Why do governments use public private partnerships



Public private partnership is an agreement involving government and the private sector for the purpose of rehabilitating the public services and infrastructure. It helps both sectors to use the resources mutually for the sake of social development with the administrative skills of the private sector, (Rosenau, 2000) to unburden the government from potentially heavy expenditure of both human and capital resources, and to minimizing and dividing the risk of cost overruns to both of the sectors. (Walker and Johannes, 2003) Unlikely to privatization in which the public assets entirely transferred to the public sector, both government and public sector work together for the betterment of the public services. (McMillan, 2005).

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Particularly in United Kingdom PPPs are extensively used by The British Government to finance different public projects like (Deakin, 2002) the construction of schools & hospitals, military and defense contracts, and precise investment projects such as improvements to the London Underground, the National Air Traffic Services and the Channel Tunnel Rail Link. Inspite of high dependency upon the system it's also well criticized for exploiting the differences of both of the sector, some of the draw backs often highlighted by the critics that this system lacks the accountability with regard to capital allocation, risk factor, and performance.

Why do Governments use Public Private Partnerships?

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Some of the advantages that Public private partnership provides over the conventional methods attract governments to use it for the provision of public services. These include quicker delivery of the services, more innovation, improvement in overall process, potential value for money and transfer of risk. The government sector dealing with public services is also responsible to analyze the factor of value for money that whether it is feasible to use PPP for efficient delivery of services over any other conventional method. (Goldenkoff, 2001) Some governments also use PPP for its political benefits to transfer the responsibility of being accountable for a service quality. Public private partnership lies somewhere in the middle of privatization and nationalization as a neutral disposition. It proved as a third way or option for the government to deliver the public services.

Types of Public Private Partnership:

Public private partnerships can vary in:

• The understanding and nature of risk involved in the partnership

•The presence of negotiation skills in each of the partner to mark the contract

• The history of the partners in previous contracts and influence of ratepayers

One of the major factors that effect on different aspects of partnership agreements is the distribution of risk among the partners. (Grimsey and Lewis 2004) Aspects such as sharing of responsibilities, total amount invested by each of the partner and provision of rewards and outcome of the project following disscusion provides comprehensive analysis of different forms of ppps in practice.

1. Build-operate-transfer


It is the most preferred and widely used form of public private partnership in which the private sector takes the prime responsibility for number of different components of the project. Private sector is accountable for designing the outline of the project and taking care of total finance and overall operations necessary for the accomplishment of the project. Depending on the time frame of the project and the period of the concession which is normally 15-25 years. After earning the designated capital and profit from the project the private partner transfer the rights of ownership and control to the public partner

2. Build-own-operate (BOO)

An agreement in which private sector remains in control and ownership without defining any specific period this form of PPP is being used in the majority of public infrastructure services and facilities, including Local council administrations, sewerage system projects, recycling waste systems, infrastructure maintenance, public parking facilities, recreational developments, parks, street managements etc.

3. Leasing

Most usual form of PPP in which the financial risk involved in the project is transferred to the private partner. The borough undertakes the operation of building and designing a facility and after the completion it lease outs to the private sector or binding it into the contract. Afterwards private sector is solely responsible for operating, maintaining and developing the facility. It can improve the efficiency of constructions and provides the room for innovations.

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4. Joint ventures (JV)

A successful form being used mostly by the Japanese government for the local economic development in which both the public and private sector pool their finance jointly and sharing the outcome to already defined ratio. It also helps the public sector to unburden itself from heavy capital investment and high level of risk involved in the project.

5. Management contract or


Commonly used for managing operation or infrastructure-related services in which private sector plays a partial role and involved in the project only for providing expertise based on past projects and experiences. This partnership remains till the period ascertain in the contract. This form of PPP can be further customizable according to the needs of the projects. Some of the other sub-types of these forms are operate and maintain (OM). Design, build, finance operate (DBFO) and operate, maintain and manage (OMM). Management contracts usually ranges from 5 to 15 years in length.

6. Cooperative arrangements or

Public-private cooperation

The public sector ensures the private sector to provide extra fiscal incentives and it tries to attract private sector to bring more finance. It's all about creating opportunities for the private sector to invest and to engage it in some physical or infrastructural development and support the respective areas.

Common Misconceptions about Public Private Partnerships

The best way to understand a concept is to know "what it is not" due to the adversity of the concept and number of different forms by different school of thoughts makes it more complex and confusing. Sometimes none availability or lack of information regarding the actual theory results in misconception the most common of these misconceptions are:

• Mixing PPP with privatization:

Public private partnerships are often related to privatization. In concept and application they are not even near to each other. The only form of PPP that comes close to the privatization is known as Build-Own-Operate (BOO) and rest of the other forms involved a constant partnership between the public and privates sector. Even the form which comes close to privatization Build-Own-Operate requires an ongoing partnership in which certain regulations and conditions imposed on the private sector. The basic reason for the application of public private partnership in this context is to develop a competition for providing public services which is not possible in privatization. As in full privatization the monopoly of public sector is entirely transformed into the monopoly of private sector.

• By entering into a public private partnership, local government

loses control over the provision of services

Before engaging into public private partnership the public sector fears that it will lose control and command over the provision of services. Actually after entering into the partnership the public authority does not renounce its control over the implementation of its policies and regulations accounts for the provision of services. Public authority is on a stronger position to establish its ground rules and has the power and capability to tailor the contract to reflect its own interests

• Public private partnerships apply only to infrastructure projects

A public private partnership is so far successful way to facilitate the governments to provide public services in a very effective and innovative way. In case of heavy infrastructure projects it tends to draws the most public attention; public private partnership is also a suitable option for delivering the projects that do not involve any kind of capital services. Example includes road maintenance services, collection services and data services.

• The principal reason for local governments entering into public

private partnerships is to avoid debt

Most of the time the major reason for a public sector to enter into the public private partnership is to improve its capability to deal with different thing such as increasing the competition by collaborating with the more efficient private sector that result in diversity, innovation, non monopolistic approach, reduced implementation timing and that ultimately provides better value. In different cases the prime motive of public sector to engage into PPP could be to "off book" itself from the burden of heavy debt but that is not and should be not the usual case. The public sector and the ultimate users of the services are still accountable about the debt in any way. While the main focus of both of the sector should be on the innovative, creative and efficient ways of delivering services not on the debt or accounting

• The quality of service will decline under public private


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Whether the services are delivered through public private partnerships or in a conventional manner it does not impact on the Quality of services. It depends on the ability of both of the sectors that how much willing they are to improve the quality. It also depends what is agreed in the contract what quality control methods will be used to ensure and enforce the quality of services. What we have learned from the past and present figures about the public private partnership that it not only maintained quality but actually enhanced it. It is always favorable for private partner to invest in the services, which increase effectiveness, improves the quality of the services that will ultimately attracts more customers and will become a win-win situation for both of them.

• Local government staff will lose under public private


The public sector staff sometimes fears that they will be dominated by the private sector and they will lose their jobs or potential reduction in their salaries and wages if they will work under public private partnership. But in most of the countries like UK the labor laws does not permit this also if any of the Public private partnership results in sacking staff or reduction in wages then it's a clear violation of the labor contract. According to the the labor laws of UK the private partner ensures a public staff and guarantee job security and competitive level of salary. Unnecessary layoffs should be avoided because by increasing the investment in employees ensures high level of output and effective skill polishing.

• The cost of service will increase to pay for the private partner's


Cost is the major concern for the public sector to consider the partnership because it's a common belief of public sector that the services provided through public private partnership will be more costly and expensive. While from the perspective of private sector it should be profitable and it has to earn profit while maintaining the existing or lower cost of the services, in that case the public authority would only consider public private partnership if the cost of services remain lower than if provided only by the government itself or if the superior quality of services provided by the private sector in the same price. The private sector is only being profitable if they provide increased productivity or variety of services by keeping the prices low.

• Local government can finance the cost of services at a lower cost

than the private sector

It is in the capability of the public sector to borrow finance from Municipal Finance Authority and to execute the project at relatively low price then outsourcing it to private sector. But that's always not the case the overall advantages of the public private partnership is far more then the public only projects, so the main focus of the public sector should on the overall bounties of the public private partnership.

• There are only two partners in a public private partnership

If we analyze the nature of public private partnership from the narrow viewpoint, then it clears only two parties involved in the contract. In reality, number of different parties can be engage in the contract to achieve the target more efficiently and effectively. These parties could include the employees that are working for support and the most important Customer of the services who will be the end users. To make the partnership more successful and better provisions of services require an ideal four-way combination among these four partners.

When Should Public Private Partnerships be


Before considering public private partnership for outsourcing a project both of the sectors should navigate the advantages and efficiencies that will be achieved. Also it is very important to look for other possible alternatives. A public private partnership may or may not be the best option for accommodating a project or public service. All of the relevant factors should be take care of before initiating any decision. Different forms are available based on the division of risk and responsibility. Selecting the best form of PPP is the key to engaging into a successful partnership.

These forms are also based on the degree of expertise and complexity needed for settling a successful contract. PPPs should not be considered as an easy answer to every difficult situation or public servicing issues faced by the public sector. Maximizing the risk transfer also increase the expectations for incentives by the private sector that will result in the increasing need for a high degree of proficiency. Based on the discussion following are some of the advantages and disadvantages related with public private partnerships.

What are the Potential Benefits of Public Private Partnerships?

Public private partnerships may not be suitable as a solution for delivering every public service. Without examining whether the implementation of PPP is appropriate for the specific nature of Public service it can all go wrong and goal cannot be achieved as it supposed to be. So before proceeding with PPP both parties should critically investigate the potential risks and benefits of Public private partnership. When it is used accordingly then following are the potential benefits that can be achieved while using Public private partnership as a mode of delivering public services.

Potential benefits include:

• Cost savings

One of the major benefit that Public private partnership provide to both government and private sector is that both of sectors are able to utilize each other's financial resources so they don't need to borrow anything from any financial institution. In that way both will be able to save the cost of debt which otherwise have to bear on borrowings (loan). With public private partnership, both of the sectors enjoys cost savings at different stages it varies with the nature of the public services like construction of infrastructure, management of operations and service maintenance. Cost saving in construction can often be achieved by combining the process of designing and construction in the same contract. When both designers and constructors interact with each other in the same environment and on same ground levels then the outcome produce by the team will be less costly and more innovative. The efficiency of the process will increase the construction time will decrease resulting in saving the labor cost and that will help in putting the facility in use quickly. The cost for the management and maintaining activities by the professionals will be reduced overall while reducing the risk of project overruns. The private sector can reduce cost by implementing the concept of economies of scale where goods are produces high in number to decrease per unit cost, the concept of just in time can also be implemented to save time and storage costs. More research and innovation can also helps to reduce the overhead cost.

• Risk sharing

With public private partnership, both government and private partner share the risk. Risks such as high capital costs, risk of insufficient revenues, risk of less expertise and lack of knowledge in certain public services, inability to deliver some public services in a certain time frame, risk of overall inability to execute a project on the bases of available resources, or a risk of not complying with the rules and regulation or environmental related issues.

• Improved levels of service or maintaining existing levels of service

If two organizations join together bring their own culture together results diversification and increased innovation to attempt the provision of services. It also helps in implementing new technologies and to come up to a solution with mutual understanding helps in improving the quality of services or maintaining the level with minimizing the cost factor.

• Enhancement of revenues

The new and more enhanced ways of generating revenues can be identified in Public private partnerships. Both sectors jointly set fees for the users of the services that not only cover the cost of the service but also generate marginal profit. Public private partnerships also helps in implementing more effective methods of generating revenues that otherwise not be possible if using conventional procedure of delivering public services

• More efficient implementation

Activities such as decision making, managing, constructing, designing and procurement can be combined together to achieve efficiency. This not only helps quicker delivery of services but also reduce the overall cost which ultimately results in smoother process in very effective and efficient manner.

• Economic benefits

Government sector is more powerful sector when it increases its involvement in public private partnership then it creates opportunities for the private sector to stimulate its business and further strive to boost its economic growth and create employment. After getting experienced and becoming expert in public private partnership the private firm can also provide their expertise and can earn some extra.

What are the Potential Risks of Public Private Partnerships?

There are some risks and benefits associated to consider the implementation public private partnership just like any other conventional method of delivering public services. These risks and drawbacks can be reduced or eliminated if these are tackled with proper strategy and understanding its nature. (Bennett et al., 2004) Involving the stakeholders in decision making can boost the confidence in dealing with the risks and also in the interest of both of the parties.

Potential risks include:

• Loss of control by local government

As discussed earlier that it's a common misconception that in every Public private partnership the government or the public sector loses its control over the decision making and implementation of its interest. But sometimes it really can happen. Due to its nature of involving the risk sharing factor and distribution of decision making power the private partner would like to take a slight edge. It can be disputable concern among the partners that who will control the price standards and the delivery of the services. This issue can be sort out while signing the contract where both of the parties come to a point and define each other's position in controlling and maintaining the services according to the stakes invested. The government has to ensure the protection of public interests and has a responsibility and authority to keep the servicing standards in check.

• Increased costs

While making the price or fees policies for the delivery of service not every government or the public firm considers the actual costs of making these services accessible to public. For example, the price of individual services is calculated without including the costs of depreciation and other overhead costs like administration. Some time the government has to subsidies the prices for the certain services. But in case of public private partnership each and every cost has to be included in the pricing policy which increases the price which the end user has to bear. Creating more complex policy for the sake of increasing the fees makes public private partnership insignificant for certain type of services.

• Political risks

We have a plenty of examples where governments in UK have an extensive involvement in public private partnerships. Lack of knowledge and experience of the stakeholders and government about the public private partnership can increase the political risks and make it more vulnerable in political environment. Government is capable of reducing such risks by using different options such as understanding the nature of public private partnerships while engaging in to a less complex and simpler form of public private partnership.

• Unacceptable levels of accountability

Usually the services that are provided by the government are more sensitive than others because they are more visible to the public and it needs more transparent approach to accountability. So in case of public private partnership, (Broadbent and Laughlin, 1999) the accountability factor for the services that are being provided are not clear and accessible to the normal public if compared to the conventional system. This drawback of the partnership may result in criticism by the public on the private partner to not taking public into account. Government can counter this criticism by properly responding the public about their demands.

• Unreliable service

In some situations the private partners can face some uncertainties or some unexpected problems like financial deficit and labor disputes that may prevent them to meet the target or commitment in the time frame. In such cases where chances of uncertainties are high the partnership contract should be design in way that it can support both of the parties in difficult scenarios.

• Inability to benefit from competition

One of the reasons that governments chose PPP is that it can create a healthy Competition in the market and every private partner can get equal chance to win a contract so it can take advantages of diminishing costs, achieving efficiency and bring innovation out of this competition. Incase if the number of private firms competing for the contract are less then instead of creating competition it will create monopoly and power of negotiation will transfer to the private partner. The government needs to be stronger if not then it cannot take any benefit from the competition.

• Reduced quality or efficiency of service

Again it depends on how well the paper work is executed in reality and how properly public private partnership contract is structured. If the possible risks are underestimated and not much effort is put up in realizing the importance of different functions of the contract then much worse should be expected. The result could be fall in the quality of the service, lack in service maintenance, increasing costs and inefficient provision of the services.

• Labour issues

In public private partnership arrangement the labor sector might feel uneasy in working with the new bosses and new chain of command. They might need time to adjust themselves for working under new management and hierarchy. The labor unions might react adversely and oppose the arrangement which they can do under the labor law for public private partnership.

Public private partnership in u.k

As our focus is more precisely on the use public private partnership In United Kingdom so further discussion will be on the role of PPP in public projects in UK's economy, the main form of PPP being used in UK is the Private Finance Initiative (PFI).

Public finance initiative

Introduction & features

The private sector in utilized in different countries around the world to provide the services like designing, constructing, financing, operating and managing the public infrastructure. For this purpose we have number of different models available such as PFI (private finance initiative), BOOT (build-own-operate-transfer), and DBFO (design-build-finance-operate). With the slight differences all fall under the heading of PPP (public private partnership). Particularly in UK the main model being used is PFI and for the other wide range of complex partnerships between public and private sector the term that is used is PPP.

Following are some of the features that make PFI suitable for the economy like UK.

Contractor responsible for capital investment.

It is expected from the contractor to invest heavily in infrastructure related services like Roads, buildings or IT-systems. The contractor usually obtains such heavy investment by using the private resources that includes issuing of debt securities and equity.

All operational tasks in one package.

Unlike other conventional methods in which each operational task is outsourced separately like cleaning, maintenance, heating, PFI combines the number of different operational tasks all together in a one package to outsource it in one long-term contract. That helps in reducing the costs and enables the contractor to look for more innovations.

Payment after performance analysis.

In PFI contracts the payment made is not based on the input and output it actually based on the performance and the quality of service provided by the contractor. It helps to keep check on the performance on regular basis and also enforce the quality control factor more effectively.

History of Pfi's in uk

It all started in the era of conservative government in 1992 which was considered as a period of declining investment in the sector of public infrastructure. (Heafey and King, 2007). The conservatives recognize the potential in PFI and announced that it will use this method extensively while improving the provision of public services this strategy of the conservative was opposed by the labour party which was sitting in opposition at that time. When labour party came into power in 1997 its attitude towards considering PFI as a major mode of delivering the public services turned into positive.

The figures suggested an increase in PFI based projects for Example, the total number of PFI based projects from 1997 to 2003 were 563 and the total financial value of these projects were £35.5 billion and about ninety percent of total projects was contracted after 1997 (Her Majesty's Treasury (HMT) 2003). The annual PFI projects increased from nine projects valuing £667 million to sixty-five projects valued at £7.6 billion (HMT 2003), while according to the current figures the total number of PFI projects by 2010 is increased to 200 valued at £26 billion (HMT 2010). PFI is re-branded by the labour party under the umbrella of Public-Private Partnerships to make it more compatible and friendlier and to remove some political risks from it.

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(HM treasury 2009)

Provision of Value for Money by PPP in UK

According to the facts and figures available on the HM treasury website and evaluation of public services that are provisioned by using public private partnerships PPPs are turning to be the most ideal method available to deal with the public services. These actually proved to be value maximizing in Britain's public services. With the better management of capital and minimizing the cost factor the government is more in position to serve the public more efficiently, effectively quickly and with the higher standards.

Public private partnership's advantages can be seen in almost every sector of public services. For example:

Health sector: After the government reformatted the structure of national health services (NHS) with the Private Finance Initiative, multiple number of new major projects have been signed initially the total value of these projects were over £3 billion consisting of total 35 major hospitals.

Education sector: Same in the education sector, the government of UK is currently working on different grouped and individual projects covering 520 schools and a number of them are still in pipeline. Some innovative projects in context to the government's new reform of the education sector including the catering services to Lewisham's 90 schools and implementation of new IT related infrastructure for Dudley's 104 schools are near competition. Many of such projects are in completion process more quickly if compared them to the conventional methods. A number of major projects are only made possible by PPP which could have remained on paper for always.

Even on smaller scale PPP proved to be highly useful for example projects like management of sewerage services in kinnegar, northern Ireland and the upgrading the old street lights in Brent, north London.

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