The Challenges of Public-Private Partnership

Governments around the world have the responsibility to improve public services for the benefit of their citizens. This involves establishment, development, and maintenance of public infrastructure, transportation, and health services among others.

However, due to constraints on public resources and fiscal space, governments are increasingly partnering with the private sector to gain an additional source of funding or to fill the funding gap.

A public–private partnership (PPP, 3P or P3) is a business relationship between the government and a private sector company to fulfill the purpose of completing either a government project or a private business venture that will benefit the public.

PPPs are becoming a trend because it can give immediate results in terms of completing a project in a shorter span of time or increasing the possibility of starting the project.

Scott Kinner and Bruce Allender of iMG, a global leader in sports, events, media, and fashion, gave a list of benefits of PPPs which include:

• Asset management implementation to ensure that capital improvements are carried out and those facilities are maintained
• Capital improvement efficiencies for increased synergies and efficiencies across the entire utility spectrum for a municipality
• Ability to retain ownership of the assets
• Retention of workforce to present opportunities for the workforce to participate in knowledge and skills transfers, as well as learn new technologies
• Customizable PPP models to meet the exact needs of the local community
• Relief of financial stresses on cities
• Upfront capital used on a variety of municipal needs and can help relieve financial pressures on other departments
• Economic growth
• New revenue opportunities
• Ability to handle aging workforce
• Investment in new technology
• Savings on precious natural resources

Looking at the list, PPPs seem to be very beneficial to the public. However, there are debates as to why PPPs shouldn’t be used as a quick fix for everything.

First, many believed that PPPs is a gateway to privatization. In the Philippines, the 5.6-billion modernization program of the Philippine Orthopedic Center became a hot topic earlier this year. Philippine Orthopedic Center is a government medical facility under the supervision of the Department of Health which provides health care delivery to patients with a musculoskeletal disorder and related conditions.

Many believed that the privatization of the Philippine Orthopedic Center will correspond to increase in medical costs which will add to the burden of poor Filipinos who can’t even afford to have an adequate shelter, food, clothing and education.

Another potential challenge is that PPP projects are likely to be greater than the traditional government procurement processes in terms of its development, bidding and ongoing costs in. An example would be the water sector in France.

According to a comprehensive study of France’s water PPPs, about three-quarters of the service is delivered by the private sector through PPPs. They found out in 2004 that the price of water under PPPs is 16.6 per cent higher than in places where the government provides the service.

Others believe that another aspect used to justify PPPs is risk transfers.

CNA, one of the largest American commercial property and casualty insurance company, defined risk transfer as a risk management and control strategy that involves the contractual shifting of a pure risk from one party to another.

However, transferring risk has costs. PPP contracts normally transfer risk to the contractor and cost more (around 25%) than the conventional contracts.

Some people also believe that PPPs are prone to corruption and it can be used for political means. For example, a politician can receive funds from private sector companies for their campaign. In exchange, that politician has to approve a PPP project as a token of appreciation.

For example, according to the UN, PPP projects in India’s roads and power sectors are most prone to corruption.

Between 2012 and 2017, India aims to invest a trillion-dollar infrastructure creation where most of it will come from PPPs. UNODC reached out to 400 private sector and government officials to confirm whether there’s corruption going on with these projects. However, they only received feedback from 100 respondents. They found out that most of them are reluctant to talk about corruption which is clearly something that needs to be addressed. Despite their silence, the survey conducted by the organization showed that although 42% of firms feel roads and power are the most corrupted sectors, 75% of government officials perceived these two sectors as “hotbeds of graft”. Almost 87% of private players said that bidding norms and tender criteria were altered to qualify certain bidders, to which over 44% government officials agreed.

Misinformation and elusiveness also contribute to this problem. There are some PPPs that cost more than what is agreed. Some blame it on circumstances, but the truth is, some people involved in the PPP provided false information by asking for funds that are more than what is needed. There are also some companies who withheld information on the grounds of confidentiality.

We can say that PPPs is a double-edged sword. It has its own advantages and disadvantages. But what’s certain is, governments who are keen to use PPPs to improve public service should find a way to weigh things out for them to understand how the citizens can fully benefit from these projects. There should be a clear agreement from both parties and a strict adherence to the contract. Transparency is essential to prevent any unexpected consequences that will greatly affect its citizens.

Sometimes, it is better for the government to do things on their own which will help the public sector to gain flexibility, control, and comparative efficiency due to reduced transaction costs and contract uncertainty and the efficiency gains of more democratic accountability.

The lesson here is simple. If you can do it on your own, do it. If you need support, you can ask for it. But make sure that the citizen’s welfare is the utmost priority above anything else.