PPP: Too tempting and too risky

FE Team | Published: January 24, 2013 00:00:00 | Updated: February 01, 2018 00:00:00

Md Fazle Rabbi It is the public sector that traditionally provides funds for public infrastructure and services. The private sector is also now involved in the provision. The practice, which is known in different names in different countries and jurisdictions such as 'Private Finance Initiative' (PFI) in the UK and Malaysia, 'Privately Financed Projects' (PFP) in Australia and 'Public Private Partnership' (PPP) in Bangladesh, Hong Kong etc, was initiated in Britain and then proliferated to other parts of the world. The uniqueness of the concept entails a special type of partnership between public and private sectors covering any contractual relationship between the government and the private sector to build infrastructure, develop a production facility, procure an asset or deliver a service. PPP usually involves creation of assets and services through the private sector financing and ownership control for a specific period. It covers economic and social infrastructure and typically includes both a capital component and an ongoing service delivery component. Government usually contributes by providing land and doing capital work, risk sharing, revenue diversion or purchase of agreed services while the private sector infuses money and technology. The earlier PPPs were encouraged by the government and development agencies as a substitute for scarce state capital. They aimed at expanding the pool of infrastructure capital and extending the reach of markets to the non-core public service delivery. However, the objectives of contemporary PPP programmes go beyond this purview. It is considered as an answer to 'both government and market failure, combining the advantages of the private sector-innovations, access to finance, knowledge about technologies, managerial efficiency and entrepreneurial spirit--with social responsibility, regulatory authority, environmental awareness and local knowledge of the public sector'. It is envisaged to provide better value for the community through mutuality and complementarity of the public and private partners and the synergies produced out of the partnership. Unsurprisingly, the PPP has been embraced by the governments as a favourite tool to overcome budget constraints in meeting the requirement of the society. In return, the PPP delivers better services for the community through: (1) integration and synergies of design, building, financing, operation and maintenance, (2) innovation, re-engineering and more efficient management, (3) efficient allocation of risks to the parties who are best able to manage, (4) whole-of-life cost calculation, and (5) more intensive exploitation of assets. A cross-section of evidence from the Netherlands, Australia, Pakistan and Indonesia covering water projects, hospitals, prisons, and rail and road projects show that in all the cases the value for monetary gain is substantial i.e. between 9.0 and 16 per cent. In Britain, it shows that seven of the first eight PFI roads have value for the money despite reducing the discount rate in calculating the Public Sector Comparator (PSC) from 8.0 per cent to 3.5 per cent. Developing countries such as Malaysia has changed its landscape and enhanced the quality of services in the public sector, in which the private investment played a crucial role. However, many PPP initiatives fail to reap the full potential in delivering desired services to the citizens in an effective way. PPP in many cases proves to be expensive and inaccessible for the poor. The 'Cochabamba' water project in Bolivia is one of the examples which emerged highly expensive for the beneficiaries. Residents there have to spend one third of the annual income on water after completion of the PPP project. Private financing proves to be expensive for the taxpayers and users even in developed countries like the UK and Spain and rather proves beneficial for the construction industry, operators and their financial backers. Private investment in the energy sector in Bangladesh probably indicates the same phenomenon. PPP limits access of the marginalised people to the services--'the basic rights to public goods'-by imposing a user fee and thus making those often off-limits to the poorer section of citizens. PPP also curtails the access of citizens to other cost-free options. For example, the legislations on the City Link Toll Road in Melbourne and the Cross City Tunnel in Sydney limit the access to surrounding toll-free roads and commuters are driven to PPP projects to make PPP deals a success in terms of economic return. Moreover, the availability of PPP funds can create a risk of distortion in a well-designed expenditure plan of the government. The government becomes attracted to the project, for which a private initiative is available, ignoring the priority areas which are less attractive to the private sector. PPP is also criticised for circumscribing public accountability and transparency and involving substantial political and democratic costs. Accountability is seriously challenged in a PPP arrangement as PPP projects bear the complexities of managing horizontal relationship in the public sector and, on the other hand, the long term nature of PPP arrangement and multiplicity of contractual dimensions make the accountability mechanisms more vulnerable. In addition, the long-term nature substantially diminishes the democratic accountability. In a democratic system, parties are voted to state power only for four to five years, after which they have to get fresh mandate for staying in the office. But, a PPP project usually continues for more than 30 years and there is no way back for the citizens to reconsider their decision on voting, when the project falls short of fulfilling the expectations in the middle of its operational life. Transparency in the PPP process is not also out of question as there is the absence, in a considerable amount, of disclosure of meaningful information for the citizens due to commercial sensitivity. As a whole, PPP is detrimental to democratic accountability and acts as a deterrent to disclosing meaningful information to the stakeholders. A.A. Khan encapsulates the downside of PPP into five categories [A.A. Khan (Eds) Friendly fires, Humpty Dumpty disorder, and other Essays: reflections on economy and governance in Bangladesh]. Firstly, PPP projects are indifferent to social justice. It does not consider the poor who cannot afford to pay the lowest market price for services. Secondly, PPP leads to 'cream skimming' of the market and hence unprofitable or less profitable segments are ignored or excluded. Thirdly, PPP may exploit the monopolistic rights by cheating consumers. Fourthly, PPP projects are full of disputes and require frequent renegotiations. Fifthly, the low income countries have the limited capacity in negotiating detailed contracts. Undoubtedly, all the downside effects can seriously constrain the outcome of PPP. Therefore, whether to take or not to take PPP projects is a million dollar question. Khan outlined a number of measures, namely, subsidy to the poor, comprehensive and clear terms of contracts to minimise disputes and finally enforcement of contracts by an effective regulatory authority to overcome the downside problems. He is basically concerned with the states which are short of finance, have the limited capacity for negotiation and lack the proper regulatory framework to tame PPP. The issue is more critical in countries with poor governance where, in addition to the capacity constraint, corruption is also rampant. In this kind of situation PPP can be a tool for privatising the benefits and nationalising the costs. Hence, it is expedient for the government to have extensive deliberation before going for any PPP project, because it is the citizens of the country who are to ultimately pay. The writer is National Consultant, DMTBF & SFA Project,Finance Division, Ministry of Finance. frabbi75@gmail.com