Public-Private Partnerships

… a core concept in Governance and Institutions and Atlas100

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Concept description

The PPP Knowledge Lab (sponsored by a group of international agencies, reference below) defines a public-private partnership (PPP) as “a long-term contract between a private party and a government entity, for providing a public asset or service, in which the private party bears significant risk and management responsibility, and remuneration is linked to performance.”

The OECD (link to pdf on right) has produced a series of recommendations on the public governance of public-private partnerships.

They are reproduced below:

A. Establish a clear, predictable and legitimate institutional framework supported by competent and well-resourced authorities

1. The political leadership should ensure public awareness of the relative costs, benefits and risks of Public-Private Partnerships and conventional procurement. Popular understanding of Public-Private Partnerships requires active consultation and engagement with stakeholders as well as involving end-users in defining the project and subsequently in monitoring service quality.

2. Key institutional roles and responsibilities should be maintained. This requires that procuring authorities, Public-Private Partnerships Units, the Central Budget Authority, the Supreme Audit Institution and sector regulators are entrusted with clear mandates and sufficient resources to ensure a prudent procurement process and clear lines of accountability.

3. Ensure that all significant regulation affecting the operation of Public-Private Partnerships is clear, transparent and enforced. Red tape should be minimised and new and existing regulations should be carefully evaluated.

B. Ground the selection of Public-Private Partnerships in Value for Money

4. All investment projects should be prioritised at senior political level. As there are many competing investment priorities, it is the responsibility of government to define and pursue strategic goals. The decision to invest should be based on a whole of government perspective and be separate from how to procure and finance the project. There should be no institutional, procedural or accounting bias either in favour of or against Public-Private Partnerships.

5. Carefully investigate which investment method is likely to yield most value for money. Key risk factors and characteristics of specific projects should be evaluated by conducting a procurement option pre-test. A procurement option pre-test should enable the government to decide on whether it is prudent to investigate a Public-Private Partnerships option further.

6. Transfer the risks to those that manage them best. Risk should be defined, identified and measured and carried by the party for whom it costs the least to prevent the risk from realising or for whom realised risk costs the least.

7. The procuring authorities should be prepared for the operational phase of the Public-Private Partnerships. Securing value for money requires vigilance and effort of the same intensity as that necessary during the pre-operational phase. Particular care should be taken when switching to the operational phase of the Public-Private Partnerships, as the actors on the public side are liable to change.

8. Value for money should be maintained when renegotiating. Only if conditions change due to discretionary public policy actions should the government consider compensating the private sector. Any re-negotiation should be made transparently and subject to the ordinary procedures of Public-Private Partnership approval. Clear, predictable and transparent rules for dispute resolution should be in place

9. Government should ensure there is sufficient competition in the market by a competitive tender process and by possibly structuring the Public-Private Partnerships program so that there is an ongoing functional market. Where market operators are few, governments should ensure a level playing field in the tendering process so that non-incumbent operators can enter the market.

C. Use the budgetary process transparently to minimise fiscal risks and ensure the integrity of the procurement process

10. In line with the government’s fiscal policy, the Central Budget Authority should ensure that the project is affordable and the overall investment envelope is sustainable.

11. The project should be treated transparently in the budget process. The budget documentation should disclose all costs and contingent liabilities. Special care should be taken to ensure that budget transparency of Public-Private Partnerships covers the whole public sector.

12. Government should guard against waste and corruption by ensuring the integrity of the procurement process. The necessary procurement skills and powers should be made available to the relevant authorities.

Paul Krugman’s comments on President-elect Trump’s infrastructure plan

In his 19 November 2016 column (reference below), Krugman writes:

“So, what do we know about the Trump infrastructure plan, such as it is?

“Crucially, it’s not a plan to borrow $1 trillion and spend it on much-needed projects – which would be the straightforward, obvious thing to do. It is, instead, supposed to involve having private investors do the work both of raising money and building the projects – with the aid of a huge tax credit that gives them back 82 percent of the equity they put in. To compensate for the small sliver of additional equity and the interest on their borrowing, the private investors then have to somehow make profits on the assets they end up owning.

“You should immediately ask three questions about all of this.

“First, why involve private investors at all? It’s not as if the federal government is having any trouble raising money – in fact, a large part of the justification for infrastructure investment is precisely that the government can borrow so cheaply. Why do we need private equity at all?

“One answer might be that this way you avoid incurring additional public debt. But that’s just accounting confusion. Imagine that you’re building a toll road. If the government builds it, it ends up paying interest but gets the future revenue from the tolls. If it turns the project over to private investors, it avoids the interest cost – but also loses the future toll revenue. The government’s future cash flow is no better than it would have been if it borrowed directly, and worse if it strikes a bad deal, say because the investors have political connections.

“Second, how is this kind of scheme supposed to finance investment that doesn’t produce a revenue stream? Toll roads are not the main thing we need right now; what about sewage systems, making up for deferred maintenance, and so on? You could bring in private investors by guaranteeing them future government money – say, paying rent in perpetuity for the use of a water system built by a private consortium. But this, even more than having someone else collect tolls, would simply be government borrowing through the back door – with much less transparency, and hence greater opportunities for giveaways to favored interests.

“Third, how much of the investment thus financed would actually be investment that wouldn’t have taken place anyway? That is, how much “additionality” is there? Suppose that there’s a planned tunnel, which is clearly going to be built; but now it’s renamed the Trump Tunnel, the building and financing are carried out by private firms, and the future tolls and/or rent paid by the government go to those private interests. In that case we haven’t promoted investment at all, we’ve just in effect privatized a public asset – and given the buyers 82 percent of the purchase price in the form of a tax credit.

“Again, all of these questions could be avoided by doing things the straightforward way: if you think we should build more infrastructure, then build more infrastructure, and never mind the complicated private equity/tax credits stuff. You could try to come up with some justification for the complexity of the scheme, but one simple answer would be that it’s not about investment, it’s about ripping off taxpayers. Is that implausible, given who we’re talking about?”

Topic, subject and Atlas course

Modernizing Government in Governance and Institutions and Atlas100.

Sources

PPP Knowledge Lab, What is a PPP, at https://pppknowledgelab.org/ppp-cycle/what-ppp, accessed 21 November 2016.

OECD (2012), Recommendation of the Council on Principles for Public Governance of Public-Private Partnerships, at http://www.oecd.org/governance/budgeting/PPP-Recommendation.pdf, accessed 21 November 2016.

Paul Krugman (2016), Infrastructure Build or Privatization Scam? New York Times, 19 November, at http://krugman.blogs.nytimes.com/2016/11/19/infrastructure-build-or-privatization-scam/, accessed 21 November 2016

Page created by: Ian Clark, last modified on 21 November 2016.

Image: Amazon.com at https://www.amazon.com/Deliverology-101-Field-Educational-Leaders/dp/1412989507, accessed 20 November 2016.