Public-Private Partnership Model

GOVERNMENTS THROUGHOUT the world look for appropriate means to accelerate the development of its numerous public services and projects in a climate of scarce public resources.

In developing countries such as Ghana, the enormity of the challenges and demand for infrastructural services such as roads, hospitals, schools, airport, and telecommunication are huge and sometimes overwhelming.

The Public-Private Partnership (PPP) or Private Finance Initiative (PFI) model is seen globally as a means to procure and accelerate development projects. Countless number of international projects are financed and procured through the PPP initiative.

What is Public Private Partnership and Public Finance Initiative?

Public Private Partnership is a partnership, which leverages private funding and the strengths of private entrepreneurship and management, for the maximum provision of public services in a climate of scarce public resources.

According to the BBC News World Edition, any collaboration between public bodies, such as local authorities or central government, and private companies tends to be referred to a Public-Private Partnership (PPP).

PPP is basically a system in which a government service or private business venture is funded and operated through a partnership of government and one or more private sector companies. PFI is a PPP special case where all the finance needed for the capital funding and its basic operation is supplied by the private sector in return for a service charge.

In some types of PPP, the government uses tax revenue to provide capital for investment, with operations run jointly with the private sector or under contract. In other types, capital investment is made by the private sector on the strength of a contract with government to provide agreed services.

Government contributions to a PPP may also be in kind notably the transfer of existing assets. The building or other asset is returned to the public body (the Authority) at the end of an agreed operating period.

The advantage for the Authority is that substantial capital debt and assets are removed from the balance sheet and converted into a revenue expenditure underpinned by central government.

Origins

The PPP model originated in the UK through the pressure to change the standard model of Public Procurement and arose initially from concerns about the level of public debt, which grew rapidly during the macroeconomic dislocation of the 1970s and 1980s.

Goverments sought to encourage private investment in infrastructure, initially on the basis of accounting fallacies arising from the fact that public accounts did not distinguish between recurrent and capital expenditure.

Initially in the UK, most public-private partnerships were negotiated individually, as one-off deals. In 1992, however, the Conservative government of John Major introduced the Private Finance Initiative (PFI), the first systematic program aimed at encouraging public-private partnerships. In 1992 program, the main focus was on reducing the Public Sector Borrowing Requirement; however the effect on the public accounts was largely illusory.

The Labour government of Tony Blair elected in 1997, persisted with the PFI and sought to shift the emphasis to the achievement of Value for Money (VFM) mainly through an appropriate allocation of risk. In June 2003, more than 500 contracts had been signed and £20 billion of private capital had been levered into public infrastructure projects such as schools, roads and prisons, which looked set to continue.

How does PPP and PFI work?

In the provision of built assets, a private sector consortium forms a special company called a Special Purpose Vehicle (SPV) to build and maintain the asset. The consortium is usually made up of a building contractor, a maintenance company and a bank lender. It is the SPV that signs the contract with the government and with subcontractors to build the facility and then maintain it. The PFI provides for 100% capital funding and building running costs. The concessionary period is usually 20-60 years, which may be renewed. During this concession, the Authority pays for the building or facility and its maintenance as a charge over the agreed period and do not normally have to show the building as an asset on their balance sheet.

The capital repayment is included in the annual charge on a fixed or variable interest capital repayment basis, reducing as the capital reduces. The service charge is usually indexed with inflation to cover the cost of maintenance, updating and building operation as necessary. Penalties are leveled by the Authority for the loss of facility use, or downgrade of service quality. A typical PFI example would be a hospital building financed and constructed by a private developer and then leased to the hospital authority. The private developer then acts as landlord, providing housekeeping and other non-medical services while the hospital itself provides medical services. PPP means of accelerating development Government and local authorities in developing economies have always paid private contractors to build roads, schools and hospitals out of tax money but the PPP sought to get contractors and the private sector to raise the necessary capital funding to foot the bill.

Under the PPP, contractors pay for the construction costs and then rent the finished project back to the public sector. A perfect collaboration between the private and public sector! This allows the government to get new hospitals, schools, roads, and sport facilities without raising taxes. The government consequently gets a significant release of capital funds for other investments and business activities. The contractor, for its part, is allowed to keep any cash left over from the design and construction process, in addition to the rent money. In developing countries where governments find it difficult to raise capital funds for development projects, the PPP remain the panacea for accelerated development in situation were public money is simply not available. It has been argued by advocates of the model that, if privatization represents a take-over of a publicly owned commodity, then PPP is more like a merger, with both sides sharing the risks and, hopefully, seeing the benefits. In the UK it has been estimated that trade in public services could ultimately net the private sector an extra £30 billion a year. The break down roughly is £10 billion in central government contracts, £5 billion in education and £5 billion in local authority contracts. Given that the roads, health and education sector remain the challenging development priorities for the government of Ghana, the benefit of opening up the public sector to private financing would be beneficial and rewarding not only to the beneficial communities but to the government as well.

This model could be used to accelerate development of infrastructural services, which are urgently needed to reduce poverty and improve the living standard. For instance, what prevent the government of Ghana from using the PPP model to develop Kumasi International Airport and establishing Thermal plant in Kumasi? What about the development of paid up Motorways in the country? The benefits would be tremendous and 'win-win' condition because the public, the private entrepreneur and the government wins. The development of the infrastructure service will not only help to open up the country for accelerated economic development but will diversify our development goals. Globally, it is argued that PPP have better track record of project delivery than the conventional procurement methods. However, there is the general consensus that without highly skilled and experienced individuals on the public and private sector sides, projects could go badly wrong. Government needs to know that the beneficial contractors have a track record of successful delivery.

What are the challenges? Critics of the PPP model argue that taxpayers will end up footing the bill. According to a survey conducted by Labour Party Research Department, the 'rent' for PFI projects in the health service alone will top £13 billion. The survey says that profits for the companies involved will total between £1.5 billion and £3.4 billion over the next 30 years, about £5 a year for every tax payer in the UK. The research also cites Fazackerly prison in Liverpool where the initial cost of the project has, it claimed, been paid back within two years, leaving 23 years of pure profit from the construction. One big criticism of PPP model is that the only way companies can turn a profit is by cutting employees' wages and benefits. Private companies have been accused of cutting corners in order to maximize profits. Trade Union in the UK also talks of their members being shifted into private sector, where they have fewer employment rights and benefits such as pensions and childcare. According to a research survey by financial market intelligence provider Standard & Poor's, PPP are being hindered by unproven ICT systems and specification changes, which disregard time or budget implications.

The report emphasized that, the most frequently reported causes of PPP construction distress were the public sector. These include inexperience, lack of commitment, lack of engagement, bureaucracy, interference, and associated scope changes and enforced delays. Other major causes of distress included delays with permits and approvals, unforeseen ground conditions, and aggressively tight construction budgets. Conclusion The PPP is a small but important part of the strategy for delivering high quality public services based on efficiency, equity and accountability. The model has helped a number of advanced economies to deliver a number of important public projects by requiring the private sector to put its own capital at risk and to deliver clear levels of service to the public over the long term. The model also ensures that the public assets are delivered on time and to budget and ensure value for money. PPP model may still be in its infancy stages, but it is already well established as a way of paying for public facilities such as roads, hospitals, schools, bridges and so on. It is a fast, effective and in the short term at least cheap way of getting new facilities built and a panacea for accelerated development of services and projects.

Link to allAfrica.com: Ghana: Public-Private Partnership Model (Page 1 of 1)