A public private partnership (PPP) is a corporation between a public sector and private sector party where the private sector and the government work together on projects involved with agreed risks and task division and each sector maintaining its responsibilities and identity.
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In a PPP contract, private sectors are committed in providing public services which were traditionally represented by public institutions both financially and operationally. Thus, the private sector assumes any operational, financial and technical risks accompanying the project and in most cases, it bears the service cost which would otherwise have been borne by taxpayers in traditional procurement.
In addition, the private parties do seek government assistance in where they get into contracts of providing goods and services during capital investment, with government contributing either whole amount or part of it. In other cases, government may opt not to provide its contribution in cash but rather in kind; a service known as “transfer of existing assets.”
Where the private sector gets involved in projects concerning public goods such as infrastructure, the government extends it contribution by subsidizing the required capital in a one-time grant form. The government also supports the private sector by reducing their tax with provision of guaranteed partly or fixed revenue. This has greatly attracted private investors in provision of public services. (Akintoye, Matthias & Hardcastle 2007, p. 163).
Unlike the traditional public procurement which obtained only a substantial value for money, PPP has been able to obtain this value in a great measure. This has enabled the PPPs to acquire a capability of implementing public services and works faster, distributing risk in a good way, minimizing the cost of life-cycle as well as improving the quality of its service accompanied by increase in revenue streams.
Furthermore, the public-private partnership has been able to utilize the qualifications of the management improving the efficiency of the private sectors, with maintenance of the output’s quality standard. The main objective of PPPs adoption was to enhance the provision of different services to the public, ranging from the construction of infrastructure, to health and education amenities with other services like waste management, criminal justice, water supply and management as well as environmental management.
The contracts between the private and public sector are characterized by long-term service provision to public parties by the private ones, with these contracts may taking as long as 30 years. During this time private sectors conduct most of the services as well as provision of assets (Grimsey & Lewis, 2007, p. 37).
PPP is involved in various models which range from private sector involvement to transferring public risk to the private sectors. The first model involves Service contract. This involves the public and private party’s agreement on requirements pertaining short-term and simple operations.
Here, the private sector employs a short time asset management, procurement and operation with the public bearing the investment and management duty. As a result the public party bears both the financial and residual value risks but on the other hand acquires technical expertise and save the cost with affecting the quality of output.
The second model is Operation and management contracts. In this model, the private sector carries the responsibility of asset management and operation. The period involve in the agreement is short though it is adjustable. In this mode the private sector is involved in reducing overall cost by improving the service quality as well as minimizing the demand risk around the operation stage.
As a result it allows acquisition of efficiency gains together with technological sophistication investment. On the other hand, the financial and investment risk remain on public sector. This model has significant benefits in stimulating more private participation in delivering services.
The third model is Leasing; the private sectors trade the public generated income streams with a fixed lease payment and assurance of maintain and operating the asset. This gives the public sector an incentive of achieving operational efficiency as it is accompanied by a transfer of demand and commercial risk to them.
Thus, for the private sector to make profit and maintain the set level of service provision, it needs to reduce the operation costs. On the other hand, the financial, network expansion and capital improvement related risks are borne by the public sector. This model is more beneficial on the infrastructures generating independent revenue streams such as public transport. Additionally, the model lightens public sector’s burden as the private sector bears all construction risks.
The forth model is Build-Operate-Transfer (BOT). In this model the construction, designing and operation responsibilities are allocated to the private sector. This enhances greater efficiency gain from the integration of these aspects under one entity. Additionally, the public budget is made simpler by elimination of maintenance issues.
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Moreover, this enables the private sector to come up with a better plan and management for service as it deals with both the asset operation and design stages. Because the asset remains to be public owned, the desired results are obtained specialization of quality output emphasized by public.
Finally, the In Design-Build Finance-Operate (DBFO) model; the public entity dictates on the form of the asset or service, and the private partner designs it accordingly. The private sector then facilitates the implementation of the asset through the set design stage and then carries out the operation of the facility. Later, this asset can be given back to the public party once the PPP contract is over.
This model is an incorporation of all the other models’ implementation and operational efficiency methods, although it is involved in capital provision. The DBFO concession involves the designing, financing, constructing as well as operating infrastructures which generate revenue by the private sectors, with a condition that they will be entitled to the revenue for a set time-period which can be up to around 30 years. This model suits projects such as roads, user-charge services and waste and water projects.
Therefore, PPP have attained skills that assist in attaining value and ensuring that low cost is realized with maximum leap of benefit to the private and public parties. Additionally, the PPP have experts who provide necessary advice to government departments, with elimination misleading information concerning the management responsibilities towards these departments.
However, in doing this, they usually mix policy formulation with technical support, making it difficult to choose project from getting the units very closer to political authority. (Grimsey & Lewis, 2007, p. 137) notes that “PPP units have been criticized for undermining other procurement process because they are approved as “policy tool of choice” through creation of the units.”
Contrary in traditional procurement, though they have been involved in construction of infrastructures, public building, schools and hospitals as well as providing services like maintenance, the design phase is separated from the construction phase.
This method therefore adopted by architects, who design the project and plan construction documents which are to be used by the constructor to finish the project. In this procurement method, contracts such as Design-Build were made by the public and private parties, where the private sector was required to design the project according to government requirements. Thereafter, the government would take the responsibility of operating and maintain the project (Lee 1998, p 182).
However, it would involve some contracts such as management or service which would help in funding some of the operations and maintenance. However, these undertakings by the government ignored the economic signals which the private parties were open to.
This was so because the means which the government used to raise its cost were out of connection with the project risks as well as its success or failure. In cases of project failure, the involved part in the contract were blamed from the outcome of their decisions though the politicians themselves and government senior officials whose involved in the project contributed to the same failure.
Elimination of their personal responsibility during negative outcome eradicated the potential of necessary incentives in modifying the plans and management as well as changing their behavior. The tradition procurement method denied private sectors ownership or control rights to properties, land and facilities, something which contributed to lack of incentive from these parties hence uncertainty of investments paying off.
More importantly, the tradition method failed to consider risk transfer from the public to the private sectors, thus motivating effective production. The government has no considerable risk undertaking and it needs no risk management techniques into the project. However, the government is involved in low capital employment on the project because of the possibility of transferring the risk to taxpayers as well as to end users without compensation.
This paralyzed the traditional decision making as it detached it from incentives needed to reduce cost as effectively operating project. However, the tradition procurement method enables the contractor to mingle with designers during the design stage and through sharing of plans to come up with an integrated construction document. Additionally, it enhances a good environment for designer’s techniques approval by the stakeholders, an aspect that creates a room for amendment to unsatisfactory design (Lee 1998, p 182).
In conclusion PPPs provides more benefits in comparison with traditional methods. Because it ensures effective project delivery speed at low cost, as well as benefits public service users by utilizing the state assets more effectively.
In addition, through regulatory scheme, PPPs have accountability of giving high quality services to the public, in a more innovative and diversified manner. Also, the PPP models have enabled acquisition of a reduced life-cycle costs, additional revenue, more effective risk allocation as well as faster facilities implementation (Yescombe 2007, p. 72).
Akintoye, A, Matthias, B & Hardcastle, C 2007, Public Private Partnerships: Management risk and opportunities, Wiley-Blackwell, Malden.
Grimsey, D & Lewis, M 2007, Public private partnership: the worldwide revolution in infrastructure provision and project finance, Edward Elgar Publishing, Northampton.
Lee, K 1998, The traditional procurement methods: the choice of Hong Kong private sector clients for residential projects, University of Hong Kong, Hong Kong.
Yescombe, E. R 2007, Public-Private Partnerships: principle of policy and finance, Butterworth-Heinemann, Woburn.