Dr. Manisha Verma*
Abstract
‘Public
Private Partnership’ or ‘PPP’ has become a buzzword in the public policy
circles, and is being increasingly preferred as a medium for provisioning of
public services both within the industrialised and low-income countries in
various sectors.
This
article provides theoretical insights into the concept of PPP, analyses reasons
for their growth, and argues at a theoretical level for a more active role of
the State in governance of the partnerships.
Role of the State in Public Private Partnerships: A
Theoretical Perspective
1
Introduction
The concept of ‘Public Private
Partnership’, or ‘PPP’ as they are popularly called, has become a buzzword of
late in the policy circles, and is being increasingly preferred as a medium for
delivery of public services both within the industrialised as well as
low-income countries. Although PPPs are more common in the transport
infrastructure sector such as roads, ports, railways, bridges and airports,
primarily due to the commercial pricing models, they are also found in water
supply and sanitation, tourism, education, health, and other social sector
programmes, albeit to a lesser degree. A significant difference is however
observed in the nature of PPPs across these sectors. In many cases they appear
to be glorified forms of service level agreements rather than ‘partnerships’ as
are defined in the normative literature on PPPs.
Engagement with the private sector for
provisioning of infrastructure facilities has become increasingly popular in
the past few decades in the country. Although PPPs as
a means of delivery of public services are comparatively recent in India, increasing
reliance has been placed on private sector participation for fulfilling the
country’s infrastructure deficit (Planning Commission, 2010a). As a policy choice,
PPPs are perceived to enable access to private sector resources and expertise
to enhance efficiency of infrastructure projects, and improve service delivery.
In terms of investment, while private participation was about 36% of total infrastructure
investment during 2007-2012, it is expected to reach 50% of the planned
investment of about US $1 tn (about 10.8% of the country’s GDP) in 2012-2017.
Within developing low–income countries, India is reported to have the largest
market for private participation in infrastructure (World Bank, 2010).
It is claimed that India has the maximum
number of projects within PPP in the transport sector. Its experience in
highways and expressways has been substantial. About 93% of all the road
projects in India have been developed within the PPP mode during the last five
years. The largest national roads and highways development programme in the
country, and one of the largest in the world- the NHDP (National Highways
Development Programme)- is being developed within the PPP framework. Targeted
investments in the road sector have been doubled to about INR 3140 bn[1]
for 2012-2017 over 2007-2012. Recently, the empowered Group of Ministers on
infrastructure has decided that 95% of road projects in the current year will
be through PPP. Several airports are being
built with private sector participation, while some metro-rail projects, such
as the Hyderabad metro, are also opting for this mode of procurement rather
than the traditional approach of public sector delivery. Recently a fund of INR
50 bn has been set up by the Government of India for supporting Research and
Development (R&D) in PPPs in the field of vaccines, drugs and
pharmaceuticals, supercomputing, solar energy and electronic hardware.
An
investment of USD 1 tn has been envisaged for infrastructure during the 12th
Plan; of this USD 500 bn is expected to be contributed by the private sector. India
attracted US$ 71.9 bn in infrastructure in 2010 which is an 85% increase from
2009. This is the highest investment in any developing country in 2009-2010.
Furthermore, according to a recent study by the Cambridge University and Royal
Bank of Scotland (RBS,
2011), emerging countries will spend about US $20 tn in the next 20
years on infrastructure, registering growth of 158%. Asia will account for bulk
of this demand with about US$ 15.8 tn in investment; India is listed as one of
the countries that is expected to benefit substantially from this growth.
Sector-wise, roads will see the second maximum investment (US$ 4.2 tn) after
power (US$ 12.7 tn).
These
figures demonstrate the primacy given to private sector participation in the
infrastructure sector, at the policy level. In view of political favour that
PPPs have attracted and the increasing preference for these modes for the
infrastructure and other sectors, it is relevant and timely to understand why
the concept of PPP has become popular in various countries. This article will
also critically analyse PPPs and provide an insight into the growing consensus in
literature for a leading and active role of the State in their governance.
2
Public Private Partnerships (PPPs)
Different definitions and interpretations have
been associated with the term Public-Private Partnerships depending upon the
context within which they are invoked and operated. Some scholars (Hodge, 2009;
Osborne, 2000; Atkinson and Coleman, 1992) argue
that the meaning of the term ‘PPP’ may have contextual explanation
within the broader socio-economic, cultural and country context in which it
operates. It
is however observed that these different meanings are not exclusive
categories as they have overlapping elements based on their intended purpose of
application and significance. As Weintraub (1997) explains, this is also
because the terms ‘public’ and ‘private’ suggest social differentiations, not
all connoting bipolar meanings. Simply put, PPP
implies collaborating with the private sector for
[1] INR- Indian Rupees.
[Available at: http://www.xe.com/ucc/convert/?Amount=1&From=GBP&To=INR
Accessed 4 September 2012].
provisioning of public services and infrastructure such as roads, airports, ports, health services, garbage and waste management, through structured framework of partnership. Such services have been historically provided by the government through public works agencies. Within the specific context of the infrastructure sector, PPP is defined as a long-term cooperative and contractual institutional arrangement between the government and private agencies, wherein they pool in their differentiated and specialised resources for planning, design, construction, operation and maintenance of infrastructure services, towards accomplishing a desired public objective. The partners share the investments, risks, benefits and responsibilities. The access this mode provides to private capital and its technological and managerial resources, in addition to the allocation of risks to the private partner, have been argued to form the crux of the partnership. PPPs are argued to provide the services more efficiently than the government could accomplish on its own, primarily due to its perceived superior qualities of the private sector in asset creation and management.
A general and common misconception about PPPs is that they involve the private sector merely for accessing its financial resources. However, PPPs are more about a service procurement policy rather than a capital asset management policy; they do not do away with public investment but merely supplement it. Within the PPP mode, the private partner is involved in a broader ambit of ‘infrastructure investment’ where neither the private sector nor the government is the only owner. In India, even though PPPs are being adopted for various services, the traditional method of delivery services continues to be part of public policy.
3 Categorising PPPs
PPPs
are often classified into ‘economic’ and ‘social’ blocks and are further
distinguished as ‘hard’ and ‘soft’. While roads, railways, telecommunication
and airports fall under the ‘hard economic’ category, areas like vocational
training, technology transfer and Research and Development (R&D)
facilitation are termed as ‘soft economic’. Water treatment, housing and
prisons and childcare are labelled as ‘hard social’ whereas social security,
environment services and community services are included in ‘soft social’
category.
PPPs
are also distinguished on the basis of stages in which the partnership is
entered into. It can be either in the ‘planning and design’ stage or at the
‘realisation’ stage. As financial arrangements, PPPs have been observed to take
different forms. There are various terms for them, such as BOT (Build Operate
Transfer), BOO (Build Own Operate), Build Own Operate Transfer (BOOT), and
Design Build Finance Operate (DBFO). The DBFO model appears to be most
preferred PPP model across the world, where a single concessionaire or a
consortium of private agencies take up all the activities of providing the
infrastructural services.
4 Analysing the reasons behind growth of PPPs
Public
Private Partnerships as are known in their current form started in the
Organisation for Economic Co-operation and Development (OECD) countries and the
USA. These gradually spread to the low-income countries. Reliance on PPPs as a
preferred mode of service delivery rose to significant proportions during the
1990s, peaking around 1997. Among all the countries adopting PPPs, UK has had
the maximum number of projects implemented under the Public Finance Initiative
(PFI) initiated in 1992. PPPs have been now included in legislation in many
countries such as the urban policy legislation of UK
and USA , industrial policies
of France , and economic
development policies of Italy ,
Netherlands and UK
On
a broad canvas the wide acceptance of PPP seems to reflect the transformation
of the State-market relationship. There has been a clear theoretical divide
between the ‘public’ and ‘private’ sectors, and ‘public’ and ‘private’ goods.
Traditionally, the government provided ‘public’ goods to prevent negative
externalities of the market, and in order to meet its social and sovereign
mandate (although, there have been differences among scholars as to what
constitutes a pure public good). There has been an ongoing debate in literature
regarding the merits of private versus government provision of goods and
services and State intervention in markets. Subsequent to a period of
domination of the government in almost all sectors (directly and indirectly),
through an era of market preponderance due to ‘State failure’, countries again
started to look towards government initiatives and interventions to tide over
‘market failure’ to ensure that public interest was not left to
price-determined market vagaries. The government was again seen as the best bet
to take countries to ‘commanding heights’. However, issues concerning
inadequacy and inefficient delivery were also observed with excessive
government provisioning. Traditional methods were observed to leave a number of
risks with the public sector, regarding the asset ownership. This is attributed
to its monopoly position with no incentive for competition, poor fiscal
discipline and limited fiscal autonomy to public bodies and managerial
inefficiency which increases production cost. Many governments attempted to
improve performance through corporatisation and performance contracts which
were largely unsuccessful. PPPs emerged in response to this situation as a form
of governance which is argued to be midway between a purely ‘State-directed’ or
‘market-oriented’ way to provide public good. In addition to providing mix of
resources of both the sectors, some scholars claim that they devoid of their
dysfunctions.
Partnership
with the private sector is argued to be moored in the neo-classical and new
institutional economics with a marked ‘market focus’. The growth of PPPs is
credited to the implicit assumption that the market stands for better
efficiencies in production and delivery of services, and partnering with the
market is perceived to improve efficiency gains for the government. Some of the
reasons cited for the growing interest in this mode of service delivery are the
access they provide to private capital (Hodge and Greve, 2005), and the market
knowledge and skills in technologically-intense fields, discipline and
entrepreneurial spirit of the private partner, its project financing and
management skills, effective organisation and innovation (Field and Peck,
2003). In addition, other benefits of PPPs include private sector efficiencies
towards better risk management (Ward et
al., 1991), emphasis on value for money and cost-effectiveness over life of
the project (Akintoye, 2009), lowered transaction costs (Chen and Chen, 2003),
overall reduced total project cost (Mothe and Quelin, 2001), and flexible and
adaptable forms that allow them to respond more nimbly to uncertainties and
opportunities (Provan and Kenis, 2007). These features are argued to make them
distinctively different from the traditional contract-based procurement method
which was found to have several limitations for projects characterised by a
high degree of product specificity, such as the highways and airports (Klijn
and Teisman, 2000). Low-income countries are relying on PPPs as part of their
overall public sector reforms to fund infrastructure services and to fill the
‘capability gap’ (Pessoa, 2008).
The
more recent discourses on PPPs view them as new forms of governance that combine
the features of both the State and the market, and as a response to limitations
to markets and hierarchies with regard to allocation of resources and
provisioning of services. As a hybrid mix of the two forms, they typically mix
virtues of state, such as accountability, probity, legitimacy and transparency,
and efficiency and quality attributes of the market (Mayntz,
1994).
5 Critical analyses of PPPs
Despite
the popular perception that ‘infrastructure partnerships symbolize modern, fast
and efficient public administration’ (Hodge, 2009: 2), comprehensive review of
worldwide experience of PPPs suggests that their overall economic benefits are
mired in uncertainty and debate. Growing evidence has revealed that it is
prudent to be cautious and even sceptical about PPPs (Boase, 2000). They have
been termed as a Faustian bargain (Flinders, 2005), while doubts have been
expressed regarding their social desirability (Vining and Boardman, 2008).
There have been serious concerns in respect to their governance aspects
including transparency, accountability, equity and efficacy under all
conditions, and the risk of being captured by the elite (Rosenau, 1999; Peters
and Pierre, 1998). The PPP model with too many actors in the fray has been criticised for fragmentation of
reporting lines and blurring of existing mechanisms of accountability through
contracts, legislation and other mechanisms (Loffler, 1999), which Skelcher
(2010: 299) apprehends may lead to ‘democratic deficit’. While new
accountability structures have not emerged, the traditional ones appear to have
diminished (Harlow, 1999). PPPs also have the potential to sidestep
parliamentary accountability (Walker and Walker, 2000). Papadopoulos (2007)
apprehends that accountability deficit may lead to legitimacy and governability
deficits as accountability of decision makers is a means for their legitimation
in democratic environments. The seemingly complex financial agreements of PPPs
have limited the possibility of meaningful participation of the common man with
their management due to a marked lack of transparency. Moreover, despite claims
of risk sharing and private financing, the stakeholder is often in the dark
about the true nature of partnership. This cloak of secrecy adversely affects
the community support in their favour even when the projects are beneficial.
Recent
studies of PPPs in the OECD and capitalist countries has found serious flaws
with the claims of economic superiority, effectiveness and profitability of the
PPP mode (Shaoul, 2009; Smith, 2009; Hodge and Greve, 2007; Pollock et al.,
2007). Analysts have been wary of veracity of measures used to determine VfM
(value for money) and cost effectiveness of these projects pointing out that
inaccurate discount rates, and flimsy and unprofitable risk analysis based on
subjective criteria are often employed for estimation (Ball et al., 2007).
There have also been allegations of excessive profiteering (Toms et al., 2009),
hidden wealth transfers to the financiers, and deliberate attempts by
governments to showcase their perceived efficiency and inflated savings
(Shaoul, 2009). Studies have also revealed flawed evidence to support claims of
improved time and cost over-runs (Pollock et al., 2007). Review of 227 new road
sections across EU countries by Blanc-Brude et al. (2006) has revealed that
PPPs are 24% more expensive on various heads against expectations from
traditional procurements. Similarly, studies in
the USA (Boardman et al., 2005; Bloomfield et al., 1998)
demonstrate that inflated figures often mask the real cost, and risks borne by
the public through unrealistic risk-transfer and higher taxes are difficult to
be captured. Analysis of 76 major infrastructure projects has revealed
significant private financing in less than half of the reviewed cases,
‘imperfect partnership’ with high degree of complexity and specificity,
unrealistic risk transfer and strategic behaviour (such as private partners
declaring bankruptcy) to claim compensation and avoid large scale losses.
Analysing the controversial case of London Underground, Hall (2008) notes that the
PPP for its maintenance and rehabilitation failed within a few years due to
multiple reasons, and the facility reverted back to the public agency with very
heavy losses to the taxpayer. Complex financial arrangement between partners,
particularly the sharing of risks and inability of the government to
effectively monitor the contracts, are observed to be principal causes for
collapse of the partnerships. Similarly, the Channel Tunnel project has saddled
the government and private investors with several financial uncertainties
(Hodge and Greve, 2009).
Some
critics (e.g. Shaoul, 2011) suggest a subtle political power shift towards the
private sector based on its capital power, through the PPPs. According to Hall
(2009), long concession periods commit the future governments and reduce their
flexibility of economic choices, which as Standard and Poor’s (2008, in Hall,
2009: 4) points out may damage the public body’s own credit rating, or its
spending on other public services. Studies (Light, 2000; Rainey, 1991) have
revealed that private firms are more prone to hazards of opportunism[1],
forcing them to cut costs, reduce quality and increase profits. Also, capital
infrastructure projects due to their intense asset specificity, complexity and
high sunk costs can potentially lead to problems of opportunism in either of
the partners due to the reduced alternative value of the asset (Globerman and
Vining, 1996). Evidence from Canada reveals that transaction costs appear to be
high in most PPPs. Also, governments have not always effectively reduced either
their total costs or their budgetary risks with PPPs (Vining
and Boardman, 2008).
Moreover, study of UK defence demonstrates that there are several transaction
costs that cannot be offset through trust-based relationships (Parker and
Hartley, 2003).
Additionally,
lack of clear government objectives and poorly defined sector policies, low
credibility of government policies, complex decision making, inadequate legal
and weak regulatory and supervisory mechanisms, and poor risk management by the
government in the context of PPP have been highlighted by several studies (Kwak
et al., 2009; Li et al., 2005; Zhang, 2005).
[1] According to Williamson (1979: 234), ‘[o]pportunism is a variety of
self-interest seeking but extends simple self-interest seeking to include self
interest seeking with guile’. It is lack of candour or honesty in transaction,
to include self-interest seeking with guile (Williamson, 1975: 9).
Political, economic, administrative and social contexts have been found to
result in various forms of barriers to acceptance of PPPs in some low-income
countries (Clarke, 2000; Hentic and Bernier, 1999; Haque, 1996). Lack of a
competent market to fulfil the presumed arrangements, marked difference between
norms and practices of administration, and ascriptive rather than
achievements-based criteria for allocation and distribution of recourses are
observed to impede success of PPPs (Peters, 2001). Studies of some East Asian
countries demonstrate that ‘crony capitalism’ and ‘clientelistic’ nature of
decision making seriously undermine market efficiency and benefit a few
powerful (Clarke, 2000; Jomo and Gomez, 2000). Several studies have
identified weak institutional structures to contribute to ineffective
partnerships. Unavailability of economic evaluation frameworks; poor clarity
about contract management; hasty, poor and uninformed closure of contracts; and
costly delays due to protracted dispute resolutions within government agencies
contribute to this conclusion (Hodge, 2005).
6 Governance of PPPs: Role of the State
Although governments are relying on PPPs
for filling their infrastructure deficit and capability gaps, recent studies of
PPPs have demonstrated that ‘[t]he evidence to date is largely based on
business case estimates, has an unclear counterfactual and suffers from a host
of poor evaluative design features’ (Hodge and Greve, 2009: 38). Evidence
through a useful body of literature indicates that while there may be many
cases where PPPs have been beneficial (Raisbeck et al., 2010; NAO, 2003), equal and maybe more number of cases
presents a contrary picture. Moreover, as Bator (1958) notes, not always can
commercial gains justify private provision of public goods. It may be possible
that ‘gains in income are accompanied by losses in welfare’ because of
inequalities the division of benefits generate (Streeten, 1983: 877).
Comprehensive review of several
‘successful’ cases in some industrialised countries claiming efficiency gains
concludes that ‘it is well to be sceptical about the data’, and that ‘in many
cases, studies rely on assertion, or on surveys of managers’ perceptions’
(Walsh, 1995: 231). Hodge (2009) therefore recommends a shift in focus from the
first generation technical matters to larger and more important dimensions of
governance and public policy to understand ‘who gets what’ in the final
analysis. Similarly, Kettl (1993: viii) argues that,
'... public reliance on private markets
is far more complex than it appears on the surface. In these relationships,
government inevitability finds itself sharing power, which requires it
fundamentally to rethink not only how it manages but how it governs'.
In
the background of increasing concerns about the claims regarding the financial
and efficiency benefits of PPPs as outlines in the sections above, there is a
general convergence of opinion among many scholars that the strength of
governing activities of the State does not diminish when private sector gets
involved in provisioning of services, but merely changes as the government
assumes new responsibilities (Allard and Trabant, 2007; Hirst and Thompson,
1995). Rejecting demands for a ‘minimalist State’, there
has been a growing support in literature for a significant and leading role of
the State in the coalition (Peters, 1998; Weiss,
1997; Evans, 1995). According to the
hypothesis, the purpose behind a strong State with an expanded agenda of a
different kind is to prevent distortions in resource allocation by the market
forces (it was presumed by neo-classical economists that market forces and
prices could be used as non-discriminatory and non-discretionary measures for
building an egalitarian society). The overarching goal of a PPP is argued to
develop infrastructure for public good
by coalescing efficiencies of both sectors, and not merely to collaborate with
the private sector because a new philosophy demands it and it is fashionable to
do so. The complementarity of the public and private domains is professed to
work well when both build upon the comparative advantage of each and not by
leveraging their power positions. Any intervention by the State to steer these
partnerships therefore needs to be distinguished on basis of the purpose behind
it; there needs to be a differentiation between ‘more regulation’ and
‘effective regulation’ as there are numerous ways by which an effective State
can stimulate markets, enhance their efficiency and make them more
people-friendly.
In
this view, the State is the key source of constitutional legitimacy with legal
authority and social mandate to seek and protect public interest, ensure
equity, continuity and stability of services, prevent discrimination or
exploitation, and ensure social cohesion (Goodsell, 2006; Osborne and Gaebler,
1992; Badie and Birnbaum, 1983). Many of the concerns regarding governance of
PPPs stem from the inherently different, and sometimes conflicting, policy and
business interests of the two partners (Peters, 1998; Streeten, 1983). The
governments are therefore required to transit from the role of the financer,
controller and commander to a wider one of regulator and facilitator (Goodsell,
2006; Hodge, 2005; Stoker, 2000). An enlarged role of the State has been
advocated for engaging in wider process of formulating policies and mechanisms
for allocating and coordinating recourses, influencing and structuring the economic
and market space, and regulating the partnerships such that the commercial
interests of the private partners are balanced with the socio-economic
interests of the citizens (Kjaer, 2004; Jessop, 2003; Gourevitch, 1986).
A
need is therefore felt for a competent government which can ‘tightly’ govern
PPPs through stringent oversight mechanisms (Skelcher, 2010; Salamon, 2002). This
is because PPPs are not merely a question of technical provision of services
but form an inherent part of public governance today and can potentially alter
how the public and private sectors are organised internally (Panayotou,
1997). The State is required to look beyond the narrow
commercial formulations of a problem (in order to steer clear of ‘opportunistic
ignorance’), and to take a wider view within a multidisciplinary framework by
bringing in the social, economic and political dimensions of the issue into the
discussion as reality is layered (Myrdal, 1968; 1951). A strong State is more
likely to ensure that PPPs secure public interest while providing facilities,
improve existing efficiencies, and supplement limited resources of government
at reasonable cost. Ineffective governance of PPPs may give rise to ‘legitimate
criticism of the Government which always remains responsible and accountable
for delivery of services to the users’, as private entities which normally use
public assets to build these projects ‘could short-change user and government
interests, thus compromising the very purpose of inviting private
participation’ (Planning Commission, 2009: Preface).
In addition to this,
the State is also charged with the responsibility to structure the partnerships
in the differentiated country context. Government agencies need to explore innovative ‘mixed’ or ‘hybrid’
collaborations with the private sector that would meet different
developmental goals of the country and not try to fit one size to all. The
private sector may not have the adequate capability and expertise in all
sectors in view of the nascent stage of development of PPPs in these sectors.
The State needs to identify the
best form of partnership in order to derive maximum benefit from the usage of
private sector resources and expertise.
7 Conclusion
This
article presented a theoretical overview of
the factors spurring growth and acceptance of Public Private Partnerships as
alternative to government delivery of public services. Brief summary of the
worldwide experiences of PPPs, highlighting the critical areas of debate and
discussion, has also been furnished. The article also outlined the crucial
issues of governance emerging from the distinct characteristics of the two
partners, thus arguing at a theoretical level for a more active role of the
government in enhancing effectiveness and efficacy of PPPs as alternative modes
of service delivery.
Published
in Indian Materials Management Review, May 2013
About
the author
*Dr.
Manisha Verma, a Civil Servant, is working in the Government of India. She has
a PhD from the Institute for Development Policy and Management (IDPM) at the
University of Manchester, UK.
She can be contacted at v.manisha@gmail.com
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