Public Private Partnerships: A Possible Value For Money Strategy

The Reverend Kwabena Yeboah-Duah, Consultant has succinctly and rightly indicated that “Performance of Private Sector Key to Success” (Ref: www.ghanaweb.com: Business News of Friday, 8 September 2006). I hope a majority of readers will concur to this school of thought in the area of corporate management.

Management text books and related literature tell us that both public and private sectors aim for Effectiveness (the degree to which specified outcomes are realised, particularly with reference to the contribution of outputs and any administered item) and Efficiency (the combination of the quality, quantity and price of an output).

Undoubtedly, those of us who have had the privilege of working in both sectors will affirm that the private sector appears to make significant success in both criteria (efficiency and effectiveness) compared to the performance of the public service. Why? Simply because the private sector at the end of the day looks at the bottom line (the profit margin of the entity in the financial year). And this stems from the acute competition at the market place. The multitude of organisations (private and public) offering various products and services need to apply sound corporate governance and better management practices such as differentiation (product, price, promotion, place etc) as marketing tools to win a competitive edge over their competitors.

At other end of the pendulum the public sector’s main objective is on the effectiveness – the impact of its outputs, products and services on the society based on the Government’s policies. Profit making is usually out of the equation.

The private sector has long provided goods and services to the public sector. However, a trend seems to be developing in a number of countries (developed and developing) towards increasing involving the private sector in the provision of goods and services traditionally provided by, and seen as a function of, the public sector. This entails a shift in the role of the public sector from supplying to buying services, with private firms designing, constructing, financing, operating and maintaining infrastructure, and the public sector paying for these services. Such arrangements are called public private sector partnerships (PPPs). Contracting out differs from PPPs in that the latter usually entails a combination of services (for example, design, construction and maintenance) whereas contracting out is usually for one or relatively simple services.

Key features of infrastructure PPPs include:

• The private sector invests in infrastructure and provides related services to the government

• The government retains responsibility for the delivery of core services, and

• Arrangements between the government and the private sector are governed by long-term contract. It specifies the services the private sector has to deliver and to what standards. Payment depends on the private partner meeting these standards.

PPPs take many forms such as design, construct and maintain, and build, own, operate and transfer. The choice of form depends on factors such as the government’s objectives, the nature of the project, the availability of finance, and the expertise that the private sector can bring. For example in Australia the main applications (by value) are transport-related. However, PPPs are increasingly being used in social infrastructure such as hospitals and schools. And one wouldn’t be surprised to see such arrangements and developments in other countries (developed and developing).

Governments are attracted to PPPs because they may provide value for money at least in the short term. The ability to transfer risk to whichever of the public or private partner is better able to manage the risk is a source of value for money. PPPs often involve the private sector providing a “bundle” of services. Bundling can provide value for money that contracting services separately cannot. PPPs can contain incentives for the private sector party to perform well. For example, under a contract to construct a road, the developer has an incentive to do the minimum necessary to meet the contract terms. However, under a design, construct and maintain (PPP) arrangement, the developer has an incentive to build the road to the standard necessary to provide services for the period of the contract.

In any arrangement of this nature there are always pros and cons. According to a research paper, advocates of private sector finance claim that it provides incentives for the partner to deliver projects to time and budget, and operate infrastructure soundly. On the other hand critics of PPPs claim that the public sector finance is cheaper than private sector finance and so the latter should not be used. But critics of this argument claim that the government’s ability to borrow cheaply is a function of its capacity to levy taxes. Whichever way one looks at it, it would be proper to evaluate each project on its merits - should the government go in for PPP or contract.

With the private sector’s corporate governance attributes, sound workplace ethics and financial management, emphasis on efficiency and effectiveness, productivity consciousness, risk management practices and related effective management tools it is recommended that the government form strategic partnerships with the private sector in most of its projects. Such practices will invariably spill over to the public sector domain whereby the desired outcomes may be achieved efficiently and in a cost-effective manner.

Charles Agyeman Manu MEng, MAppSc, MBA.
Assistant Director Civilian Engineer Career Management, Australian Public Service.
Member of National Institute for Governance, Australia.

Views expressed by the author(s) do not necessarily reflect those of GhanaHomePage.