The Effectiveness Of Public Private Partnerships Business Essay

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Public private partnerships (PPPs) are intended to harness the incentives of private markets to the public interest criteria of the state. Private capital and private sector companies finance and operate infrastructure that previously was publicly funded and managed. Governments keen to reduce government spending and borrowing and aware that private enterprise can provide services at lower cost, have introduced PPP programmes in place of or to supplement direct state investment. This paper reviews the public private partnerships phenomenon and more specifically the effectiveness of this partnerships. A brief historical background, theoretical aspects, a case study, and a discussion about the effectiveness of PPP are presented in this paper in order to achieve its goal.

Historical Background

For many years, partnership working has been espoused by government at all levels and of whatever hue. Politicians ware always happy to associate themselves with the concept of working with others, but in reality they didn't want to share the power. About the same story happened with the bureaucrats at any level, whom credo was obfuscation to the clarity which true partnership working requires. By the mid-1980s the context had change significantly. The image of the public sector was eroded and the pressure to deliver public services more effectively was rising. The development of policy and subsequent projects to implement policies was becoming a much more complicated process. It could no longer be presumed that the government had the monopoly of wisdom (Geddes 2005). On top of this, the developments of communication technology lead to an explosion of information which changed policy making forever. And most important, there was a recognition that the public sector could not continue to finance everything up front, nor did it had a monopoly of management skills necessary. In consequence, private money and expertise had to play a full part in the process. By the mid-1990s, there was a willingness to recognize the benefits of sharing risks, rewards and benefits between the various sectors, the climate had changed significantly and true public private working and partnerships started to come into being (Akintoye, Beck & Hardcastle 2003).

Theoretical Concepts

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Public Private Partnerships combine the resources of government with those of private agents (businesses or non-for-profit bodies) in order to deliver societal goals. The forms taken by public-private partnerships include contracting-out of services, business management of public utilities and the design of hybrid organizations for risk sharing and co-production between government and private agents (Ferlie, Lynn & Pollitt 2005).

PPP involves a contract between a public sector authority and a private party, in which the private party provides a public service or project and assumes substantial financial, technical and operational risk in the project.

These definitions highlight a number of characteristics of a PPP:

It is a medium - to long-term relationship;

It is a relationship based on shared aspirations;

It can involve a range of partners;

It involves the sharing of risks, rewards and resources on the part of all the partners;

The aim is to deliver outcomes and services in the public interest on a continuously improving basis;

PPP models in the UK

Model

Definition

Asset sales

The sale of surplus public sector assets.

Wider Markets

Introducing the skills and finance of the private sector to help make better use of assets (both physical and intellectual) in the public sector.

Sales of business (by flotation or trade sale)

The sale of shares in state-owned businesses, by flotation or trade sale, with the sale of a minority (e.g. BNFL) or majority (e.g. CDC) stake.

Partnerships companies (e.g. NATS)

Introducing private sector ownership into state-owned business, while preserving the public interest and public policy objectives through legislation, regulation, partnership agreements, or retention by government of a special share.

Private finance initiative

The public sector contracts to purchase quality services, with defined outputs, on a long-term basis from the private sector, and includes maintaining or constructing the necessary infrastructure; the term also covers financially free-standing projects where the private sector supplier designs, builds, finances and then operates an asset.

Joint ventures

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Partnerships in which the public and private sector partners pool their assets, finance and expertise under joint management, so as to deliver long-term growth in value for both partners.

Partnership investments

Partnerships in which the public sector contributes to the funding of investment projects by private sector parties, to ensure that the public sector shares in the return generated by these investments.

Policy partnerships

Arrangements in which private sector individuals or parties are involved in the development or implementation of policy.

Source: HM Treasury, 2000

The public and private sectors partners can either form a new company or assume joint ownership of an existing company, which provides a service. Joint ventures are generally used in combination with other types of PPP (Akintoye, Beck & Hardcastle 2003).

Under joint ventures, the government acts as the regulator and active shareholder in the operating company. In this position, the government may share in the operating company's profits and ensures the wider political acceptability of its efforts. The private actor usually has the responsibility of performing the day-to-day management of the operation. The public and the private actors work together from the earliest stages, often forming an entity that provides a forum for direct dialogue between the public and the private sector partners as they work to develop the final project of the operation. This entity can take a whole range of forms, from a simple working group, in the simpler cases, to an institutional vehicle.

Effectiveness of PPPs

Generally, PPP procurement can provide a wide variety of net benefits for a government. Chief amongst these is the possibility of more and better projects being built and services being provided (HM Treasury, 1997).

In management, effectiveness relates to getting the right thing done. There is a series of actions that must be taken by both the public and the private sector actors to achieve effectiveness. This action or steps consist in facilitate creative and innovative approaches, reduce the cost and time to implement the project and access the skills, experience and latest technology available in order to deliver the most cost-effective product or service. For example, in the case of PPP procurement, the developer could build facilities that serve multiple purpose while being simultaneously used for a variety of specific community purposes. However, not all innovative solutions are satisfactory to users. In the USA, contracting out solid waste management did not improve levels of government and resident satisfaction with these services. A PPP offers the potential benefit of reducing costs or delivering higher quality for the same cost, both for the design-build phase of the project and for the operational phase of the project. The National Audit Office(NAO) stated that the average savings that can be achieved is around 20%. This figure was attacked by Arthur Andersen in 2000 and the fiscal studies made by Hall J. in 1998 shows that in the UK the contracting out arrangement achieved less than half the cost reduction than ware made in similar contracts by the private sector.

In a conventional procurement process, the government construction of major infrastructure projects is typically broken down into relatively small pieces and carried out over an extended period , with the initiation of each phase being tied to a multi-year capital plan. Additionally, acquiring the funds for major public construction projects often entails a complicated and lengthy process with an uncertain outcome (Utt 1999). The experience associated with the building of the Tate's Cairn Tunnel in Honk Kong have indicated that time reduction can be associated with PPPs.

Governments can gain new skills, technology and knowledge as a result of undertaking a PPP project. The PPP procurement process requires a rigorous analysis of the project including an analysis of opportunities for innovation. This can expand the government's expertise beyond that associated with a conventional procurement process (Akintoye, Beck & Hardcastle 2003).

Case study : UK defence

PPPs including in the UK 'private finance initiative' (PFIs) are part of a wider policy of 'privatisation' based on the expectation that the private sector provides services more efficiently and more effectively than the public sector. PPPs/PFIs permit an expansion of infrastructure provision; an expansion beyond what the state on its own could achieve given budgetary constraints and a lack of project management skills . At the same time, however, concerns have been raised about their true long-term costs and therefore on their ability to provide public investments more cheaply on a life-time cost basis. PFIs and now PPPs have been adopted in the UK in such areas as new government IT programmes, education, hospital building, waterways, road schemes, prison management, re-development of the London Underground, estate transfers by government departments and Ministry of Defence projects. The total value of capital projects is estimated at around £22.5bn.

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Defence is a sector that is dominated by 'national security' concerns and so might be expected to be resistant to PPP/PFI initiatives (e.g. 'national security cannot be left to partnerships with private industry'). It is a classic example of a public good that traditionally has involved both public finance and public provision. In fact, defence has adopted PPP/PFI initiatives as a major part of its efficiency programme and has been innovative in some of its partnering with private industry, so demonstrating opportunities for the private finance and private provision of some defence activities.

By 1996, PFI was announced as a recognised part of MoD's drive for increased efficiency and value for money. The Ministry identified six areas for PFI, comprising training, equipment, property and accommodation, support services, utilities and information technology. The Labour Government's 1998 Strategic Defence Review, which announced UK defence policy to the year 2015, made specific reference to the importance of private finance and PPPs as part of the continuing pursuit of improved efficiency in the defence sector. These efficiency savings are central to ensuring that MoD can adequately fund its new equipment programme. By early 2002, MoD had signed 42 PFI contracts with a capital value of over £2 billion with a further 40+ projects to a capital value of £12 billion under consideration.

PPPs/PFIs are, therefore, a central feature of the MoD's new procurement policy. They differ from complete privatisation in that the MoD retains the responsibility for ensuring service delivery, with the private sector investing in, managing and operating any capital assets needed for delivering the service. As the customer, the MoD pays directly for services or output, usually through a long-term contract, typically in excess of 10 years, with MoD payments covering the whole or the majority of the project cost. Policy requires that for all projects, MoD will only consider using its own capital funding resources if PFI and other forms of PPP have been demonstrated to be 'unworkable, inappropriate or uneconomic' (MoD, 2000a).

Examples of PFI/PPP contracts signed by MoD are shown in the following Table.

Project

Description

Value of contract (£m)

Duration (years)

Allenby/Connaught

Re-development of garrisons around Salisbury plain and Aldershot

845

30

Skynet 5

Range of satellite services

682

n.a.

Tri-Service White Fleet

Lex defence management to supply MoD's commercial vehicles

500

10

Main building re-development

Re-development of MoD main building, London

208.6

30

Roll-on/Roll-off strategic sealift

Provision of strategic sealift services: six vessels

950

25

Tank transporters

Heavy equipment transporters for army

290

20

Armoured vehicle training Services

Provision of gunnery and specialist driving AFV training services

102.4

30

Tri-service airfield support services

Fire/crash cover; fuelling; movements; airfield clearance; air traffic control

350

25

Medium support helicopter aircrew training facility

Training for Chinook, Merlin Mk3 and Puma

105

40

Attack helicopter training service

Training to support apache attack helicopter

165

30

Defence fixed telecommunications Service

Telecommunications services consisting of six services

70

10

Joint service command &staff college

Construction, IT, Furnishing and support, including some academic support

80

30

RAF Lossiemouth Family Quarters

Re-development of 279 married quarters

38.3

21

Source: MoD (2002).

PPP is highly flexible, embracing elements of PFI, contracting out and commercial exploitation applied to MoD services, activities and physical assets. MoD views PPP as representing 'a new way of identifying cost-effective solutions to requirements, and even to take advantage of opportunities for maximising the utilisation of MoD assets, whether irreducible spare capacity or intellectual property rights' (MoD, 1999, p. 7). The emphasis of MoD is on innovation by encouraging industry to offer innovative solutions that meet the output requirements faster and at lower costs, with a sharing of risks and rewards resulting in 'win-win' solutions. These aims and the accompanying rhetoric are attractive and persuasive; but appearances can be deceptive and need to be subject to critical scrutiny-carefully distinguishing myths, emotion and special pleading from statements which can be supported with reliable empirical evidence (D. Parker 2003)

To date, PPP/PFI in defence has been restricted to support activities. There remains, however, the option of applying the policy to front-line units and equipment. For example, equipment might be leased from defence firms rather than purchased for ownership by the Armed Forces. Defence firms would enter into long-term contracts offering to provide a guaranteed number of operationally available front-line equipment on a daily basis (e.g. combat aircraft, tanks, warships) with the contractor assuming responsibility for maintenance and repair over the life of the contract and eventually disposal of the equipment (e.g. nuclear-powered submarines). As with all PPP projects, such a proposal would be subject to the public sector comparator test. However, risk assessment would be a major challenge when writing such contracts, with the need to allow for the use, destruction and re-supply of equipment in conflicts and wars (currently, the Armed Forces bear such risks). Defence firms would also need guaranteed contracts with cancellation provisions before they would be willing to invest private funds in developing and producing highly specialised equipment where there might be only one buyer, for asset specificity reasons. For both MoD and defence contractors, writing such contracts appears to be a challenge, although these are all problems the Ministry 'solves' whenever it buys equipment for the Armed Forces. The interesting question is whether a PPP solution would be more efficient than the current arrangements, where the Armed Forces purchase and own their equipment and assume responsibility for its operational availability, maintenance and repair throughout its life cycle (none of which is costless). There is at least one published example where PFI was rejected in favor of a conventional approach. This occurred with combat support vehicles, where an investment appraisal showed that a PFI solution would not offer better value for money than buying vehicles and using military personnel (HCDC, 2002).

The conclusion of the analysis is that the use of PPPs will not necessarily lead to improved economic efficiency in defence procurement and that considerable care will need to be taken both in terms of negotiating PPPs, monitoring their performance, and in their renewal. The UK defence sector illustrates that PPPs involve significant transaction costs which must be set against any benefits in terms of economic efficiency incentives. This conclusion has significance going beyond the defence sector to other forms of PPPs sharing the same sort of uncertainties, both in the UK and internationally. The study suggests that the costs and benefits of PPPs must be carefully balanced against the costs and benefits of more traditional forms of public sector procurement. Future research could usefully focus on better quantification of PPP costs and benefits and identification of the circumstances in which information asymmetry problems can be overcome by developing true partnership relationships (D. Parker 2003).

Conclusions

The PPP movement is still in its infancy; many organizations in all sectors remain reluctant to share power and influence despite their acceptance of the added value which PPPs can bring. In most developed countries, PPPs are utilized to some degree or another in the provision of services or infrastructure. In Europe, the UK has taken a lead position in PPP procurement, especially the Labour Government took action to enhance PPPs within days of taking office in May 1997, allocating over £32 billion to various projects concerning hospitals, schools, water treatment and transport (HM Treasury 2000). For example, in 1999 around 40% of all PPPs in Europe by value occurred in the UK, compared with 8% in Germany, 4% in Spain and 9% in Italy, France and the Netherlands combined.

The effectiveness of the PPPs is still in debate, some believe that it gives way for opportunists to make a quick buck. The demand for cost-effective services had arise in the same time as public awareness of the public funds, driven by the recent economical constraints. Effectiveness can be and is achieved through the best interest and management, things that are no longer something exceptional, but a requisite for survival in the present times.

PPP is a key element in the Government's strategy for delivering modern, high quality services and promoting the UK's competitiveness (HM Treasury, 2000)