When And How Policy Makers In Government Rely On Private Market? What Impact Does It Have On The Effectiveness Of Public Service Provision?
Public Private Partnerships are defined as "The combination of a public need with private capability and resources to create a market opportunity through which the public need is met and a profit is made." PPP is a collaboration of government, communities, NGOs, individuals and private sector, in the funding, management and operations to support education development in Pakistan.
The ultimate goal of PPPs is to obtain more "value for money" than traditional public procurement options would deliver. Although the ex ante assessment of expected value for money is often extremely complex, in general a PPP can be said to generate value improvements whenever it produces/achieves the following advantages:
reduced life-cycle costs;
more efficient allocation of risk;
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improved service quality; and
When compared with in-house delivery by the public sector, the private provision of a public service is socially beneficial whenever the net gains from PPPs are greater than the
corresponding net gains from traditional public provision.1 In a nutshell, the following relationship must hold true:
PPP net allocative efficiency gains + PPP net productive efficiency gains > gains with public provision
The 3P is a real partnership; with shared responsibilities and shared rewards for all participants. Skills and assets of each sector (public and private) come together in delivering a service or facility for civic benefit. This means multiplying inputs to achieve sustainable development outcomes. Bureaucratic procedures are minimized by the use of tested template agreements to accelerate the process.
At the same time partnerships are formed only where the community identifies a need and expresses willingness for the private sector to become an active social investor. This translates into a healthy corporate-community relationship and builds company goodwill. Most importantly, the arrangement ensures long-term success, by engaging the coalition of partners including the beneficiaries in planning, implementation and monitoring.
Reasons for Adopting Public Private Partnership
Value for money
Output based specifications
Long term nature of contracts
Performance measurement and incentives
Private sector management skills
Time to delivery savings
Reduction on the public treasury
Improved response to market forces
Improved cost calculations
In Which Sectors Are PPP's A Valid Option
Possible trends in PPPs are related to their potential expansion to different sectors. PPPs have been successfully employed to provide road and railway infrastructure, waste and water management, healthcare and school buildings. However, it remains to be seen if PPPs are really capable of ensuring value for money in areas closely linked to the core competences of the public sector, such as clinical services, education or prison facilities. The future expansion of PPP arrangements will mainly depend on the success or failure of existing pioneer projects and on the political will and support expressed at national level for this type of scheme.
As the principal agent theory suggests PPPs can be successfully applied only to those sectors where service quality can be clearly specified, measured and guaranteed. This is particularly complex to achieve in those areas, such as healthcare and education, where public-interest objectives generally clash with the cost-saving behavior of the private party, thus resulting in complex and costly contractual negotiations.
When the Policy Makers in Government Rely On Private Market
The Government recognizes that there are some things which the private sector does best and others where the public sector has more to offer. The old argument, as to whether public ownership was always best or whether privatization was the only answer, is simply outdated. The Government firmly believes it will only deliver the modern, high quality public services that the public want and increasingly expect if it draws on the best of both public and private sectors. The starting point is, therefore, recognition of the contribution that the public and private sectors can each bring to the partnership.
Central to the Government's approach is to use PPPs where they provide better value compared to public sector investment. Under PPPs, the public sector specifies the outputs required from the investment, but the responsibility for, and many risks associated with, delivering those outputs is transferred to the private sector partner. This can offer better services, delivered more efficiently and providing better value for money for the taxpayer than public sector investment, provided the outputs can be clearly specified from the outset and that both parties fully understand the risks they are taking on. In addition, PPPs encourage innovative approaches, as the private sector partner is given flexibility over the design of the assets and operational procedures. PPPs can also act as a value benchmark against which wholly public sector providers can be compared.
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Governments worldwide have increasingly turned to the private sector to provide infrastructure services in energy and power, communication, transport and water sectors that were once delivered by the public sector. There are several reasons for this growing involvement of the private sector which include:
Availability of additional resources to meet the increasing needs of investment in infrastructure services
Increased efficiency in project delivery and operation
Access to advanced technology
Sustainable development in infrastructure facilities and services.
Nevertheless, considering the reasons for adopting of PPPs, now governments in most countries consider them as an attractive off-budget mechanism for delivering infrastructure services and have promoted PPPs as a part of their overall strategy. In this respect, many countries have created a PPP enabling environment through the establishment of necessary legal and regulatory regimes, initiated sector reforms, streamlined administrative procedures, and have formulated policies to promote PPPs.
As a result, new highways, rail systems, port and airport facilities, power plants and gas pipelines, telecommunication systems, and water and sewerage systems are increasingly being built and/or the existing ones being improved or upgraded following various models of public-private partnerships.
In bringing the best of the public and private sectors together, the key test of any partnership arrangement is not whether it is classified to the public sector or to the private sector. Instead, what matters is whether it provides the structure most likely to deliver the Government's objectives. The Government develops public private partnerships with three broad objectives in mind:
to deliver significantly improved public services, by contributing to increases in the quality and quantity of investment;
to release the full potential of public sector assets, including state-owned businesses, and hence provide value for the taxpayer and wider benefits for the economy;
to allow stakeholders to receive a fair share of the benefits of the PPP. This includes customers and users of the service being provided, the taxpayer and employees at every level of the organization.
There are, however, underlying fiscal costs and contingent liabilities of PPPs to government that may arise in the medium and long term. Besides, there are many important economic, social, political, legal, and administrative aspects, which need to be carefully assessed before approval of PPPs are given by the government. PPPs have various limitations that should also be taken into account while consideration of this modality is made. The major limitations include:
Not all projects are possible (for various reasons: political, legal, financial etc).
The private sector may not take interest or may lack the capacity to undertake a project.
A PPP project may be more costly unless additional costs (due to higher transaction and financing costs) are off-set by efficiency gains.
Change of ownership to the private sector per se may not be sufficient to improve economic performance unless other necessary conditions are met, which include appropriate sector and market reform, and change in operational and management practices of infrastructure operation.
Often, the success of PPPs depends on regulatory efficiency.
How the Policy Makers in Government Rely On Private Market
How the policy makers in government rely on private market of the main types of PPP ranging from the least sophisticated modes of private sector involvement to the most complex forms of PPP implying greater risk transfers from the public to the private party.
1. Service contracts
Service contracts are agreements between a public agency and the private sector particularly suited for simple, short-term operational requirements. It is a very limited form of PPP, where the private party procures, operates and maintains an asset for a short period of time. Management and investment responsibilities remain with the public sector, which bears the financial risk and residual value risk, but benefits from the technical expertise of the private operator and obtains some cost savings, without transferring control over the quality of outputs. Service contracts are commonly used for toll collection services, for the provision and maintenance of vehicles or other technical activities.
2. Operation and management contracts
Operation and management contracts are agreements in which the responsibility for asset operation and management is passed on to the private sector.The private sector operate and manage a public owned asset. Revenues for the private party are linked to performance targets. The public sector bears financial and investment risks
3. Leasing-type contracts
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The private sector buys or leases an existing asset from the government, renovates, modernizes, and/or expands it, and then operates the asset, again with no obligation to transfer ownership back to the government. Since the commercial risk and the demand risk are transferred to the private sector, the private agent has an incentive to achieve operational efficiency. Leasing type contracts involves the following contracts:
Wrap-around addition (WAA)
4. Build-operate-transfer (BOT)
The private sector designs and builds an asset, operates it, and then transfers it to the government when the operating contract ends, or at some other pre-specified time. The private partner may subsequently rent or lease the asset from the government. The combination of these different responsibilities under a single entity fosters greater efficiency gains and removes important maintenance issues from the public budget. BOT scheme can be declined in a number of following variants according to the specific project needs:
5. Design-Build-Finance-Operate (DBFO)
The private sector designs, builds, owns, develops, operates and manages an asset with no obligation to transfer ownership to the government. These are variants of design build-finance operate (DBFO) schemes. At the end of the PPP contract, the service or asset can be granted back to the public sector under the terms of the original PPP agreement; in alternative, the agreement is renegotiated.
These different PPP models can be flexibly selected and tailored according to the sector of application. Some areas are better suited for risk transfer to the private party than others, as the different models imply various degrees of control by the public party.
In general, the private sector proved to be a better manager of construction risk and quality standard risk, while regulatory risk is more appropriately borne by the public sector. Correct evaluation of each party's abilities and management capacities has a direct impact on the choice of the PPP model and on the likelihood of success or failure of the project.
The following two forms PPP in the social sector provide a simple way to categorize publicly funded service delivery models.
Public Funding-Public Delivery Model
The government both provides and pays for services which has lead to inadequate funding and poor quality of services especially at the peripheral level. The services provided and paid by the government are in areas of public education, public health facilities, public universities and public hospitals.
Public Funding-Private Delivery
In this model the services or at least some parts are delivered by the private sector in the belief that the quality and efficiency of these services will be better than if they were provided by the government directly. The two most common models of this type are contracting and insurance programs in health and contracts and scholarship programs in education.
The most common type of public private partnership is the contracting model. Most governments have long experience with this model in the contracting of hospital and secondary school services often in rural areas with church groups. Private groups are using contracting much more widely for an array of services ranging from ancillary services such as food, maintenance and logistics to the direct delivery of care.
In addition to contracts, in health an emerging area is the use of health insurance programs that give individuals health care coverage at a provider of their choice funded through a public program. A system somewhat similar to insurance is the use of vouchers. A voucher system provides individuals with government funded vouchers that entitle them to receive a fixed amount of services in education or health.
In education there is also wide use of scholarships that are targeted to individuals either on the basis of need or of talent and are generally available for higher education. Scholarships are easy to administer but do not give payer control over program to which they are sponsoring students.
Many countries rely heavily on a program of social security through which a variety of services especially health are provided. Social security is managed independently but is financed by the government.
Impact on Effectiveness of Public Sector
The impact of Public Private Partnerships (PPP's) on effectiveness of public sector includes the following:
Speedy, efficient and cost effective delivery of projects
Value for money for the taxpayer through optimal risk transfer and risk management
Efficiencies from integrating design and construction of public infrastructure with financing, operation and maintenance/upgrading
Creation of added value through synergies between public authorities and private sector companies, in particular, through the integration and cross transfer of public and private sector skills, knowledge and expertise
Alleviation of capacity constraints and bottlenecks in the economy through higher productivity of labor and capital resources in the delivery of projects
Competition and greater construction capacity (including the participation of overseas firms, especially in joint ventures and partnering arrangements)
Accountability for the provision and delivery of quality public services through an performance incentive management/regulatory regime
Innovation and diversity in the provision of public services
Effective utilization of state assets to the benefit of all users of public services
Governments are turning to the private sector to provide a broad range of services previously delivered by the public sector. These public-private partnerships (PPPs) are often long-term arrangements in which the government purchases services under a contract, either directly or by subsidizing supply to consumers. In other PPPs the government bears substantial risks. For example, by guaranteeing revenue or return on projects that sells directly to consumers.
This shift from traditional public sector methods places new demands on government agencies. They need the capacity to design projects with a package of risks and incentives that makes them attractive to the private sector.
They need to be able to assess the cost to taxpayers, often harder than for traditional projects because of the long-term and often uncertain nature of government commitments. They need contract management skills to oversee these arrangements over the life of the contract.
And they need advocacy and outreach skills to build consensus on the role of PPPs and to develop a broad program across different sectors and levels of government. An increasingly common way to provide these capacities is to establish PPP units, as new agencies or as special cells within a cross sectoral ministry such as finance or planning. Making the right choices on what function these units should perform and how they should interact with line agencies responsible for service delivery will be critical to ensuring that they both add value and fit into existing governmental processes.
In most advanced national experiences, new forms of PPP's are continuously emerging, and the existing ones are being tailored to the needs of different sectors. PPP's have become the means to bring together a set of actors for the common goal of improving the health of the population based on the mutually agreeable roles and principles.
Public Private Partnerships (PPPs) in developing countries have become increasingly popular as a method of initiating public works projects through the private sector. These partnerships range from the construction of physical infrastructure to public administration and the provision of health and services. PPPs have the potential to increase outputs of public goods and the economic benefits associated with them through innovative use of resources as well as managerial expertise. The prevailing idea among development circles is that PPP arrangements, particularly in infrastructure, allow governments and municipalities to shift risks to the private sector. The ultimate objective is to allocate risks in such a way that both the private and the public sector benefit and consumers are well served.