Building Public Sector Capacities



The Research Intelligence Unit – www.riunit.com


The following article is taken from the forthcoming RIU edited publication on Building Public Private Partnership in Sri Lanka and is authored by Dr. Srinivas Sampath, Adviser and Head, Public-Private Partnerships, Governance and Institutional Development Division, Commonwealth Secretariat, London.

Background

Large numbers of Governments in developing parts of the world are examining alternative service delivery and asset creation models. Large-scale fiscal deficit has limited their capacity to meet growing infrastructure needs and has emerged as a major challenge in their efforts to improve their investment climate. Increasingly, governments’ are viewing Public-Private Partnerships (PPP) to play an important role in the provision and the management of various infrastructure services. However, public service agencies in these countries particularly face a number of challenges in managing these complex relationships. This article highlights those key challenges, and suggests a way forward in addressing those challenges.

Introduction

Public-private partnerships (PPPs) are primarily a contractual relationship between the public sector and its partners (whether from the private sector or voluntary organisations). They involve sharing and transferring risks and rewards between government and its partners, and require multi-sectoral and multi-disciplinary expertise to structure, finance its activities to deliver desired policy outcomes that are in the public interest. It is about creating, nurturing and sustaining an effective relationship between the Government and the private sector.

PPPs also aim to leverage private sector expertise and capital to obtain efficiency gains in service delivery and asset creation. PPPs play a small but important role in the overall objective of delivering modernised public services, and asset creation. PPPs cannot viewed as a panacea to all infrastructure requirements of a country. Even in a mature market for PPP like UK, it represents only 10-15% of total investment in public services. PPPs can take various forms and shape, and can vary in implementation structure, level of delegation to private sector partner.

Public sector perspectives on developing PPPs

The key focus of any PPP project from a public sector point of view should be to improve service delivery to its communities. Given the nature of PPPs, it also requires a fundamental shift in the thinking of public sector agencies which are well verse with managing conventionally procured contracts for service delivery and infrastructure stock creation. Unlike the conventional contracts which emphasise on providing input parameters, the focus of PPP projects is less on specifying the inputs, but on developing clear and measurable output specifications for the private sector to deliver the outputs, with a view to achieve value for money.

PPPs also enable public sector organisations to spread the cost of service delivery/infrastructure investment over the lifetime of the asset, avoiding some of the uncertainties present in conventional procurement. In addition, since payment mechanism to the private sector is linked to achieving project related milestones, PPPs offer improved likelihood of projects being on time, to budget and meeting the original output specifications. A key point, however, to bear in mind is that private financing of infrastructure is typically higher than public sector borrowing cost. The transaction costs for PPPs (both in terms of time and cost) are significantly higher than conventional procurement. Therefore, for PPP projects to offer value for money, savings through PPP should far exceed the costs involved.
Public sector challenges in structuring and implementing PPPs

Most of the developing member countries of the Commonwealth are still at an early stage of developing PPPs. Based on work carried out by the Commonwealth Secretariat on PPPs in a number of countries, following are some of the key challenges faced by the public sector agencies in the effective implementation of PPPs.

1. Internalising partnership process within the public sector

One of the key challenges public sector agencies face is with regard to internalising the partnership process for PPPs. PPPs are procured very differently than traditionally sourced services. Following are some of the key steps that would enable in effectively internalising the partnership process for PPP within the public sector agencies.

• Department/Agency undertaking a PPP project must have an explicit government approval for the process, as PPP projects require long term legal and financial commitments

• Understanding of risk allocation and commercial framework in order to deliver the best outcome for the country/region. Public sector agencies are often weak in this area, and therefore they will have to make special efforts in developing a good understanding of the overall commercial framework of a PPP project, and risks associated with the project.

• Standardised approaches/templates should be developed to minimise transaction time. PPP projects tend to have a longer transaction time, and often a large part of the transaction process is similar irrespective of the sector or the project under consideration. Standardisation of approaches and templates enable the public sector agencies to structure PPP projects across different sectors, therefore optimising the overall transaction time on PPP projects.


2. Preparing the Partnerships environment

Strong political leadership is a necessary perquisite for a successful PPP. However, the whole process should be developed in an environment that supports the public interest. This requires the creation of an autonomous, accountable and independent regulator, and a robust legal framework. There also needs to be effective competition in the market for partnership opportunities. Clear guidelines for managing un-solicited bids should be established. Where unsolicited bids are accepted, they should be subject to realistic competition.

3. Project identification & project development

Identification of partnership projects must take place in the right institutional setting if the results are to be accepted and implemented. A good project development process is of fundamental importance to increase the likelihood of successful outcomes. Priority projects need to be identified in the context of a sectoral strategy based on effective stakeholder participation and policies that promote development objectives. The strategy should highlight those projects or programmes capable of being implemented under a PPP structure.

Subsequently, project development should focus on defining project specifications and desired characteristics, determining tariff policy appropriate to government objectives, implementability and financing, identification of risks and development of a risk management framework, and scoping of all those factors that may affect government decisions on the future of the project.

4. Preparing the Business Case

Public sector agencies face a formidable challenge when it comes to commercial positioning of a PPP project. As a result of that, they often get into a contractual arrangement that is not based on optimal risk transfer. It is in this context that formulating a sound business case becomes crucial in determining the success of a PPP project. A good business case for a PPP project, should inter-alia, address the following

• Establish project financing arrangements;
• Identify the nature and scale of all project risks;
• Determine the proposed extent of government support;
• Allocate risks between government and the private sector partner;
• Define the provisions to be made for unforeseen events and specify the procedures for contract renegotiation if required;
• Confirm that the proposed allocation of risks and extent of government support are likely to attract serious participation from partners.

Developing a detailed risk management plan is a key component of a good business case. The public sector agency should bear in mind the following when transferring or retaining PPP project related risks:
• Risk should be allocated to whoever is best able to manage it at least cost, keeping in view public interest considerations.
• It does not mean that all risks should be transferred to the partner. Each risk has a price premium built into it.
• If a risk is transferred or retained in-appropriately, then Government will pay a premium or price for the same.
• Whoever is allocated a risk must have the freedom to choose how to handle and minimise it.

While preparing the business case, public sector agency responsible for the process, should maintain regular contact with potential partners, so as to understand their concern, and if need be incorporate their suggestions, to make the project marketable from a private sector perspective, and bankable from a capital market point of view.

5. Securing competitive bids, negotiation and award

The basis for bidding follows directly from the business case. It is then necessary to put in place a clear bidding process for partner selection. This requires strategic marketing to maximise market interest, an accept¬able PPP framework in terms of the balance of risks and rewards offered, and confidence in the capacity of government.

Often public sector agencies are constrained by lack of capacity and institutional structures to manage the complete bidding process, and negotiation with the partners. This has emerged as another key challenge for public sector agencies in managing and delivering successful PPPs particularly in the developing parts of the Commonwealth.

6. Supporting implementation and operations

Often, it is after the signing of the contract and during the implementation phase of a PPP project that the relationship between the public sector agencies and private sector partners is put to real test. During this stage, the public sector agency responsible for PPP process, and the government agency, signatory to the contract need to be proactive to ensure a satisfactory operating environment and maximise the success of the project. One of these agencies will be responsible for administering the contract and regulating it on an agreed basis in the public interest. Adherence to contract procedures is essential, and the agreement should provide for independent monitoring.
Deciding on PPP option

In addition to the key challenges outlined, above, it is important to bear in mind that partnerships may take many forms and shapes, and could vary in terms of time period. The favoured option in any given case will depend on:
• The goals of government;
• Expectations in terms of targets or service levels to be achieved;
• The capacity and needs of the public sector agency concerned;
• Political and institutional constraints.
PPPs may not always be the right solution and are not suited to all countries, particularly where complex contractual structures are involved. PPPs are more likely to be favoured where there is the necessary political leadership and commitment to a PPP policy, political stability, a sound macro¬economic framework and domestic capital markets capable of providing the finance required.

Lack of public sector capacity remains a critical challenge in implementing successful partnerships, particularly as it assumes new and more complex tasks in regulating and facilitating the development of partnerships. In fact, far from reducing the burden on governments, greater engagement in partnerships requires increased capacity to manage effectively. While the initial design of partnerships may seem relatively straightforward, it is during implementation that deficiencies in policy frameworks and the capacity of governments will become most apparent.