Public-Private Partnership in Changing World: Nexus between Public-Sector Need and Private-Sector Goal… Value-for-Money…

Public-private partnership is an important option that can be utilized in times of economic uncertainty and in periods of prosperity. There is a nexus between the public sector’s needs and the private sector’s goals. ~Doug Domenech

Public-private partnership is often touted as ‘best-of-both-worlds’ alternative to public provision and privatization. But in practice, they have been dogged by contract design problems, waste, and unrealistic expectations. Governments sometimes opt for a public-private partnership because they mistakenly believe that it offers a way to finance infrastructure without adding to the public debt…

According to Eduardo Engel and others; there is ‘best practice’ to ensure that public-private partnership provides public value, for example; choosing partnership for the right reasons; relying on flexible-term ‘present-value-of-revenue’ (PVR) contracts; implementing good governance practices… Enacting these reforms will help maximize taxpayer value and reduce risks for each party involved in a public-private partnership… Public-private partnership describes a government service or private business venture which is funded and operated through partnership of government and one or more private sector companies. 

These schemes are sometimes referred to as PPP, P3 or P3. PPP involves a contract between a public sector authority and a private party, in which the private party provides a public service or project and assumes substantial financial, technical and operational risk in the project. Over the past two decades more than 1400 PPP deals were signed in the European Union, representing an estimated capital value of approximately €260 billion. Since the onset of the financial crisis in 2008, estimates suggest that the number of PPP deals closed has fallen more than 40%.  

Today, partnering is the new governance and it continues to evolve, particularly to address new trust environments due to social/economic changes… For more than two decades public-private partnerships have been used to finance health infrastructure. For example; spending estimates on healthcare among the OECD and BRIC nations will grow by 51% between 2010 and 2020, amounting to a cumulative total of more than $71 trillion.

Of this, $3.6 trillion is projected to be spent on health infrastructure and $68.1 trillion will be spent on non-infrastructure health spending cumulatively over the next decade. Health care spending in the U.S. accounts for approximately half of all health spending among OECD nations, but biggest growth will be outside of U.S.

According to PwC projections, the countries that are expected to have the highest health care spending growth between 2010 and 2020 are China, where health spending is expected to increase by 166%, and India, which will see a 140% increase. As health spending increases it is putting pressure on governments and spurring them to look for private capital and expertise…

According to FEMA; there’s no way government can solve challenges of a disaster with a government-centric approach. It takes the whole team... FEMA believes in the value of public-private partnership and has worked steadily to provide tools, models, and resources designed to inspire their creation and nurture their success…

According ‘PricewaterhouseCoopers LLP’: To rebuild crumbling infrastructure U.S. may, at last, be ready to fully embrace public-private partnership (PPP)– many of the country’s highways, bridges, rail lines, ports, and airports have either deteriorated to a state of disrepair or have become increasingly outdated. Public officials are obliged to consider timely, cost-effective alternative approaches to financing, building, operating, and maintaining infrastructure. Long-ignored structurally deficient infrastructure must first be repaired-replaced.

Equally important is the pressing need to replace infrastructure that no longer serves its original purpose. An important concern is identifying sources of short-and long-term funding. One viable option, widely used in Europe and other parts of the world to address infrastructure crises, is the use of public-private partnership…

The Brookings Institution estimates that the ‘American Recovery and Reinvestment Act’ of 2009 authorizes an estimated $126 billion for infrastructure. That’s a good start, but the money can be stretched much further if government agencies partner with the private sector for additional financing. By some estimates, available private capital totals more than $180 billion…

According to Dr. Sotiris Pagdadis; the number could be significantly higher if the government is forthcoming in its desire to forge true strategic long-term alliances with the private sector, and is not just looking for a quick fix to monetize desperately needed projects. 

According to Leonard Shaykin; public pension funds have begun allocating between 1% and 10% of their portfolios to public-private partnership projects… Pension funds currently view PPP investments in a variety of ways– as bond-like, as real estate-related asset, and as simply private equity alternative investment…

Value for money in public-private partnership decisions: Value-for-money (VfM) analysis evaluates future cash flows to determine whether a capital project is best suited to a traditional public-procurement option or a public-private partnership. Conducted by multiple independent third parties with specialized operations, costing, and engineering expertise, VfM assessment measures relative financial benefit. It also provides an audit trail that ensures public transparency. The public-sector comparator (PSC), a major component of VfM analysis, is a hypothetical, risk-adjusted cost estimate for a project, were that project to be financed, owned, and implemented by public sector.

Employing financial and statistical modeling techniques to estimate costs, it provides a baseline measure against which to compare future bids, as well as, a benchmark to measure ‘value for money’. VfM analysis allocates, analyzes, quantifies, and simulates risk to better understand the project’s risk profile: retained risks are retained by the public sector, shared risks are shared by the public and private sectors in PPP option, and transferable risks are transferred to the private sector in a PPP option.

VfM analysis allows well-informed, accurate, full-cost pricing early in a project. It also encourages competition from bidders, who are aware that a genuine benchmark exists that they will have to beat. A requirement for all projects in the UK since the early 1990s, the public sector comparator is now standard practice in much of Australia. However, no uniform global method exists to calculate VfM analysis or simulate the public-sector comparator; standards vary by country… However, despite their many merits, PPP aren’t the optimal approach for every project. In fact, Pagdadis cautions– while the monetized value of the asset itself can be enticing, it should not be the reason to enter a venture.

Public-private partnership are not always completely thought through because states in debt can forge PPP with a ‘trophy’ asset to generate significant cash-up front that can be used to support other desperately needed projects.

According to Pagdadis; this may also encourages states to enter into longer term concessions than they would not normally feel comfortable entering into. The longer the concession period, the more up-front cash they can realize. A public asset in the hands of the private sector for an indeterminate amount of time simply creates unnecessary anxiety.

Public-private partnership introduces significant efficiency and reliability, perhaps the most compelling argument for their use. They are also intrinsically transparent. As such, they have earned a strong reputation for the ability to deliver projects on time and without the typical cost overruns that plague many multiyear infrastructure projects– especially when multiple administrations, each with their own priorities, come and go during the lifespan of a project. In a 2009 study of 114 PPP, the ‘UK’s National Audit Office’ found that 69% were delivered on time and 65% came in within budget.

In Australia, financial advantage of PPP has been well documented. The University of Melbourne conducted a study of 42 traditional procurement projects and 25 PPP and concluded that PPP provide far greater cost certainty. The researchers found that once the contract had been signed, PPP had an average cost escalation of 4%, while traditional procurement projects had a much higher average cost escalation of 18%. To understand the benefits more clearly, consider the PPP project for Canada Line, a 12-mile regional rapid-transit rail line…

Completed several months ahead of schedule in August 2009, Canada Line is the achievement of a private consortium that won a 35-year contract to design, build, partially finance, operate, and maintain the rapid-transit system. It’s the first transit project in North America to be developed as a PPP. The net-present-value (NPV) of the transaction in 2003– when the deal closed– was $1.47 billion. Before deciding to proceed with a PPP, officials studied partnerships in Australia and UK, and conducted ‘value-for-money’ (VfM) analysis.

That type of analysis evaluates future cash flows to determine whether a capital project is best suited for ‘traditional public-procurement option’ or PPP. In the case of Canada Line, the VfM analysis found that the PPP option offered significantly higher value-for-money than public sector procurement.

According to Jane Bird; we were confident that our partner had the necessary experience to manage the risks we assigned… It’s all about education; I can’t overstate the need to continue to communicate and educate on both the government side and the public side. According to the United Nations, good partnership governance is open to much interpretation but overall six core principles have become widely accepted:

  • Participation: Involvement of all stakeholders.
  • Decency: Formation and stewardship of rules without harming or grievance to people.
  • Transparency: Clarity and openness with which decisions are made.
  • Accountability: Responsible to society for what they say and do.
  • Fairness: Rules apply equally to everyone in society.
  • Efficiency: Human and financial resources are applied without waste, delay or corruption, or without prejudicing future generations.

The most successful public-private partnership combines best of public-sector governance with the most valuable of private-sector efficiencies.

According to Darwin Bondgraham: PPP is at least three things: First, re-branding of privatization– the phrase purposefully evokes a win-win scenario involving equal ‘partners’ working toward a common goal. Government leaders have been sold this new kind of privatization as solution to declining tax revenues and borrowing capacity, while private companies claim to offer expertise and capital in spirit of public service…

This worldview, meanwhile, hails private companies and the private profit motive as the bearers of efficiency and fiscal discipline… Second, it can become a private finance initiative, where the government takes advantage of private-sector management skills by awarding long-term franchises to a private-sector partner, which assumes the responsibility for constructing and maintaining the infrastructure and for providing the public service. Third, it can cover– selling of government services to private-sector partners, which can better exploit commercial potential of public assets…

Given the many positive attributes, then why are PPP still in their nascent stage in many countries? For one thing, studies indicate that government officials continue to harbor misgivings and misconceptions that PPP proponents must be prepared to address. Often, the reluctance to consider PPP reflects a lack of understanding of the details, based on a dearth of comprehensive information.

A 2009 survey by consulting firm Halcrow Inc. shows a clear correlation between experience and interest in PPP. While 70% of 75-U.S. state and local officials surveyed know of projects outside their own states, 61% have had no direct PPP experience and don’t understand the terms and benefits. But more than 90% of the surveyed state and local officials with experience with PPP expressed interest in them. Still, three-quarters of officials expressed ambivalence.

Officials with knowledge of PPP cited difficulty of implementing and contracting such projects, while inexperienced officials were worried about losing future cash flow from projects and said government manages projects better than private companies do. Both groups also expressed concern about unacceptable profits made by private businesses at the expense of users, and inexperienced officials worried that private entity might skimp on maintenance and repairs to boost profits…

According to Stavridis and Evelyn N. Farkas; harnessing know-how and resources of corporations, universities, research institutions, and charitable, as well as, development organizations is and will be critical to maintaining policy innovation and effectiveness. Just as we need to invest in education and research to cultivate national competitiveness, we must build partnership leveraging private-sector expertise-capability to enhance both global development and national security.