Delivery models, merits and demerits

Why PPP?

PPP offers a win-win-win solution for the public sector, the private sector and members of the public.

For the Public Sector:

PPP allows the public sector to get better value for money in the delivery of the public services. Moreover, by switching its role from a provider to a buyer of services, the government can focus on its core responsibilities of policy-making and regulation. Through closer partnership with the private sector, efficiency gains and other benefits can be reaped, particularly in the following manner:

a) Private Sector Expertise and Competitive Advantage: PPP allows government to tap into the private sector?s expertise, innovation and competitive advantages in the delivery of public goods and services. This could raise quality and improve cost effectiveness through innovative designs or business tie-ups. In addition, the government can also tap into the private sector networks to maximize asset utilization and commercial potential. One such example is the Sports Hub where private sector connections and expertise can be leveraged to bring in world-class sporting programmes in order to enhance asset utilization.

b) Cost Efficiency through Lifecycle Optimization: By combining design, build, maintain and operate functions in the same PPP contract with the provider, it gives the provider a strong incentive ensureing the project design takes into consideration operational and other lifecycle costs. PPP also allows for private sector scrutiny of design specifications and the business model, with the possibility of achieving the same outcomes at lower cost.

c) Optimal Sharing of Risks: In a PPP project, Government and the private sector share the risks of delivering a service. The risks may be allocated according to each party?s expertise in managing and mitigating the risks in the service delivery process. Typical risks that are allocated to the private sector include design, construction and financing risks. On the other hand, the public sector may take on political and regulatory risks, while other risks such as demand / revenue risks will be assigned to whichever party is best able to bear it. By transferring the financial risks to the private sector, there will also be greater certainty over the Government?s future cash flows.

For the Private Sector:

PPP offers more business opportunities to the private sector. The private sector will be engaged to deliver a full suite of services (e.g. design, construction, operations and maintenance) which were traditionally performed in-house by public agencies or performed by multiple private companies.

PPP also allows the private sector to move from just constructing assets according to clearly specified designs, to designing and delivering innovative solutions. The private sector has more room to innovate and offer efficient solutions for public services. In addition, the private sector can also use its expertise and network to maximize asset utilization and the commercial potential of the project.

The involvement of private sector players in PPP projects may also give companies valuable expertise and experience to spur their development in the PPP arena and position them to win overseas contracts.

For Members of the Public:

PPP brings together the expertise of the government and the private sector to meet the needs of the public effectively and efficiently. When structured appropriately, PPP will deliver public services that can better meet the needs of the public without compromising public policy goals and needs.

? Government will also ensure that public interest is protected in all PPP projects and that service delivery will meet public needs at the best value for money when the private sector is brought in to provide government services.

Merits and Demerits of PPP Model

The merits of Public Private Partnerships (PPP?s) include 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 utilisation of state assets to the benefit of all users of public services

? Easyness in funding to mega projects Easy

The demerits of Public Private Partnerships (PPP?s) include the following:

? PPP contracts are typically much more complicated than conventional procurement contracts

? This is principally because of the need to anticipate all possible contingencies that could arise in such long-term contractual relationships. Each party bidding for a project spends considerable resources in designing and evaluating the project prior to submitting a tender. In addition, there are typically very significant legal costs in contract negotiation. Having several bidders do this involves a cost which can add up in total to tens of millions. It has been estimated that total tendering costs equal around 3% of total project costs as opposed to around 1% for conventional procurement. The cost of both successful and unsuccessful bids is, in effect, built into total project costs.

? Given the length of the relationships created by PPPs and the difficulty in anticipating all contingencies, it is not unusual for aspects of the contracts to be renegotiated at some stage. Wherever possible, provisions are included in the contracts that spell out how variations are to be priced. But, given the length of time spanned by the contract, it is almost inevitable that circumstances will arise which cannot be foreseen.

? Where the need for renegotiation comes from the public agency (which, it appears, is often the case, perhaps as a result of a change in government policy) and no pricing rule is contained in the contract, the government can end up paying a heavy price, since the price is not determined in a competitive bidding context. The cost of such changes is difficult to factor into the original project evaluation, since by definition, it is unanticipated.

? Given the difficulty in estimating financial outcomes over such long periods, there is a risk that the private sector party will either go bankrupt, or make very large profits. Both outcomes can create political problems for the government, causing it to intervene.

? One of the difficulties with performance specification in the area of service delivery is that performance sometimes has dimensions which are hard to formulate in a way that is suitable for an arms-length contract.

 

 

 

 

P. B. Dandawate

Chairman and Managing Director Dhruv

Consultancy Services Pvt Ltd

Dandawate has worked in Maharashtra PWD and MSRDC for more than 20 years and has vast experience in road and bridge construction, toll and BOTs. He was involved in formulation of BOT policy and implementation of mega BOT projects in Maharashtra.