Should Public Private Partnerships (PPP) be preferred over public provision or privatization?

By Shan Yahampath

shan@shanyahampath.org

Building and maintaining public goods and property such as highways, bridges & tunnels, air and sea ports are some of the main responsibilities of a government. Selecting and prioritizing infrastructure development projects, hiring competent private contractors and making decisions on funding these projects are some critical functions a government should perform in this regard. Public debts or taxes, privatization and PPTs are the three basic ways in which public goods and property can be made accessible for citizens of a particular country.

The concept of PPP came into being when some countries such as the United Kingdom, and the USA started to encourage private sector participation in public service areas that were not conventionally easy to privatize such as highways, schools and hospitals. This created a new opportunity for long term contracts between the state and private companies to provide infrastructure through bundling financing, construction, and operation (and maintenance) within a single firm. The development of PPP introduced a new approach whereby a single private firm finances and builds a project and then becomes responsible for the operation and maintenance of the installations on par with agreed service/performance standards.

A PPP can be considered as an agreement through which the government contracts a private company to build or improve, maintain and operate infrastructure for an extended length of time (e.g. 25 to 30 years) in exchange for revenue during the period of the contract. In the case of highways, revenue mainly comes from users whereas in investments such as public hospitals the government makes periodic payments as users are not charged. But in most cases the concessionaire is remunerated with a combination of user fees and government periodic payments, such as shadow tolls in the case of highways. At the end of the contract period the assets are handed over to the government. Privatization of a government property or service is different from PPPs as the infrastructure is permanently transferred to a private entity.

Figure 1- The basic structure and the flow of work of a PPP project.

PPP in Europe

PPSs in Europe had a steady fivefold growth on an annual basis from 1990 till 2007.

Figure 2 – The PPP investments in Europe (1990 – 2011) in billion euros

Figure 3- The 10 countries in Europe with the most PPP investments.

Country Total Investment

1990 – 2006 (In Million Euros)

Belgium 2,112
France 7,670
Germany 5,658
Greece 7,600
Hungary 5,294
Italy 7,269
Netherlands 3,339
Portugal 11,254
Spain 24,886
United Kingdom 11,2429

Source: Blanc – Brude, Goldsmith and Valila (2007)

Figure 4- Toll type for PPP roads, bridges, and tunnels in Europe, 1990 – 2007

Country Contract

Availability

Real Toll Shadow Toll Total
Austria 0 2 0 2
Finland 2 0 0 2
France 0 8 0 8
Germany 0 8 0 8
Greece 0 6 0 6
Hungary 0 5 0 5
Ireland 0 8 0 8
Italy 0 7 0 7
Latvia 1 0 0 1
Netherlands 2 0 1 3
Norway 0 3 0 3
Poland 0 1 1 2
Portugal 0 6 11 17
Spain 0 31 14 45
United Kingdom 4 3 20 27
Total 9 88 47 144

Source: Kappeler, A. and Nemoz, M., (2010)

The United States has been lagging behind many European and developing countries in terms of PPP investments. However, they have achieved a remarkable growth on an annual basis between 1998 and 2007 and during the three-year period of 2008-2010. The majority of investments are in transport sector as per the available data. The entire PPP sector has attracted approximately $23 billion USD between 1998 and 2011.

PPP investments in low and middle-income countries

As it is shown in the figure given below the investments in PPP grew at an annual rate of about 28 percent between 1990 and 1997. This growth however, was negatively impacted by the East Asian crisis and up until 2003 the investments were very low. Between 2003 and 2010 the investments had a steady upward growth reaching $180 billion USD in 2010. Surprisingly the global financial crisis of 2009 hardly made an impact on the upward trend in middle and low-income countries.

Figure 5- PPP Investments (Billion USD)

Figure 6- PPP Investment in Developing Countries, 1990 – 2008

U. S. dollars (In Millions)
Country Energy Telecommunications Transport Water & Sewage Total
Argentina 29,540 29,328 14094 8,176 81,137
Brazil 75,993 107,554 32142 4576 220,265
China 37339 14,518 47449 8427 107,732
India 45,868 52,898 24766 331 123,864
Indonesia 15492 24,972 3743 1020 45,228
Malaysia 14313 9596 16552 10441 50,605
Mexico 10753 54068 25374 1675 91,869
Philippines 19268 14280 3478 8071 45,096
Russia 30484 48813 706 2225 82,228
Turkey 12,678 24293 8170 942 46,082

Source: World Bank – PPIAF PPI database

Problems with Public Provision

Governments usually face multiple challenges when providing infrastructure services in any country, be it developed or developing. The challenges range from immediate ones like prioritizing projects among many competitors, ensuring completed projects fulfill their service and performance obligations, maintenance of the infrastructure built, financing the projects to more dire challenges like ensuring neither the public nor the government is overcharged especially in a fee for service model. These challenges are at times made more critical due to sectorial capture by certain leading companies through political connections and corruption. Poor design of government institutions and their employee incompetence leading to cost overruns and delays take an extra toll on public provision.    

Why PPP?

There are both theoretical and pragmatic arguments as to why PPP can be considered favorably by governments to provide infrastructure effectively and efficiently. The Financial Times once claimed that “The boom in PPP is good news for governments with overstretched public finances: many local and national authorities have found themselves siting on toll roads, ports, and airports that they can sell for billions of dollars to fund other public services”.

  1. The most feasible arguments are that PPP can relive budgetary restrictions and release public funds.
  2. Since project financing is private it brings much needed financial discipline with prudence which can lead to gains in efficiency.
  3. PPP bundles construction with operation and maintenance and this can lessen the deterioration of infrastructure such as roads and highways.
  4. PPPs can mimic a competitive market because they are often adjudicated in competitive auctions/bids.
  5. Since the private party is interested in making profits the user fees have to reflect a market price and this may discourage lower fees due to political pressure, overconsumption and wastage of infrastructure.
  6. According to Adam Smith when infrastructure is privately provided and sustained with user fees, a market test filters white elephants.  Smith A (1937)

Good Governance

A mixture of good and bad experiences are present with regard to the real impact of PPP infrastructure projects in the world. Countries such as China, Chile, Brazil and the UK provide ample examples of such experiences. With a sufficient learning curve these countries have learned that getting a single state institution to manage all aspects of the production and delivery cycle: the planning, tendering, construction, maintenance, supervision, contract enforcement and conflict resolution can lead to possible conflict of interest. Because, when every aspect is within the same scope inefficiency and corruption become inevitable. This is also due to an inherent issue in the government sector as to how departments and ministries are organized. Usually these are organized by products and not by functions. For instance, building schools and educating children fall under the same ministry. There should be an independent central body to carry out cost benefit analysis and this may reduce the undue political interference. Ensuring concessionaire’s adherence to compliances throughout the lifecycle is also a must. The experiences of the countries mentioned above are such that, the terms and conditions of most of their projects had to be renegotiated as a result of oversights of the government and the private firms. The government can always impose regulatory framework while the concessionaire has no choice due to a sunk investment. These kinds of issues can be avoided through proper planning during the initial negotiation period. It is vital to have a proper mechanism and a central body to handle conflict resolution as well. This may lead to project delays but the ultimate benefits will be passed on to the society and its people whose user fee payments and tax rupees are financing these projects.

Long Way to Go – Capable Political Leaders

Leaders are of different kinds. This is probably why James MacGregor Burns once said Leadership was one of the most observed and the least understood phenomenon on earth. Among different kinds of leaders, political leaders are the least researched and studied.

In my opinion, the best way to categorize political leaders is based on their time orientation. Certain leaders glorify the past. They always talk about what they had and what they have lost. They always tend to compare what is not there now as opposed to what was there in the past. It is evident that they struggle to let go of the past. On the other hand some leaders are more futuristic and tend to look into the future with a more optimistic approach. Yet another set of political leaders focus on ‘the now’ where they neither focus on the future nor glorify the past. It is safe to say that they have a myopic view of the future and do not glorify the past. Apart from these three kinds of leaders, it would not be an exaggeration to point out that there is another set of leaders who does not do anything at all.

If we carefully observe and analyze the types of leaders we as the general public have elected and sent to the parliament to represent us, all these four kinds of leaders can be found there discussing the issues that matter to us and taking decisions on our behalf.

Within the course of seven decades of post-independence, for about three decades we were fighting a bloody ethnic war. In that sense we have no past to glorify. Because what we have achieved is nothing more than pained hearts and souls. With due respect to the leaders who ended the bloody war it is time to make use of the freedom won rather than wasting time and energy in glorifying the past without forgetting the fact that we have a lot to catch up on as a country. When we compare ourselves with other countries in the region that won their independence and freedom during the same period, they seemed to have progressed much faster than us and have achieved greater economic and social benefits. If we are to blame and point fingers at someone or something, I am sure the leaders who have run the country up to now should be our first choice.

We as a country and an economic unit have an enormous amount of issues thanks to our past politicians and the decisions they have made. Some examples of such issues are the heaps of foreign loans taken at staggering commercial rates without proper planning and prioritization, which requires immediate corrective action. Moreover there are certain areas that have progressive problems which can lead to economic, social and political catastrophes at a national level. What is not working should be fixed and that is an indisputable fact. However, there should be an approach to transform the prevailing situation into a much larger economically beneficial situation, which is future oriented and filled with opportunities. There are ample examples around us to learn and benchmark ourselves against, starting from South Korea, Singapore, and Malaysia.

If we carefully study the countries that were transformed from once being poor economies to current economic giants in the global arena, their success stories can always be attributed to a leader or a set of leaders. These leaders had something that other leaders did not have or they did something that other leaders did not do. There must be an innate quality in these leaders that made them do something different and unique. Either they had a strong political will with a futuristic view or they knew that, what was required had to be done without giving into political pressure. After all, they possessed the much-needed skills to get things done and make things happen.

At the moment, Sri Lanka is undergoing a transformation or at least we have realized that the country needs a political and economic overhaul. The question is how capable the political leaders are at convincing their electorate that these changes are a must even if they are not politically popular? Do they know what our immediate critical issues are at a macro level? Can they get out of micro level, individual issue based relationship management and focus more on macro level issues at a national level? Can they demonstrate the much-needed behavioral competencies in managing their relationships with much wider and dynamic communities? How informed are they of the international changes that are taking place and changing the dynamics of international trade and commerce? How enthusiastic are they to embrace innovative and disruptive technologies that may present unprecedented growth opportunities or eradicate the traditional opportunities for growth? Do all these leaders share the same mental model about the country’s development and the challenges faced by the economy?

Let us try to understand the broader issues faced by Sri Lanka as a country and see what kind of competencies that these so called politicians should possess if they are to contribute to the overall successful transformation of the country.

  1. 1. The need to increase economic growthThis can be considered the most pressing issue that we need to battle as a country. It seems that a consistent economic growth with a minimum trade deficit can be the solution to most of the issues that are there today. It is not an exaggeration to say that we should increase our exports and manage our imports by restricting and discouraging unnecessary imports with the objective of retaining foreign reserves. Every political leader should have a clear understanding as to how every single activity done by their respective portfolios is connected to achieving the much needed economic growth, be it short term or long term. In this context it is important that every parliamentarian takes off his or her micro level thinking hats and embrace a macro level approach to their work. This essentially requires getting rid of traditional cause and effectthinking and adapting a systems thinking approach. Otherwise, history will repeat itself and there is a greater possibility that todays solutions can become tomorrows problems. What is popular is not always effective. They should be willing to make tough calls for the betterment of the country in the long run.

  1. 2. Reducing corruptionCorruption has escalated to a whole new level in the recent past. Traditional methods of bribery and taking commissions have been modernized leading to a number of whitecollar crimes. The question is whether the existing rules and regulations pertaining to bribery and corruption are strong enough to prevent such national level corruption. Corruption should be discouraged, eradicated and penalized at both micro and macro levels across the country.

  1. 3. Enhancing transparencyIn a country where literacy rate is above 90%, people tend to read, write and comprehend on going matters to a greater extent. Some people may ask questions as to how different development projects were done, on what basis they were awarded, on what conditions the loans were taken etc.… whilst some may not be interested at all. Just by enacting the act of right to information, transparency will not be upheld nor promoted. Both the general public and the bureaucrats should be empowered to look for and share what is relevant and important without causing unnecessary troubles to the development process. Transparency goes hand in hand with reducing corruption. The greater the magnitude of transparency the lesser the room for corruption. Whilst the culture of secrecy should be discouraged along with the unwillingness of bureaucrats to share such information, enabling efficient processes to facilitate this objective is also paramount.

1.4. Improving social wellbeingImproving social wellbeing should go beyond the physical and the mental health of the general public. As a country, we spend a considerable amount of tax rupees on physical health and it seems that efforts to address mental health has taken a back seat. The efforts or objectives of improving social wellbeing should necessitate much larger macro level benefits across the country without focusing only on underprivileged groups. In fact it should go beyond the general public. It means, that whilst the whole economy creates equal opportunities for the general public it also ensures a decrease in income inequality. These efforts should focus on creating a fair playing field for cooperates to carry out their profit oriented ventures without undue influences.

With regard to the four-macro level challenges clarified above, every parliamentarian, whether s/he is in the government or in the opposition, should possess a minimum of the following competencies for the sake of the overall development of the country. All of them should make a conscious paradigm shift from being bogged down in their own political ideology towards a more open minded perspective by keeping their eyes focused on the changes that are happening internationally.

Insights into the interests of the general public

  1. Committing to general public as a whole, regardless of political ideology or political party they support. This should come with the understanding that in a democratic society people appoint leaders of their choice to get what they need and want. At the end of the day all these needs and wants are similar, therefore treating them equally is a must even if they have not voted for you or your political party.

  1. In a country where open-economy has been instrumental as the engine of growth, the private sector should be truly empowered to live up to its full potential. Therefore, creating a business friendly economic and political environment across the island is a must. This includes enacting policies and programs to encourage entrepreneurship and the creation of new ventures.

  1. The need to eradicate corruption has been identified as a macro level challenge but it has to be implemented and monitored at the level of individual leaders as the  general public tends to think that if corruption is eradicated the benefits can be passed on to them in the form of social welfare.

  1. No economy can grow without getting its own people to consume more. Domestic consumption can only increase, if purchasing power is increased in terms of per capita income on a yearly basis. This can only be achieved if leaders take the standards of living of the general public into serious consideration. Every parliamentarian, especially those who hold ministerial portfolios should understand as to how their respective programs result in raising the standards of living of the general public.

Flawless Execution

  1. Collective aspirations of individuals are strong and powerful. They make and break governments. They bring parties and individuals to power and ousted them when their aspirations are not made a reality. The vision of a government should necessarily be based on what people think is right. Moreover it should definitely meet their overall expectations. Any government or political party can come up with appealing development programs but nothing will be achieved unless they are implemented. Transforming the overall ambitions of individuals in to the vision of the government can only become a reality if individual parliamentarians execute their respective responsibilities with a strong political will.

  1. As a leader, collective aspirations are made a reality through flawless execution as mentioned above. No leader can do a single micro level activity on his/her own. In order to achieve this, they should be able to get things done and make things happen through the cooperation and support of others, be it bureaucratic public sector or private sector. All in all, 99% of any kind of success depends on the flawless execution of plans and activities.

Objective Savvy

  1. Within the four macro level challenges identified earlier in this article, there are many other challenges that require time and energy, rational and emotional contemplation in order to come up with robust solutions. Certain issues regardless of them being at a macro or a micro level, have been pestering the country for ages. Those affected by these issues say that no one has taken their issues seriously. Those who hold office should be agile in addressing these issues and responsive when the issues are brought to their attention. In order to better manage such issues, every parliamentarian should be objective savvy so that they can quantify the impact and prioritize a course of action accordingly.

  1. In order to enable growth and achieve the vision of the government, certain policy decisions should be made. This requires changes to the existing regulations and reform in order to meet modern day requirements. Decisiveness in such policy decisions and reforms is a must, in order not to give in to political and social pressures that are coming from multiple parties because what is right is not always popular.

  1. It is easier said than done. Only fruits fall from trees without an effort. Everything else has to be made possible. Leaders should be proactive in looking for the reasons as to why things are not happening the way they are supposed to happen. While the articulation of a vision and its flawless execution are critical, leaders should also be proactive in looking for obstacles that may hinder progress. Be it red tapes, process or policies, if seen as an obstacle it should be proactively eliminated to facilitate execution.

  1. We have learnt that insignificant daily activities can lead to significant outcomes. Therefore relentless focus in achieving respective objectives is key regardless of the changes that may occur.

Engaging Others

Politicians are often blamed for being surrounded by the wrong people. These so called ‘wrong’ supporters are supposed to be the wrong crowd to have around due to various reasons. They may be politically misguided due to the fact that they were supporting a different political ideology or regime or they used to criticize the current government when they were supporting the opposition. They may be known for corruption or various other wrong doings in the past. Even though the prevailing electoral system encourages being surrounded by the wrong crowd, it is detrimental that political leaders surround themselves with the right sort of people who are capable. When you say ‘the right people’ they should be politically accurate, believing in an effective political ideology and should have faith in an effective political vision. Moreover they should be generally accepted by the majority of the general public. Just being right does not necessarily mean that they are capable. It is very important that the people who are appointed to hold different leadership positions in public enterprises, different ministries and authorities are capable of executing tasks and getting things done by keeping the overall political vision in mind. It is extremely important to have a group of people who are not only capable of executing plans but who also have faith in the political vision of the government.

If change were an easy thing to achieve, things would have been much easier all over the world. The amount of resistance and political pressure that are coming from different parties would have been minimal if it were the case. It is very much important for a leader to be able to influence the key stakeholders across the society at large. Be it religious leaders, social leaders, labour unions and various other social groups who have received a sense of acceptance among the general public. Unless properly managed, these stakeholders can sabotage or can cause significant delays for much awaited political efforts to develop the country as a whole.   Therefore, it is important to maintain regular briefings and educate them on and about the bigger picture in terms of the overall socio economic impact.

Holding broad support

The ability and the charisma to capture and hold the support of diverse groups both locally and internationally is a key trait that a determined and an effective political leader should possess. However this does not mean using bribes and fake promises to keep a strong hold on his/her supporters and well wishers, nor does this mean giving a packet of rice and a bottle of arrack to get the votes of his/her electorate, rather this simply means the ability to be a leader in the true sense of the word by being fair, honest and transparent as much as possible in his/her dealings and activities. A political leader who is widely supported and loved is supposed to be street smart and know instinctually to get off his/her high horses and approach the people at a grass root level as well as h/she is supposed to be qualified, intelligent, well versed, and literate in English and all the other main languages used locally in order to gain the respect and support of professionals and intellectuals both at a national and an international level.  In order to unite diverse ideologies, different age groups, diverse ethnic groups and socio economic classes in the country, an effective political leader needs to set an example to the general public by treating everyone equally, enacting policies to reduce ethnic, age and gender discrimination. This means reducing favourtism and eradicating unfair practices such as giving prominence to his/her close friends, family or supporters.  Moreover, a sense of clear direction and a high level of transparency, where all of his/her activities are accounted for and carried out in an open manner, will surely increase the support and respect that such a political leader would receive.

All in all, as a nation we have a long way to go in order to be a proud nation led by effective leaders. Such a day is not far from our future only if our leaders are willing and humble enough to look within themselves, accept their weaknesses and be brave enough to empower themselves by equipping themselves with the missing pieces, qualifications and tools. Only then, would we be able to effectively address the challenges that are facing us and be a proud nation led by great leaders.

The trimmed version of the same article can be found here – http://www.dailymirror.lk/article/A-long-way-to-go-135327.html