Public Private Partnership The Concepts And Theories Accounting Essay
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Published: Mon, 5 Dec 2016
Public Private Partnership has been inferred to as Public Action Partnership than a mechanism for providing services and good governance. The assumption, nevertheless, is that the process in which the citizen influences decision to be made by government or an organisation that is exclusive of profit lust is what is being referred to as public action while private partners are characterised by the signpost of profit desire.
Indeed, for many years, service provision to the citizenry has been dominated by government but the increasing call for more services couple with sparse resources and dwindling quality of services, alternative approaches where sought by government in order to acquire funds and deliver quality services to the public. As a way-out, therefore, the concept of public-private partnership came into being as an alternative way of reducing funding deficits and providing improvement in the quality of public services being delivered. This approach is part of the thinking that aroused in the “New Approach to Management” (Bojovi
This essay is contending that Public Private Partnership (PPP) is not eligible to be called Public Action as it is characterised with all the elements of cost recovery. In essence, PPP is just an instrument in which service are delivered to the general public.
Public Private Partnership: the Concepts and Theories
The concept of PPP has been described in several ways. The Agency theory, which is often called the principal-agent theory, shows the affiliation between the principals and agents and emphasise that the principals have the basic task of choosing and controlling their agents (Palmer, 2009).
The theory that sees parties engaging in exchange as contracting is called “transaction cost theory.” It emphasise that contract should account for both personal and social expenses while reaching a contract and further noted that the process of contracting could be costly because it includes cost of structuring, bonding, monitoring, negotiation and residual loss due to principal agent problem (Palmer, 2009).
Partnership under “evolutionary theory,” is about efficiency and prudent utilisation of available resources, which is aim at plummeting replication in the overhead expenses. The exchange and dependency theory, highlight on integrating disjointed policy landscape (Lyne, 2009). Others viewed PPP as a mechanism for management, financial arrangement and development. To others, PPP is just a language gimmick because it is privatisation in another way (Khanom, 2009).
In spite of the many perspectives on PPP, it has been defined as “an arrangement between two or more parties who have agreed to work cooperatively toward shared and/or compatible objectives and in which there is shared authority and responsibility; joint investment of resources; shared liability or risk taking; and ideally, mutual benefits” (Rodal and Mulder, 1992, The Scottish Parliament, 2001).
Types of Public-Private-Partnership
There are several types of Public-Private-Partnership. For instance, Kernaghan (1993) provided several classification of PPP, which include; collaborative partnership that allows each partner to have power in decision-making process; the operational partnership, on the other hand, emphasise more workload sharing than in decision-making; the contributory partnership is where support such as funding is provided by one partner and become less involve in other operational matters. In the case of consultative partnership, it is more of providing policy advice to public organisation.
Other kinds of PPP are “Financially free-standing projects, sale of services to the public sector and joint ventures.” According to Allan (1999) other types of PPP are; “Design (D); Build (B); Finance (F); Operate (O); Maintain (M); Own (O); Transfer (T); Lease (L); Develop (D) and Buy (B).”
Contracting in Public-Private-Partnership
According to Iossa, Spagnolo and Vellez, (2007), Public Private Partnership has no “one-size-fits-all” principle in designing contract because that lies on the objective and sector of the project. At any rate, contracting in PPP is largely done based on output specification approach. In this case, the basic standard services to be provided are defined by the public sector while the private-sector is responsible of deciding how to meet and improve the basic standards (National Association of State Chief Information Officers (NASCIO), 2006).
In PPP, there are several types of contracting and risk factors always define the nature of the system of contracting. In Iossa, Spagnolo and Vellez, (2007), the following are some of the kinds of contracting in Public Private Partnership:
Build-Operate-Transfer (BOT) Contract: In this type of contract, the private sector is responsible of building; operating and managing the assets while the public sector took over after the expiration of the contract.
Design-Build-Finance-Operate (DBFO): the private sector, in this type of contract is responsible and in-charge of all the stages of a given project for the provision of public service
Concession Contracts: in this type of contract, the private sector is responsible of financing, constructing new or modernising an existing facility and operate such facility for given period. The public sector took over after the expiration of the contract
Operation PFI: in this type of contract, services are sold directly to the public sector by the private partners instead of charging user fees. In this case, the private sector receives commitment of future payment from the public sector from the service being provided.
Management Contract: in management contract, the private sector operates and manages a public sector facility or asset and is remunerated through a fixed fee or other incentives based on meeting performance target.
Lease Contract: unlike management contract, in lease contract, the private sector operates and manages public facility but is allowed to charge final users. In this case, operation and risks are the responsibility of the private sector.
Joint Venture: in this type of contract, both the private and public sector jointly create a company for the provision of public service. This allows both partners to own shares and have representative of the board.
Affermage Contract: in this type of contract, the public sector is responsible of providing major capital in the investment while the private sector provide a small portion of that and allows to recover it by charging operating cost.
Collaborative Partnerships: These are often non-legal relationship between public and Private sector in order to achieve a common objective. These are usually in form of knowledge exchange or sharing of other resources.
Payment mechanisms are crucial elements in PPP contracts. This is the way in which the public sector is able to allocate risks and incentives on a given contract to the private sector. There are basically three payment methods. These are; “Cost-plus, fixed-price, and incentive payments.”
Cost-Plus Payment: In this payment system, the public sector usually reimburses a private partner for a documented construction project or operation cost carried out including a fixed fee.
Fixed-Price Payment: In this approach, the private sector received a fixed payment from the public sector for the services provided after certain basics and quality standards have been achieved.
Incentive Payment: This type of payment has two components – that of a fixed amount and another payment as compensation for the cost incurred.
Apart from the above, there are other types of payments to the private sectors which combine user charges and contribution from the public sector.
Strengths and Weaknesses of Public-Private-Partnership
Public-Private-Partnerships have it own strengths and weaknesses but this varies from project to project. The strengths of the PPP, according to Allan (1999), is that PPP allows for “leveraging of public funds, better management, allocation of risks, better incentives to perform, improved effectiveness, alternative revenue sources, access to economies of scale or scope, encouragement of multi-use infrastructure and improved service responsiveness.” In Haarhoff (2008), PPP allows the pooling of resources, it enhances effectiveness and efficiency through coordination, it creates legitimacy for government policies, it allows optimum allocation of risks, it gives value for money, speedy delivery of services; encourages trustworthiness, promote transfer and sharing of technology, facilitates training and create development avenues from business sectors.
The disadvantages of PPP as highlighted by Haarhoff (2008) are that; the PPP has sometimes unclear goals and difficult to enforce performance standards where there is bad customer relation. Similarly, the PPP are undermined by resource cost problems and unequal power relation which leads to tension among partners. For instance, some groups may try to impose their will against majority view.
It is also argued that PPP sometimes impede on other projects or services because funds meant for other services are diverted. Further, PPP failed if there is lack of support or capacity from the organisation. For instance, Samir (2008) pointed out that though PPP provide value for money, inefficient capacity from the regulators impede on effective implementation of the PPP.
Is PPP a Mechanism for Good Governance or a True Public Action Partnership?
The PPP has been celebrated, but all its attributes have the rudiments of business orientation. Indeed, the affiliation between partners cannot be better than that of “principal-agent.” The concept of PPP has been touted to be that of providing public services but public action is the role expected to be played by citizen at the course of their governance. According to Miraftab (2004) in PPP there is an “inherent conflict between profit-driven interests of the private sector and welfare-driven interests of the communities.”
There is no doubt that the PPP has the characteristics of good governance, however, transparency and accountability issues in most PPP contracts have been questioned. For example, commercial confidentiality clause has been used in some PPP contracts to undermine transparency. Also, in some cases, regulators that rely on what to be realised by the private sector for their funding often collude thus abandoning their role of ensuring accountability (Miraftab, 2004).
The Case Study
The case study examined a housing scheme in South-Africa between the local government and the private sector to provide 1millioon houses to the poor over a period of 5years (1994 -1999). Under the scheme, a subsidy of 17,000 Rand is paid directly to the private housing developer for every low-income household. Then the developer purchases land and build it on behalf of all qualified households (Miraftab, 2004).
But after 5years, the private developers were unable to meet the 1million housing target and those built were of poor quality and located in far remote areas which families refused to occupy because of fear of losing access to jobs opportunity. Nevertheless, the developers have deducted their margins of profit from the small subsidies and the amounts left available are too little to construct decent residential units (Miraftab, 2004).
This case study has shown that the combination of small subsidy provided by the government and the profit-drive of the private sector has led to the collapse of the scheme (Miraftab, 2004). As, therefore, argued above, the private sectors are more concern about profit than providing public services.
In this essay, as would be noticed that, PPP is used as a system of service delivery to the public; however, the profit-driven nature of the private sector has disqualified it to be a true Public Action Partnership. Even as a mechanism for good governance, the PPP has it shortcomings especially in using the confidentiality clause. On the whole, the PPP is more of an Principal-Agent relationship while the Public Action is concern with influencing decision rather than providing services.
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