Definition Of Public Private Partnership Construction Essay

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Governments worldwide have sought to increase the involvement of the private sector in the delivery of public services. These initiatives have taken many forms, such as the outright privatisation of previously state-owned industries, contracting out of certain services and the use of private finance in the provision of social infrastructure (Nielsen, 1997; Dulaimi, Alhashemi, Ling and Kumaraswamy, 2010). Public-Private Partnership (PPP) offers a long-term, sustainable approach to improving public service delivery and social infrastructure, enhancing the value of public assets and making better use of taxpayers' money (Akintoye, Beck and Hardcastle, 2003:a).

Such partnerships between the public and private sector are now accepted as an alternative to the traditional state provision of public facilities and services (Kent, 1998). Arguably, this joint approach allows the public sector client and the private sector supplier to blend their special skills and to achieve an outcome that neither party could achieve alone (Akintoye, Hardcastle, Beck, Chinyio and Asenova, 2003:b). Therefore, the first section of the literature in PPP examines the concept while focusing on the development of PPP globally, the drivers of PPP and the critical success factors of PPP. The second section of the literature reviews PPP in education, and the last section highlight examples of PPP in South Africa.

2.2.2 Definition of Public-Private Partnership

Literature about Public-Private Partnership (PPP) indicates that PPPs are notoriously difficult to define (Evans and Bowman, 2005; Hodge, 2005; Jefferies and McGeorge, 2008). Bettignies and Ross, (2004) point to the fact that PPP has been defined differently by academics, public agencies and international organisations, with the result that a universal definition to which all would agree is elusive. Weihe (2008) concludes that an authoritative definition of PPP, one that encompasses all the different variations of the concept currently in use, is still not logically possible.

Hodge and Greve (2005) defined PPP as institutional cooperation between the public and private sectors designed to increase the efficiency and effectiveness of public service delivery. Hayllar (2010) defines PPP as a contractual arrangement involving the private sector in the delivery of public services based on a partnership approach where the responsibility for the delivery of services is shared between the public and private sectors, both of which bring their complimentary skills to the enterprise. Van Ham and Koppenjan (2001) defined PPP as a cooperation of some sort of the durability between public and private actors in which they jointly develop products and services and share risks, costs and resources that are connected with these products.

In the United Kingdom (UK), HM Treasury defines PPP as a government desire to resolve financial constraints in the provision of public facilities and services by calling upon private management skills to increase the efficiency, effectiveness and quality of facilities and service delivery (HM Treasury, 2000). In South Africa, Treasury Regulation 16 of the Public Finance Management Act (PFMA) defines PPP as a contract between a public sector institution or municipality and a private party, in which the private party assumes substantial financial, technical and operational risk in the design, financing, building and operation of a project (Department of National Treasury, 2004). Therefore, the central elements embodied in these definitions include cooperation; sharing of responsibilities; decision-making power and authority; sharing of risks and rewards or mutual benefit; pursuing shared or compatible objectives and joint investment.

2.2.3 The concept of Public-Private Partnership

Public-Private Partnership has emerged as an important model governments use to close infrastructure gaps as it offers several benefits to governments trying to address infrastructure shortages or improve the efficiency of their organisations (Grimsey and Lewis, 2004). The involvement of the private sector in the development and financing of public facilities and services has increased substantially over the past decade. Approaches to these PPPs continue to be developed in order to draw the public and private sectors together to share the risks and rewards (Li, Akintoye, Edwards and Hardcastle, 2005).

PPPs are collaborations in which public and private sectors each bring their complementary skills to a project, with different levels of involvement and responsibility, for the sake of providing public services more efficiently (Chan, Lam, Chan, Cheung and Ke, 2010:a). PPP typically consist of voluntary, enduring arrangements that involve significant levels of resource-sharing and joint decision-making (Smith and Wohlstetter, 2006). Achieving value for money, especially from the taxpayers' perspective, is reflected as an element of PPP.

The concept of PPP is underpinned by a government's desire to resolve capacity constraints in the provision of public facilities and services by calling upon private management skills to increase the efficiency, effectiveness and quality of facilities, and services delivery (Li et al., 2005). The level of private sector involvement might range from simple service provision without recourse to public facilities, through service provision based on public facilities usage, up to and including full private ownership of public facilities and operation of their associated services (Li et al., 2005). These partnerships come in all sizes and types, which makes it difficult to group them in a consistent fashion (Akintoye et al., 2003:a).

2.2.3.1 Public-Private Partnership development globally

Globally, Public-Private Partnership arrangements are often entered into to accelerate the implementation of high-priority projects through advanced technologies that are usually not available through standard public procurement processes (Beh, 2010). Ideally, management resources are optimised to ensure quality, cost control and strict adherence to scheduled timelines.

The concept of PPP in the United States and Europe has existed for centuries, but has become more prominent in recent decades in local economic development of countries (Pierre, 1998). Some scholars note that it was the United Kingdom's (UK) Labour government that first introduced the PPP concept in the 1990s (Spackman, 2002); however, a review of the literature revealed that the PPP label has been in use since at least the late 1970s (Fosler and Berger, 1982), and that it first appeared in United States (US) urban policy literature. Yet, others state that the UK is leading the way in the development of PPP (Ghobadian, Gallear, O'Reagan and Viney, 2004).

The growing use of the Private Finance Initiative (PFI) has inspired governments worldwide to adopt PPP arrangements, as governments recognised their value (Yuan, Skibniewski, Li and Zheng, 2010). The Australian government has used PPP to deliver several social infrastructure projects (Yuan et al., 2010). In Malaysia, infrastructures PPPs are used mainly for projects in public transport, roads, waste management facilities, and water and wastewater services (Beh, 2010). In the Netherlands, most PPP projects occur in the areas of transport, housing and urban development (Klijn, 2009).

The US is a pioneer with contracting out and has started experimenting with other forms of PPP; emerging democracies form Central Europe are following suit (Yuan et al., 2010). However, problems in policy formulation and implementation as well as with corruption, supervision and a lack of access to investment capital have affected PPP growth. As in other countries, political accountability and risk management also are major issues in PPP endeavors (Beh, 2010).

2.2.3.2 Drivers of Public-Private Partnerships

The key drivers for involving the private sector in the provisioning of public services were (and are still) to address public sector budget deficits and to search for greater efficiency, creativity, satisfying growing demands, and the expectation of new and upgrading of existing ageing infrastructure (Grimsey and Lewis, 2004). Generally, PPPs can provide a wide variety of net benefits for a government. Chan, Lam, Chan, Cheung and Ke (2009) identified the drivers for adopting public-private partnerships.

Figure 6: Drivers of Public-Private Partnerships

Source: Chan et al 2009

2.2.3.2.1 Equitable Risk Sharing

The private sector is in general more efficient in asset procurement and service delivery than government, and, as a result, it is to government's advantage to share the associated risks with the private sector (Chan et al., 2009).

2.2.3.2.2 Cost Savings and Value for Money

Cost savings refers to the reduction in price as a result of delivering a project by PPP instead of traditional methods (Chan et al., 2009). The savings could be a result of the private sector's innovation and efficiency, which the public sector may not achieve (Grimsey and Lewis, 2004; Akintoye et al., 2003; Li et al., 2005). The private sector generally achieves higher operational efficiency in asset procurement and service delivery by applying their expertise, experience, innovative ideas or technology and continuous improvements. Therefore, the overall cost savings to the project can be achieved by striving for the lowest possible total life cycle costs while maximising profits (Chan, Lam, Chan, Cheung and Ke, 2010).

Value for money, defined by Grimsey and Lewis (2004) as the optimum combination of whole life cycle costs, risks, completion time and quality in order to meet public requirements, is another important consideration especially for the public sector (Chan et al., 2009; Grimsey and Lewis, 2004; Li et al., 2005).

2.2.3.2.3 Enhanced Asset Quality and Service Levels

Innovation is another important concept that the private sector can bring to public services. Generally speaking, the public sector may not be as innovative as is the private sector. The private sector is continuously searching for new products and services to increase their competitive edge and to save costs (Chan et al., 2009). The private sector is also made responsible for ensuring that the asset and service delivered meet pre-agreed quality benchmarks or standards throughout the life of the contract (Grimsey and Lewis, 2004).

2.2.3.2.4 Reduced Public Financing

To the government, PPP frees up fiscal funds for other areas of public service and improves cash flow management as high upfront capital expenditure is replaced by periodic service payments and provides cost certainty in place of uncertain calls for asset maintenance and replacement. Consequently, the public funding required for public services can be reduced and redirected to support sectors of higher priority, e.g., education, healthcare, community services, etc. (Chan et al., 2009).

2.2.3.2.5 Catalyst for the Economy

To the private sector participants, PPP provides access to public sector markets. If priced accurately and costs managed effectively, the projects can provide reasonable profits and investment returns on a long-term basis. Also, these projects tend to be large and therefore expertise from many areas is required; hence, cooperation among different collaborating parties is encouraged (Chan et al., 2009; Grimsey and Lewis, 2004). Business opportunities are also created, due to the large scope of works that can benefit different sectors (Chan et al., 2009).

2.2.3.3 Different approaches of Public-Private Partnership

Four general approaches are identified in the PPP literature according to Weihe (2008):

2.2.3.3.1 The Urban Regeneration Approach

In the urban regeneration approach the focus is on public-private partnerships in relation to urban economic renewal and development. This approach seems to have its roots primarily in the American urban governance literature. Urban regeneration partnerships are typically initiated by the response of private businesses to urban crises (Weihe, 2008). Private-to-private cooperation subsequently paves the way for a formal stage where public, private and nonprofit partners work together.

2.2.3.3.2 The Policy Approach

In the policy approach, the PPP term refers broadly to the relations between the public and private sector in certain policy areas and policy setups (Weihe, 2008). The PPP concept here does not necessarily encompass specific collaborative projects but focuses instead on describing and analysing public-private constellations within specific policy areas (Weihe, 2008).

2.2.3.3.3 The Infrastructure Approach

There are broad and narrow usages of the PPP term within the infrastructure approach. The narrow version includes only arrangements that include private finance and the bundling of design, construction, operation and/or maintenance into a single contract (Li et al., 2005). Particularly the presence of private finance, the allocation of risk to the private sector, and the integration of construction and maintenance/operation are defining characteristics of the narrow understanding of the infrastructure PPP. The broad version of the term however, covers all of the above-mentioned varieties, including for instance joint ventures, leasing and management contracts (Weihe, 2008).

2.2.3.3.4 The Development Approach

The central focus in the development approach is the achievement of development goals. Here PPPs are means to achieve such broad ends as to reduce poverty and social deprivation, reduce corruption and improve education. Although they are typically not directly engaged in partnerships, key actors in development PPPs are national and international non-governmental aid organisations. Their role lies primarily in that of promoting and creating environments conducive to PPP in recipient countries (Weihe, 2008).

2.2.3.4 Critical Success Factors of Public-Private Partnership

The term "critical success factor" is a business term for an element which is essential for an organisation or project to achieve its mission. A company may use the critical success factor method as a means for identifying the important elements of its success (Chan et al., 2010:a). Rockart (1982) defines Critical Success Factors (CSFs) as those few key areas of activity in which favourable results are absolutely necessary for a manager to reach his/her goals. The CSF methodology is a procedure that attempts to make explicit the key areas that are essential for management success (Li et al., 2005). One critical step in the development of CSF is to identify, analyse and categorise various factors that are critical to the success of PPP in general.

Zhang (2005), believes that a PPP project should be based on a public-private win-win principle. It should create a favorable environment and provide necessary support for private sector participation and establish effective measures to ensure that privatised projects and services are delivered at public acceptable standards and quality; government support and private sector inputs should thus be balanced. Therefore, CSFs are influenced by the context as they try to describe the areas that would enable management to achieve success (Dulaimi et al., 2010).

2.2.3.4.1 Description of Critical Success Factors

2.2.3.4.1.1 Favourable Investment Environment

The willingness of private sector investors and lenders to develop public infrastructure projects depends greatly on the environment where these projects operate (Hayllar, 2010). For PPP schemes to work there should be favourable political, legal, economic and commercial environments for private sector participation (Zhang & Kumaraswamy, 2001).The government is in a better position than any party in creating such environments, which largely eliminate fears of the private sector concerning various risks, especially political risks such as expropriation and nationalisation (Zhang, 2005).

2.2.3.4.1.2 Appropriate Risk Allocation via Reliable Contractual Agreements

The contractual arrangement is a CSF for construction projects (Hayllar, 2010). The identification and allocation of risks are an important issue in contractual arrangement which dictates both the type and content of the contract. Other important issues include the clear statement of the objectives of the contract and the obligations and rights of the contracting parties, adequacy and clarity of plans and technical specifications, a formal dispute resolution process, and motivation and incentives to the contracting parties (Zhang, 2005).

2.2.3.4.1.3 Economic Viability

Economic viability is critical to the success of any kind of project (Dulaimi et al., 2010). PPP projects are characterised by high capital outlay, long lead time and long operation period with a broad range of risks and uncertainties. The uncertainties bring risk into capital investment evaluation decisions and, consequently, new methods have been developed (Dulaimi et al., 2010). Therefore, for projects that are not financially viable but of significant economic value and political and environmental objectives, the government should provide necessary flexible project-specific support and/or guarantees to make them financially viable (Zhang, 2005).

2.2.3.4.1.4 Reliable Concessionaire Consortium with Strong Technical Strength

While the government is in a better position to create a favourable environment for private sector participation in public infrastructure development in general, private sector participants play a paramount role in the successful implementation of particular PPP projects (Zhang, 2005). Significant realignment of risks among multiple project participants is a striking feature of the PPP scheme, in which the concessionaire undertakes many more commitments and assumes much broader and deeper risks than a mere contractor (Zhang, 2005); therefore, selection of the right concessionaire which can be realised through a competitive tendering process (Chan et al., 2010:a) is critical to the success of the project.

2.2.3.4.1.5 Sound Financial Package

The PPP in infrastructure projects are often financed on a non-recourse or limited recourse basis (Zhang, 2005). A number of financial instruments may be used in project finance such as debt, equity, mezzanine finance, contractor, supplier and purchaser credit, or sureties. A sound revenue stream of the project is the basis of project finance as lenders and investors have recourse to no funds other than this revenue stream, and assets of the project may or may not have any residual value (Zhang, 2005).

Therefore, the financial package usually has a greater impact on the viability of a PPP project than the physical design or construction costs. Significant financial engineering efforts should be made to gear the great capital outlay of an infrastructure project to mesh with innovative financial instruments compatible with its projected cash flow (Chan et al., 2010:a).

2.2.3.4.2 Identification of Critical Success Factors

The identification of the CSFs will enable efficient allocation of limited resources. The CSFs can be identified based either on quantitative measures or on expert opinions (Zhang, 2005).

2.2.3.4.2.1 Critical Success Factors for PPP identified in previous studies

Research in and discussions about CSFs for PPPs have been previously conducted (Zhang, 2005). Tiong (1996) has identified six CSFs in winning Build-Operate-Transfer (BOT) contracts: (1) entrepreneurship and leadership; (2) right project identification; (3) strength of the consortium; (4) technical solution advantage; (5) financial package differentiation; and (6) differentiation in guarantees. Tiong and Alum (1997) have further identified distinctive elements of winning proposals in competitive BOT tendering from the sub-factors of the CSFs of technical solution advantage, financial package differentiation and differentiation in guarantees. Gupta and Narasimham (1998) in Zhang (2005) provide additional CSFs for promoters to win BOT contracts: ability to provide a suitable transfer package; built-in flexibility for future growth and changes; supportive and understanding community; and short construction period.

2.2.3.4.2.2 Critical Success Factors for PPP under Win-Win Principle

PPPs involve various kinds of risks that may emerge at different stages in the life cycle of a project (Zhang, 2005). PPPs are not merely a vehicle for governments to develop infrastructure projects by transferring all the risks to the private sector and thus shedding of all their responsibilities; rather, they require appropriate allocation and management of risks (Zhang, 2005). Therefore, a PPP project procurement protocol should be based on a public-private win-win principle. It should create a favourable environment and provide necessary support for private sector participation, and establish effective measures to ensure that privatised projects and services are delivered at public acceptable standards and quality. Governmental supports and private sector inputs should be balanced (Zhang, 2005).

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