Pros And Cons Of Private Public Partnership
Chapter Two: Literature Review
2.1 Overview
In the recent past, a number of countries situated in the cold regions of the globe have been faced with a challenge of managing snow and ice. Though this is an exceptional case of PPP, there exist a number of different types of public private partnerships that take place in infrastructure development and provision of public utilities, which cannot be adequately provided by the state. Public private partnership (PPP) was defined by Rosenau (2000) as the generic term applied to different types of collaboration between the government and private developer to provide support necessary for public sector infrastructural development and provision of public services. This form of partnership involves a contractual agreement between the collaborating partners which seek to bind the parties to discharge their mandate as outlined in the partnership.
There is no precise definition of private public partnership. This is because of the nature and complexity of the relationship between the parties to the contract. Harper and Stein (2003) asserted that the aim of a private public partnership is always to create a public infrastructure that can be shared by all people in a given state or country. The government always seeks to benefit from the external expertise and innovation offered by private developers in an efficient and effective manner. This boosts and improves the quality of services and public utilities offered to the general public.
In public private contracts, the state acts as the main legislator and regulator of laws governing certain activities, while the private developer acts as the main financier and innovator of the project to be undertaken. Thus, a public private partnership is a contractual agreement that involves shared responsibility between the parties to the contract to discharge a project designed to meet the needs of the entire public. There are pros and cons associated with public private partnership and they will be dealt with in the sections below.
2.1.1 The Pros of Public Private Partnership
Several researchers have underscored potential benefits of engaging in a public private partnership. Private public partnership (PPP) is an alternative mode of financing huge and complex projects which are designed to provide services to the general public. Due to problems emanating from the inadequacy of funds to finance public investments, most governments have resorted to private public partnership to meet their budgetary forecasts. Private public partnership offers a number of potential benefits, such as faster completion of projects, reduction of risk in financing, high quality and innovative products and services, as well as reduction of budget deficit (Harper and Stein, 2003; Plummer, 2000).
Porter (1995) inferred that a public private partnership is an alternative form of financing which is not only cheap but also involves huge expenditure of funds. Most governments usually prepare their budgets based on the available funds. Robinson (2002) inferred that some projects may occur unexpectedly leading to unplanned expenditure, such as financing projects meant to deal with risks associated with natural calamities. Raising capital is another challenge that impedes the ability of any given government to meet all the needs and expectations of its citizens. Therefore, private public partnership remains to be a key factor that has forced state-owned divisions to join forces with the private sector entities to meet the basic needs of the common citizens. Public sector entities in most cases are faced with financial constraints, and this, as asserted by Innes and Booker (2002), usually limits effective realization of state-based objectives.
Other researchers have also underscored the importance of public private partnership in project development and economic growth. In order to narrow the gap of services utilization between the rich and the poor in an economy, governments usually engage private sector entities to handle huge ventures, such as construction of low-cost housing facilities for specific types of people, construction of roads which are meant to offer maximum benefits to all citizens, regardless of social class, and provision of special services, such as health and education (Plummer, 2000). These investments impede the ability of governments to meet other important needs, such as defense and governance. Therefore, private public partnership will finance some of these projects which can cause an economic crisis, if not well checked.
Private public partnership also offers other benefits. Miraftab (2004) reasoned that PPP is a way that could contribute to economic growth by allowing private sector investment to thrive in public domains. Generally, in any economy there are certain key investments that can never be privatized. These strict provisions often lead to poor delivery of services by state-owned corporations, especially where monopoly exists. The quality of services in public entities is always low (Hemson, 1998) owing to the fact that innovation and creativity is not nurtured. In contrast, private sector entities have high-quality services which are both reliable and value-giving. Therefore, when a government engages a private contractor to put up housing facilities that are meant to keep some of its citizen warm during winter, the quality and innovation in public service delivery is guaranteed. The involvement of the private sector in public investment contributes to faster growth of the economy, since all the stakeholders of a country feel involved (Harding, 1990).
Hailey (1997) maintained that private public partnership is relevant to any economy, since its benefits are observable. Bond (2003) affirmed that these kind of projects lead to transfer of risks from one sector to the other. Harper and Stein (2003) contended that private public partnership allows a party with the required expertise and machineries to undertake a given project at low costs. For instance, if a project involves huge investment, the government may not undertake it to its maturity due to the number of commitments, thus casing financial losses that may be incurred by the government but borne by the tax payers (Plummer, 2000).
In addition, private public partnership offers favorable grounds where risks involved in infrastructure contracts, such as building of houses, can be reduced or avoided at all costs. In realty, governments in most countries are committed to different objectives which involve heavy expenditures. This puts a lot of pressure on most governments forcing them to abandon some of their important projects (Porter, 1995). Therefore, as a way to reduce of failing to complete certain projects, most governments usually involve private partners in their projects. There are some risks associated with legal requirements which limit some private developers to venture into public investment and this might limit their operations. Therefore, private public partnership facilities risk transfer and eventual minimization by both parties (Miraftab, 2004).
Other researchers have argued that private public partnership offers improved service delivery. Such projects allow parties with relevant expertise to undertake a given project in an efficient and effective way. Most private sectors contractors operate on the principle of quality in service provision and cannot, therefore, afford to undertake a project that will yield poor services. For instance, Fainstein (2000) argued that private entities have special sections that are involved in quality management, innovation and idea generation and in research and design (R&D). These sections, therefore, allow such practices to be transferred to a public domain where new paradigms of innovations and quality are reaped to the fullest.
Harding (1990) pointed out that private public partnership has been an avenue facilitating the growth of the private sector within an economy. In many cases, governments always hold a bigger share in the total control of their economic resources, thereby limiting the growth and expansion of private sector entities. Similarly, as reasoned by (Plummer, 2000), PPPs have emerged as new dimensions that empower private sector entities to take advantage of their competitiveness in quality and innovation to provide public goods and services.
Rosenau (2000) claimed that when projects are jointly undertaken between a private and public institution, its completion is always guaranteed. In many instances, private enterprises have alternative ways of raising finances and can thus undertake a project involving high cost of capital. Therefore, most governments have decided to partner with private contractors to facilitate faster completion of projects. In addition, private public partnership offers favorable grounds where risks involved in infrastructure contracts, such as building of houses, can be reduced or avoided at all costs (Miraftab, 2004). In realty, governments in most countries are committed to different objectives which involve heavy expenditures. This puts a lot of pressure on most governments forcing them to abandon some of their important projects. Therefore, as a way of reducing a likelihood of non-completion of certain projects, most governments usually involve private partners in their projects (Innes and Booker, 2002).
Other researchers have concluded that public private partnership reduces budget deficits for governments in times of uncertainty (Plummer, 2000; Hailey, 1997; Fainstein, 2000). According to them, this may be caused by unforeseen natural calamities, such as snow and ice, which are common in cold countries. Most governments have thin budgets that are developed to meet some specific investments; therefore, allocating some funds to other projects may put a lot of pressure on projected budgets. Robinson (2002) affirmed that private public partnership would transfer some of the responsibilities to the private sector.
2.1.2 The Cons of Public Private Partnership
Bloom et al., (2004), while carrying out an empirical study on the disadvantages of public private partnership in health sectors, identified five main challenges. They are related to higher consumer prices, reduced competitiveness, reduced transparency and accountability and delays in contract negotiations. Similarly, Savas (2000) noted that private public partnership involves transfer of risks from the public sector to the private sector. Since most projects usually involve massive investment of resources, there are fears that some projects may not be completed, thus leading to unforeseen losses. This forces the government to transfer such risks to private sector enterprises. Once risks have been transferred, a private partner becomes solely liable for any loss it incurs in the project execution (Beckett, 1998).
Gaffikin and Bond (2007) supported Bloom et al., (2004) by inferring that when responsibilities are transferred to private entities, higher consumer prices are bound to arise. Wettenhal (2003), however, disputed this by claiming that the high power is justifiable owing to the fact that raising capital by a private entity involves higher interest rates. In government sector, any attempts to raise capital by borrowing loans often have some potential benefits, whereby a government gets a funding at a lower rate. Bailey (1995), however, contended that the private sector may not offer such services at affordable prices, since they are always driven by profit-maximizing motives.
Fowler (1997) offered that PPPs are affected by problems of transparency and accountability. When these parties decide to engage in a common project to benefit the whole public, a consortium created usually gives each partner the right to report on the returns based on the perceivable estimates. Such estimates may not reveal the true picture of the project in terms of actual costs and expected returns. Some parties may try to conceal the information from the public and any effort to access such information may not bear any fruit, as private entities do not freely give their information to external parties not stated in the consortium. It is always expected that public projects will be subjected to public scrutiny to establish how accountable the project developer was. However, once a project is transferred to a private developer with the approval of the government, no person can afford to establish the true costs of a given project, and in some instances a project may be overestimated or even inflated so as to get higher payments (Fainstein, 2000; Bond, 2003; Hailey, 1997).
A research carried out by Squires (1989) into the performance of PPPs indicated that there are considerable delays in such contracts. For instance, to evaluate the completion of a project and the maximum time taken to renegotiate acontract is often unpredictable. Governments have strict guidelines and laws that have to be followed based on a certain prescribed bureaucracies and hierarchies which often limit the performance of such contracts. Government departments and ministries are usually held by individuals with political affiliations who can influence the performance of a given private public partnership. This might cause “holding up” of some projects and their being undertaken by a private developer (Harper and Stein, 2003).
Consequently, once projects have been successfully completed by a private partner, the government may decide not to honor the terms and conditions of the contract and forcefully take control of the returns without compensating the private partner (Savas, 2000). It is important to set clear guidelines and regulations that can govern a private public partnership. This is the only way to ensure that both parties in a private public partnership are protected. This has been rampant in cases where governments are controlled by powerful persons who do not obey set rules and regulations. Therefore, a private entity operating in such countries may lose a lot of funds borrowed from other private entities, thereby subjecting it to debt crisis.
Porter (1995) predicted that private public partnerships often lead to reduced competiveness in service provision. Private sector entities are known for quality service delivery. However, according to Bond (2003), high quality may not be offered when government tenders are costly and involve favoritism of preferred contractors. Therefore, a private and public partnership offers potential benefits that can help bring about change in the provision of public goods and services. However, as Hemson (1998) asserted, the weakness of private public partnerships remain a challenge to full adoption of such engagements in many countries.
A research carried out by Harding (1990) identified that public private partnership often involves higher costs that are too risky to both parties. Beckett (1998) asserted that most governments have a bigger share in acquisition of loans. This is due to the fact that a loan advanced to the government will involve lower interest rates. Governments have power to influence other institutions to support their investment activities. However, Fowler (1997) claimed that it is quite difficult for a private developer to secure a loan, since they are perceived to be riskier than governments.
Plummer (1990) also noted that the high costs involved in private public partnership due to longer time involved in the negotiation of tenders. In most cases, a tender tends to cost higher prices, and therefore investors intending to enter into a private public partnership have to pay higher amounts to secure such contracts. This might in turn limit participation of private developers in public projects. Plummer (2000) further inferred that private public partnership are complicated and involves a lengthy period to negotiate and agree on a common course of action. The complexity of private public partnership limits the performance of the partners, especially the private sector. Innes and Booker (2002) argued that the nature of a public private partnership limits the ability of the party to discharge their mandates. For instance, public projects involve numerous rules and procedures, which impede faster delivery of services.
Harding (1990), argued that where a government project is transferred to a private entity, there could be cases of monopoly, which reduces efficiency and effectiveness in service delivery. Some private companies have been known to offer high-quality services with greater innovation and creativity. However, these entities may turn out to be ineffective and inefficient once they engage into a private public partnership. This is because public entities are monopoly-based and will always strive to maintain the status quo. Such engagement, as described by Bailey (1995), may not be entered into by private entities. Other researchers have also underscored that private entities are known to be productive and competent, unlike public entities, hence engaging into a private public partnership reduces efficiency of their performance.
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