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Principals are now being frequently adopted in the governing agencies, belonging to both the developed and the developing nations, for the placement of the major projects in the private sector instead of the public sector's traditional domain. These agencies utilize the concessions to progress and keep up with the developments in the infrastructure and various other projects keeping in track with their organization's plans (Smith, 2008). The private and public partnerships (PPP) were created as a result initiating a different strategic approach which aimed at bonding the public and private sectors together in a long term partnership, to enable them in reaping mutual benefits with their joint efforts. These partnerships provide learning opportunities for both the developed and the developing countries through experiences.
The public and private partnerships (PPP) engage the private sector in the designing, financing, constructing phases, ownership and the operational requirements of the public sector utility area and the services. The traditional method of the state providing the public utilities and services are now no more practiced, but instead they have been replaced by the system of public and private partnership. The joint venture of the public and the private sector enables them to achieve unimaginable results as they combine their skills to achieve an objective which if attempted separately would have been impossible (Akintoye et al, 2003).
The following report will discuss the public private partnerships in detail. The report is divided into three sections in which the first will define these partnerships from different concepts. This method will be observed in the view of different case studies of the developed countries, especially while discussing the PPP implementation of projects in the construction sector. The various methods and approaches, differing from the traditional approach, implemented by the PPP as a result of the alliance approach, will be discussed in this part of the report. The second part of the report will contain a detailed discussion about the international and the domestic problems of the market. Methods to deal with these issues and the major risks will also be addressed. The end of the report will highlight the positive opportunities created for the (PPP) projects present in the developed and the developing nations. Aspects that support these opportunities will also be discussed and finally the report will be ended in a summary of the major points of discussion throughout the report.
What is Public Private Partnership (PPP) projects?
Definitions of PPPs projects.
According to an article, the term partnership, is too frequently misused and is a bit overused at times. But when this term is merged with 'Public and Private', then its versatility is increased and a more fashion sense is added to it, but without reducing any chance of it being misused (Ghobadian et al, 2004). Regarding the term 'public and private partnership' there has been a conflict in opinions, as some perceive it as a governing tool and others who take it as a language game. According to many people the PPP are linked to the infrastructure projects. These are arrangements between organizations that are recognized as new separate units functioning to achieve the target. The public private partnerships are perceived as financial models that enables the public sector to utilize the finances from the private sector, which increases opportunities for the government and the private sector (Hodge & Greve, 2007), although the PPP cannot be defined specifically in one definition.
'Public and private partnerships', according to Davies and Eustice (2005), are the types of collaborations existent between the public and the private sectors for the purpose of aiding funding, construction process, renovation process, management or maintenance of infrastructure and the provision of services.
The public and private partnership is actually a contract based relationship, in which the private party has the responsibility for all or some part of the government's processes. This engagement is in fact an agreement of the private concerns with the public sector agency to utilise the resources and mange the risks in a joint effort for the development of the public infrastructure and the public service. There are many instances of projects in the private sector where the schemes are not firm enough and have a weak financial base. Therefore the public sector is pushed forwards in contributing in sharing the financial burdens and the risks of such projects or vice versa. Various types of partnerships are covered in the label of public and private partnerships, such as:
The contribution of the private sector as the owners in the state owned businesses with the help of the wide range of the structures available.
The collaboration of the public and private sector as in the PPP, where the public sector purchases quality services from the private sector in form of a long term contract. This enables the public sector to benefit from the private sector management skills.
The government services can be sold to the other markets and to other types of arrangements (Treasury, 2000). .
Public and private partnerships are a sort of an alliance that enables the private and the public sectors to work in collaboration with each other in a long term relationship, to acquire a learning experience, with proper management to minimize the risks involved.
An over view ABOUT PPP projects implementations.
The concept of public and private partnerships has been familiar in many countries since a long time, but it was till the 1980's that the concept became popular. The PPP became common and was adopted in many versions as part of the privatisation movements and the government's efforts in the developed countries (Spiering & Dewulf, 2006).
Globally, the PPP is gaining much interest with the involvement of organizations on the local, regional, national and multinational scales. The financial and legal challenges linked with the PPP are now being boldly addressed by the public and the private sectors. They are now concerned with the adequate management system, that can be used to provide proper services (Grasman et al, 2008). Private investments in the public sector have been going on since the 18th century in the European countries, as is indicated by history. A good example is the, concession contract that was responsible for supplying drinking water to Paris. Many other cases were also observed, like the Suez Canal and the Trans Siberian Railway, turnpikes, railroads developments in Europe, America and the Asian countries. It was later in the 1990's that the PPP was actually implemented. The approach was frequently applied in the European countries especially England, till the 1997. The private organizations have been contributing in the facility developments such as the designing and construction. They are also involved in the financing of the projects as well as the ownership and the functional necessities of the projects. In fact the PPP has seen involvement of foreign organizations and international financial institutions instead of the domestic organizations (Tang et al, 2010).
The public and private partnerships was an ideal way of engaging the finance of the private sectors in the development processes and was frequently used as an alternative to other methods since the last decades (Davies & Eustice, 2005). This approach was especially utilized in the development of states since the beginning of times and is now been used in the modern world by the developed and the developing nations as an effective way of establishing collaborations with the domestic and the international countries. This way these companies are able to participate in the development of the major sectors of the country, such as shown in the table below:
Hospitals, Assisted Living Facilities.
Parks &Recreation, Sports Complexes.
Housing, Schools &Science Centres, Energy-Related, Water &Waste Treatment, Recycling.
Hotels, Information Systems, Shopping Malls.
Airports, Light/Heavy Railways, Ports, motorways,
TABLE me: PPP APPLICATION AREAS.
(Source: Grasman et al, 2008).
From all of this these different sectors give lot of opportunities for both sides as we shall see later in this essay.
The main objectives of using PPP approach.
The problems being currently faced by the public and private sector as well as the advantages of using PPP in these situations will be explored with practical solutions for the implementation of the PPP approach. The PPP has the capability of delivering a better result, in accordance with the value of money as compared to its alternates. But before its implementation, the pro's and the cons have to be evaluated as compared to other alternatives and with respect to the context (Davies & Eustice, 2005). According to observations, in case of participations, the public sector is seen to adjust the payment amounts to the lowest, so that the private sector will be able to invest in it and be able to deal with the financial risks involved.
The PPP.'s are a valuable source of provision of a strong valued propositions to the public sector in form of developed system of management and by minimizing the risks involved, while also providing ways and means of overcoming the financial restrictions and open roads to infrastructure development. And all of these possibilities are available with a reduced cost. The primary objective is to involve the professionals from the private and the public sector in adding the expertise in the processes of identification, negotiation, management and implementation of successful projects via exchange of experiences and knowledge. This also provides opportunities to test the best of practices for the future implementation (Grasman et al, 2008).
As can be noted from the above, the most important objectives of using PPP as follow:
The opportunity of delivering improved services with the help of improving quality and with the help of investments.
The public sector assets are utilized to its full potential including the state owned businesses which enables the provision of the value addition for taxpayers and enhanced benefits for the economy.
The risks are transferred to the party who is best capable of handling these risks.
The stakeholders are allowed an equal share in the PPP's benefits like the customers and the user's benefits of the services. The taxpayers and the employees are provided benefits at every level of the organization.
The provision of opportunities for the specialist skills, experiences and technology.
The provision of opportunities for the cost reduction while allowing the public sector to pay only when the services are delivered, as shown in the figure below:
Figure me: PPP Approach for the Public Sector.
(Source: Davies & Eustice, 2005).
The Public Private Partnership Methods.
The public private partnerships exist on the basis of economic game theory principal agent, that is the public sector and the private sector have a especial signed contract between them, which enables the private sector to complete a project within the restricted time limit. According to the above mentioned relationship, the public sector is working as the principal partner while the private sector is the agent in this deal. In the PPP project, the public sector therefore is responsible for meeting the public needs and requirements and is there to pursue the social benefits. The private sector is only keen to obtain financial benefits (Cheng and Yu, 2010). A balance needs to be maintained between the two sectors, in order to maximize the benefits. This paper will present the principal agent model between the two sectors in the PPP projects. The basic methods of the models are as shown below:
The private sector's involvement often yields uncertain results as the result is not only governed by their own level of efforts but also the external conditions applying on them.
The reward functions are decided by the public sector or the principal sector.
When the revenue generated surpasses the retained income level, it is then the private sector (agent) decides to participate.
The private sector is more likely to avoid risks while the public sector is neutral to the risks involved as the public sector possesses more funds and has an optimistic approach when approaching risks, as compared to the private sector.
Figure II: PPP contract procurement process.
(Source: Treasury, 1995).
International and domestic PPP projects.
The implementation of the PPP has to overcome challenges both in the global as well as the local market. These issues are present in many countries and the companies, generating a positive or a negative impact, as will be explained in the following parts of the report.
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The issues in international and domestic markets.
The recognition of risks, project issues and the identification of opportunities are made possible with the help of the public and private partnerships, which is done before the establishment of the project's target price and the process that would be adopted for the elimination of risks and the acquiring of rewards and opportunities. But the only concern harbouring in the minds of the financers of the PPP project, is the uncertainty in the final costs of the project. The service results can however be improved with the development and improvement in the project management (Clifton and Duffield, 2006). All the aspects of the alliance, whether they are risks or opportunities, should be considered by every country or the company, such as the PPP, which aids in the steady development and progress of a project. The following points will further elaborate the aspects.
The above discussion highlights the importance of the risks involved in the public and private partnerships, which may be the main risks or the additional risks involved. These risks are not considered as easy to deal with in the first phase of the project or the alliance. Moreover the additional will threaten the project during the whole course of the project. These risks have a great impact on the countries as well as the companies. Therefore the report ahead will explain these risks in detail.
The advent of globalization meant more opportunities for the PPP projects in the field of construction industry for the developed countries. Raising the standards of infrastructure in the making it the highest ranked in the world. The competition is given a boost in the developed countries to boost the rapid development creating new opportunities for both the local and the foreign partners, paving the way for the new industry. But the availability of opportunities does not mean the absence of risks; these will be present in every situation. Therefore the likely risk to be encountered is as following:
Government (Political) Risks: The government or the political risks involved, should be given utmost priority as they may include issues such as, inappropriate approved budgets, delays in acquiring permissions and approvals, modifications in the rules and regulations applied by the government, absence of any control on the project and the transfer of technology. These risks mainly create trouble for the foreign participants as the local partners are usually backed up by the government and possess a stronger background as compared to the foreign partners.
Social and Cultural Risks: The cultural and the social risks involved may include issues created by languages, religion, education, training, etc. the developing countries and emerging companies may be directly affected by these risks as they will hinder the development of these countries who already don't have an experience in the global market as compared to the developed nations, who have along experience of work with the foreign companies to back them.
Economic Risks: The economic or the financial risk involved is to be taken seriously as they determine the success or the failure of any project. These risks may include issues such as inflation, interest rates, currency policy and taxation.
Knowledge Risks: The risks created by the lack of knowledge, experience and ample information usually hinder the communication ability with the other parties as is the case in the developing nations. Lack of experience in the PPP projects is the main cause behind these risks.
The above mentioned risks in the international as well as the local market have to be addressed, in order to determine the success of the PPP projects. By overcoming these risks, one may automatically gain confidence with respect to the other markets and parties thus increasing the knowledge and the experience in the field of PPP. The additional risks involved are highly dependent on the global scenario and the countries which may be political, economic. These risks may be project related such as site related delays, delays created by clients and the market. Hence the additional risk will be explained in the following portion of the report.
The primary risks associated were discussed in earlier in this report, but now we shell proceed with the additional risks, which are no less important than the main risks. These risks may not appear in the early phase of the project and may not be restricted to cross border arrangements but may be found in the context of these cross-border investments arrangements (Yescombe, 2007). These risks are difficult to predict beforehand, that is at the agreement stage of the project or at the start of it, as these are determined by the economic, nature and the social issues within or outside of the project. These risks may have a stronger impact in the foreign market as compared to the local market or companies. The risks have been categorised in three groups, which are:
Risks allocated to the public sector:
Site risks: Risks that is associated with the site's conditions such as ground condition, archaeology and fossils, protests from the public that may appear in the latter part of the project.
Operational risk: These risks include the operational revenue below par, productivity less than the operational capacity, low maintenance, overrun of operation cost and higher cost of maintenance.
Risks allocated to the private sector:
Projects risks: The project risks constitute of the time delays and the cost overruns, inadequate management, contractual disputes, procedures of selection, and the poor communication skills that exists between the parties.
Market risks: The market risks include risks like increment in wages , technical personnel falling short, increment in the prices of materials, material and equipment shortage
Client risks: These risks are client oriented and may be issues like the inappropriate project budget, inappropriate project brief, variations in the project specifications, settlement delays, and absence of control in the project.
Risks shared between public and private sectors:
Design risks: The design risks may include the changes proposed in the latter part of the projects causing delays. These changes may be in the use of the project, in the function of the project, the capacity or size of the project such as hospitals. The issues may also occur due to the replacement of the project with another project in the same location or delays being created in some stages of the project.
Contractor risks: The contractor's risks may be caused by the provision of inappropriate estimates, financial difficulties, absence of experiences, poor management, absence of control over the nominated subcontractors and the unexpected changes in the PPP.
Residual risks: These risks are considered as insignificant due to its less chances of occurrence such as the staff crisis, varying working methods and third party's tort liability.
These risks, as clarified earlier, arise in the executing phases of the project under the PPP alliance between the domestic, foreign market and the government. Varying methods are adopted to deal with these risks which may be dependent on the experience of the company or the country in the field of PPP. These factors may be the ample experience level for the developed countries in this field, the extent of collaboration amongst the project parties to solve these risks. This may also be dependent on the inquiry as to who is responsible for the risk.
What they should do to mitigate or avoid these additional risks.
Many of these risks are existent in the early phases of the project's execution, that is during the phase of it planning, designing or when modifications are applied to the project. Inadequate planning and designing of the project usually initiate these risks. The consequences will require a large amount of finance to resolve them if they occur in the later stages of the project as compared to the construction activities. Therefore the parties involved in this project, cooperate under the PPP to function as a single institution or organization in solving these risks successfully.
The private sector can be engaged for the proper utilization of its skills for the utilization of its experience, technology, innovation in the delivery of these services. The risks are shared at different levels by both the public and the private partners (Tang et al, 2010). The risks of cost and time delays can be reduced by the commercial discipline introduced by the private sector in the public projects (Akintoye et al, 2003).
The public sector on the other hand should not introduce modifications and changes in the policy continuously as they may ruin their chances of collaboration with the private sector. Financial compensations should be introduced in cases of changes introduced by the political establishment and the parties in the preconditions and the principles of the project. Each and every organization wants a risk surcharge for projects which usually entails large risks; therefore this should be taken as for granted by the public sector (Reijniers, 1994).
The critical factors for mitigate or avoid these additional risks as follows:
In order to minimize the risks the government and other parties when undertaking the PPP projects should chose partners with a lengthy experience in the field whether they be local or foreign. The companies should also seek for countries with political stability and they should chose companies with experience in this field.
The parties involved should deal with the risks as a mine risk and should develop a hierarchy of the risk analysis such as the Risk Breakdown Structure (RBS), in understanding these risks with its weaknesses to be able to devise an effective method of overcoming them.
The political and the economic risks affect the project in its later stages. Sharing these risks will reduce the burden of these risks.
Working methods with clarified agreements should be constituted to develop a mutual understanding and confidence among the parties.
The objectives of the PPP should be obtained in a combined effort between the public and the private sector, working efficiently and effectively.
The majority of the risks should be handled by the private sector during the project's life.
The PPP's primary and positive aspect is the availability of opportunities, in which the government participates by providing the infrastructure according to the budget and the high quality standards thus ensuring the provision of the best of services to the people without any delays. The companies have an opportunity to obtain the trust and the confidence of the countries for future collaboration, thus increasing their options for financial investments and giving them some information about the market. Thus it gives them the opportunity to build upon their reputation in the world of trade and commerce.
The PPP is an effective method of developing the infrastructure for the public at a reasonable cost without exerting any burden on the financial ability of the public. The resources are saved as the government will invest in projects according to its competencies and will not require reliance on its resources for projects unfamiliar to it (Tang et al, 2010). The private sector's participation ensures the productive utilization of the government's assets, data and intellectual property resulting in the enhancement of quality of public facilities and services. The hierarchy of the civil structure can be mended to make it leaner and straighter for the efficient transfer of responsibilities for the service industry. The economic factors are also enhanced besides the benefits of efficient usage of resources. For instance the lifecycle's costs have been reduced with the help of PPP (Akintoye et al, 2003).
The cost overruns and delays can be effectively reduced by the introduction of commercial discipline by the participation of the private industry (Bing et al, 2005). The economy and the knowledge of a country are substantially improved by the transfer of technology between the parties and the sharing of experiences enabling in the improvement of services.
I will illustrate the most opportunities undertaking PPP method as flowing:
Enhance government's capacity to develop integrated solutions.
The scope of procurement is widened with the help of PPP to a broader and a wider context. The objectives can centralize around the development of an integrated solution which can assist in the continuous development and the improvement of services to the public sector. The involvement of the private sector ensures quality standards and is especially useful in cases of hospitals, housing, schools, roads, shopping malls, hotels, government transactions. The developing countries utilize this aspect of PPP to run such projects with the companies under the PPP approach.
Transfer risks to the private sector/partner.
The primary beneficial feature of the PPP can be said the transfer of risks from the public sector to the private sector. The design, construction and the operational risks are transferred to the private sector including the cost and performance risks. The government can benefit from the PPP approach as projects are completed within the time duration and at low costs, all owing to the private sector, which bears the exchange rate risks and other risks when dealing with a foreign counterpart.
Facilitate creative and innovative approaches.
The bidders are able to compete according to their abilities owing to the PPP approach. This helps in developing a unique and distinctive approach to the acquiring of project goals. The facilities could be developed by the developer, for the multiple usages and can be utilized by a variety of community purposes (Akintoye et al, 2003). Therefore the approach will attract the private sector investments to enable the provision of public services.
Reduce the time of project's implementation.
As the PPP approach provides opportunities for design and construction to be executed concurrently instead of doing it in a sequence, the total time for the construction in the PPP method is thus reduced. This also reduces the number of times a government project is given to tender. The developing countries have an edge due to their experience in dealing with the PPP method.
Reduce the cost of the project.
The losses and the profits of the projects are shared between the parties while the PPP approach helps in the cost reduction and ensuring high quality services within the limited costs.
Transfer technology, skills and creating an environment to technological growth.
A new set of skills and knowledge is obtained by the government owing to the PPP project (Akintoye et al, 2003). The PPP approach allows the progress of technical innovation as compared to the traditional methods. The developing countries enhance their knowledge by participating in the international market and by engaging in the project with the foreign partners.
What they should do to enhance or support these additional opportunities.
The opportunities are equally shared by the developed and the developing countries as well as the companies under the PPP approach. The further development of these opportunities can be easily done by following the set of above mentioned solutions. The risks can be eliminated and the success rate can be increased with the alliance of these countries under the PPP approach. The public sector has to act as a private company with respect to management, in order to ensure the success of the project. This means that they have to act effectively and efficiently in achieving the targeted goals within the available funds and the limited time available (Reijniers, 1994).
The above argument can be supported by the additional points of cooperation and collaboration as a single organization to share the responsibilities in ensuring the success of the plan collaborated in the joint effort.
The opportunities can be exploited and worked out in the stages planned according to the project.
These opportunities can be manipulated to serve the purpose of the companies and the countries in attaining the technology transfer and specialised skills in order to develop the society and its services.
The business's continuous progress is ensured through the usage of all the sources and characteristics available, connecting the goals.
The report initiated with the definition of PPP that is the public and private partnership, in varying concepts thus highlighting the aspects of PPP as an alliance in which all the participants have to collaborate together as a team for the attaining of the combined goals and objectives. The private sector is pushed to participate in the public sector via this approach specifically in terms of services like health and education. The infrastructure is developed through this approach such as transportation, Hotels, parking, shopping malls etc. the PPP is used effectively in majority of the services by the developed countries. This approach encourages the government to participate and support the business sector by the joint capital investments which is frequently adopted in the developing countries, where many regional PPP contracts can be seen.
The risks are transferred to the private sector through the PPP approach which increases the chances of the completion of the project within the time limits, by reducing the costs through hard money bids by the proponents. The alliance may have to deal with risks which can have a long term impact and are thus risks faced by both the private and the public sector. The additional risks have an equal importance as they cannot be eliminated or planned before hand such as the political instability, natural disasters, and economic crisis. These risks can only be dealt effectively in a combined effort. While other risks can be avoided by pre-planning on the basis of experience and collaboration. These risks are often divided according to the allocation to the sectors, such as site and operational risks are the responsibility of the public sector and the private sector is responsible for the project and the client. These risks are shared amongst the participants thus reducing its effects. Provision of opportunities such as the development of public sector by the private sector, opportunities for technological transfer, skills and experience from other participants is an additional advantage of the PPP. The cost is reduced and the time is also effectively utilized therefore leading to more projects under the PPP contract. Possible recourses are used to enhance these opportunities and lead the project to the accomplishment of a unified goal. Collaboration and cooperation are the basis of the PPP approach as it allows a strong commitment to solve the issues together thus multiplying the benefits due to the joint collaboration between the private and the public sector. Thus time delays are reduced also. Therefore it would be safe to say that the PPP is an effective approach of alliance between the public and the private sectors to undertake the issue together, in both the developed and the developing nations. This will enable the parties to share their experiences, transfer technology and consider recourses of other parties under the alliance created by PPP.