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Home > Business > Special

The public-private partnership model

Matthew Angus and Lee Clarke | June 27, 2003

Public service provision in India is seen by many as inadequate. It is not that India lacks the engineering expertise or the desire to provide reliable and quality public services (a quick journey on the New Delhi Metro proves that); it is just a matter of organisation and funding.

Some commentators, such as the World Bank, point out that the government tries to extend access to services, perhaps in terms of political capital instead of sound economics.

Added to that, corruption is a major problem, making sure that funds intended for the payment of service provision do not find their way to the intended end users.  But what is the solution?  Is there any way in which better governance, funding and expertise can be brought in without a significant increase in tax or borrowing?

Using private money to fund the provision of public services may be part of the solution. Investment in transport, communications and urban environmental services are factors that can prompt productivity to such an extent that it would outweigh any increased cost of borrowing that the private sector will incur, and which the public sector will have to pay for.

Also with sufficient risk transfer to the private sector, the use of private money and private sector expertise in providing public services may be acceptable and justifiable, in terms of value for money, to the Indian government.

The concept of partnerships between the public and private sectors is already being embraced by a number of so called 'developing' countries.

But one place where such schemes have been used for a relatively long time is the United Kingdom where over £ 4 billion worth of private funding has been devoted to the provision of public sector services and infrastructure.

PPPs in the UK have been used in all sorts of sectors including roads, hospitals, schools, prisons, information technology infrastructure and general governmental administrative tasks.

In PPP schemes, the public sector asks the private sector to fund, provide and take some of the risks inherent in the project, in return for the possibility of making a profit.  The idea is that the public body purchases a service.

It is not a method of infrastructure procurement per se, although the project will involve either the construction or refurbishment of infrastructure.

In a hospital scheme for example, the services being purchased will be the use of the hospital, equipment and the provision of ancillary services (such as cleaning and repair) -- the doctors and nurses are still trained and employed by the government.

This switches the role of the public sector from a provider of services to a guardian of services.  Control in the day to day delivery of certain services is taken away from government officials and government managers.  If services are not being provided satisfactorily, the public sector managers can make deductions from the fees paid.

At the heart of the PPP concept is optimum risk allocation. Certain risks are transferred to the private sector such as design risk, construction risk and operational risk, incidental to running any business.

Risk transfer is supposed to outweigh the increased cost of borrowing by the private sector who will have to obtain the finance from an investment bank at a more expensive rate than the government. Whether this is true is a matter of debate and still requires some research.

However, PPPs are not without their critics, and many of the problems facing the UK will of course also relate to any implementation in India. Some schemes have not worked well at all and have collapsed.

For example, a government administration scheme for digital scanning of passports went wrong, resulting in a substantial increase in waiting time, and a subsequent rise in the  price of passports. So it is not always the case that private sector involvement leads to better public service provision.

Also, in the UK, many people (mainly on the political Left) see PPPs as a kind of mortgage, for which the public will pay more in the long run. Evidence suggests that some PPPs are more expensive than outright procurement, and some people object to the 'have now, pay later' mentality.

A further problem facing the introduction of such schemes (and one which might affect any introduction in India) is the views of the public sector workers.  In the UK, some public sector workers and their unions object to the private sector taking control in areas where there is a long tradition of public service.

Public sector workers may also consider (rightly or wrongly) that their employment rights will be reduced and job security threatened and this may lead to industrial action.

Whatever the specific problems India may face if she were to introduce PPPs, the acid test will be whether banks are interested in funding such projects.

As the bank is providing the finance, it will want to ensure that there is no risk or impediment to its loan being repaid, which ultimately flows from contract payments made by the public sector. It would also like to see quick and efficient dispute resolution procedures and will require as many procedures in place to avoid corruption.

The ultimate challenge is whether the government can provide an investment environment that will attract banks and funding.

But PPPs also present incentives for governments. In the UK, some PPP schemes are 'off balance sheet' so they do not appear on the UK government's books. This helps make the UK government's public expenditure figures look rather good.

Whether this is good economics and/or accounting practice is another debate. Further, the speed at which PPP infrastructure is constructed will be attractive to any government who wishes to meet election pledges on services, without an increase in tax or borrowing.

Because the private sector does not receive any payment until the infrastructure is built, there is a real incentive to get the infrastructure built quickly. In the UK, PPP schemes are constructed much faster so that they can then charge for the services.

The electorate can see the infrastructure being built before their eyes and projects may not be affected by a new government reversing the decision or cutting off the funding.

PPPs are not necessarily a bad idea; some schemes in the UK are delivered early, to a good quality standard and on budget. It remains to be seen whether they are good value for money.

The Indian government should therefore look very carefully at PPPs, because if economic advancement can be made via infrastructure improvements, it may meet any increased cost of involving the private sector.

(The authors work in the projects department of Beachcroft Wansbroughs, London and are active on behalf of the public and private sectors engaged in PPPs in the UK)

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