gained currency for this increased cooperation of government with private partners in the

German-speaking countries since about the middle of the 1990s.

Public private partnership contrasted with conventional provision of public services

PPPs can be said to differ from other forms of provision of public services in the following 3 points: In PPPs,

the ownership of the project is shared. The heart of a PPP is thus the sharing of risks and profits. Compared to

providing the service directly, in a PPP the state can concentrate on its core competences. The state does not

need to allocate experts of its own for the implementation of the project and is thus less intimately involved.

Additionally, PPPs exhibit a trend away from conventional, tax-based financing approaches towards financing

through contributions of individual users (e.g. tolls for motorways).

In the social services sector, PPPs have been implemented mainly in the health services and overseas

development until now. As current discussions about PPPs in the social services sector show, this sector has

special requirements and will need special conditions and criteria for possible PPPs. The definition of goals is a

particularly central and sensitive issue in finding a suitable form and modalities of implementation of PPPs in

this area. Existing types of PPP will likely need to be modified to include extra mechanisms and criteria in order

to function adequately in social services. In other words, public social private partnership (PSPP) is not merely

an extension of the PPP idea, but a pre-condition for ensuring that a PPP with a social goal:

· will assure and implement the public aims, agendas and tasks in the sense of community benefit,

welfare, etc.

· agendas and aims of cooperation's are adhered to and sustained in the mid- and long-term

· and that the necessary conditions and resources (e.g. financing) for sustainable results are planned and

applied suitably.

Application of a PPP model to fulfilling social aims for people in disadvantaged situations naturally leads to

expansion of the PPP to a PSPP. PSPP rather than PPP criteria become applicable when public aims such as

the common good and welfare are being pursued. In this area, all the mid- and long-term indicators of success

belonging to the agendas and goals of the cooperation depend on the correct adherence to PSPP specifications.

Partnership is in general a specific form of social interaction that implies that two or more actors work together

on activities chosen by them. The actors must be able to choose whether they will take part in the partnership

or not. A decision by a potential partner against joining the partnership in question must not threaten their

existence. The partners retain their separate identities. Partnership in a PSPP includes the three levels of

financing, project leadership and demand/placing of orders. In order to qualify as a PSPP, the "constitutive

partnership principles" must be fulfilled. The fulfillment of the "further partnership principles" is relevant for

the successful realization of a PSPP.

133

Table of Contents: