What you may not know about PPPs ~ Part-I

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A common catch phrase has arisen when government officials are talking about funding the huge infrastructure backlog in the country.

“PPPs are the way forward and will enable decent infrastructure to support economic development in Uganda”

In the recent Uganda Government Budget Speech that was read in the second week of this past June  2014 clearly stated that Public Private Partnerships (PPPs) are an important option for delivering the very much needed public infrastructure projects and related services. Public infrastructure and services, such as roads, water, energy, health, education, and public order have traditionally been provided by governments. We now understand that government is not the only possible provider of such services. Where governments have failed to provide, communities have organized themselves to provide essential services like water and sanitation. The approach of supplying public goods and services by private companies is growing in importance not only where there is failure or the inability by public entities (national and local) to deliver services, but also due to recognised advantages and benefits of Private Sector Participation (PSP) in PPPs.

So, what are PPPs?

Let us ditch the Economists’ language and just understand what PPPs are as the name suggests.

It is a partnership where the responsibility for the delivery of services is shared between the public and private sector both of whom bring their complementary resources to a project. PPPs bring together the public and private sectors in a long term contractual relationship to deliver public services. PPPs combine the deployment of private sector capital and, sometimes public sector capital to improve public services or the management of public sector assets. By focusing on public service outputs, they offer a more sophisticated and cost-effective approach to the management of risk by the public sector that is generally achieved by the traditional input-based public sector procurement. It must not be confused with privatisation in which a project/ or enterprise that was formerly owned by the public sector and is now owned by the private sector.

pppA key motivation for governments considering public private partnerships is the possibility of bringing in new sources of financing for funding public infrastructure and service needs. It is important to understand the main mechanisms for infrastructure projects, the principal investors in developing countries, sources of finance, the typical project finance structure, and key issues arising from developing project financed transactions.

With that aside, there are usually two fundamental drivers for PPPs.

Firstly, PPPs are claimed to enable the public sector to harness the expertise and efficiencies that the private sector can bring to the delivery of certain facilities and services traditionally procured and delivered by the public sector. Secondly, a PPP is structured so that the public sector body seeking to make a capital investment does not incur any borrowing. Rather, the PPP borrowing is incurred by the private sector vehicle implementing the project and therefore, from the public sector’s perspective, a PPP is an “off-balance sheet” method of financing the delivery of new or refurbished public sector assets.

Some of the key benefits that accrue to the private sector players are;

  • Businesses are able to reduce risks through joint investments
  • The private sector players are able to create additional demand for their goods and service through access to new and expansion of the existing markets
  • Another unique benefit of PPPs to the private sector is greater productivity and access to resources through government incentives to implement public projects.
  • Lastly, businesses are better positioned in bolstering their knowledge and market understanding by having access public know-how, wider experiences and key government and other networks.

It is very important that we understand that PPPs are not the same; one major difference is the means by which the private partner receives a return on its investment (ROI) and these are;

  1. Financially free-standing projects where the services are provided for the use of the public which pays the private partner direct. These are often economic infrastructure projects, such as toll-charging roads like the Entebbe Express Highway currently under construction.
  2. Projects that provide services to the public at less than cost and the payments to the private partner involve a mix of public subsidy from the government and end-user charges imposed on consumers of the services. Examples of such services are Secondary Schools under the Universal Secondary Education (USE).
  3.  Services that are provided direct to the government, which pays the private partner for those services. These are often social infrastructure projects like the management contracts for road maintenance under Uganda National Roads Authority (UNRA).

In conclusion, it has been observed that bringing the specific efficiencies, discipline, focus and mindset id-10067190-262x174of for-profit businesses to bear on the public and non-profit sectors is an old idea, but one that is gaining momentum with the success and increase of PPPs over the last two decades on the global scene. And as such, challenges such as poverty, public health and education which have for long been considered as governments’ obligations, have proved stubbornly resistant to government-only solutions.

However, collaborative efforts between the public, private and civil sectors to address major societal challenges have delivered progress. Working together, the three sectors are often able to accomplish far more than any one actor can do alone. Indeed, the very mixture of differing approaches and expertise is the added value which these partnerships bring, making them far more than just the sum of their parts. Despite this success – or because of it – a growing sense has emerged that PPPs could do even more.

To do more though, additional help is needed from the private sector. And not just any help, but the right kind of help. Providing more resources whether money, staff time, products, or other in-kind contributions are always welcome but more valuable is expertise: the very reason for the formation of PPPs in the first place and this shall led us to the next article that shall focus on how the private sector can tap into the PPP’s space.

By Brian Ahabwe Kakuru

Brian Ahabwe KakuruBrian is the Managing Director at BLEGSCOPE®, and has 9+ years of management consultancy experience notably in the finance and banking industry, MSMEs, FMCG companies and in the service industry. You can follow him on twitter >> @BrianAhabweK

 

 

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