May 2021 Q4 c.
Fiscal constraints experienced by countries have resulted in developing new and innovative approaches to the provision and financing of public infrastructure and services. Public-Private Partnership (PPP) framework reflects the Government’s desire to improve the quality, cost-effectiveness and timely provision of public infrastructure and services in Ghana.
Required:
i) Distinguish between Public Partnership and Public-Private Partnership. (2.5 marks)
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Public-Private Partnership(PPP) is a contractual arrangement between a public entity and a private sector party, with explicit agreement on shared objectives to produce public infrastructure and services traditionally provided by the public sector. Or, it is the partnership between the public sector and the private sector to deliver a project or a service, traditionally provided by the public sector, whilst Public Partnerships (PUPs) is a partnership between a government body or public authority and another such body or a non – profit organisation to provide services and or facilities, sometimes with a goal of transferring technical skills and expertise within international development projects.
ii) Explain FIVE (5) reasons why you would discourage the Government from embarking on Public-Private Partnership. (7.5 marks)
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- Public-Private Partnerships (PPPs) have various limitations which should be taken into accounts while they are being considered. The major limitations include:
- Not all projects are feasible (for various reasons: political, legal, commercial viability, etc.)
- The private sector may not be interested in a project due to perceived high risks or lack of technical, financial or managerial capacity to implement the projects.
- A PPPs project may be more costly unless additional costs (due to higher transactions and financing costs) can be offset through efficiency gains.
- Change in operations and management control of an infrastructure asset through a PPP may not be sufficient to improve its economic performance unless other necessary conditions are met. These conditions may include appropriate sector and market reform and change in operational and management practices of infrastructure operations.
- Development, bidding and ongoing costs in PPP projects are likely to be greater for traditional government procurement processes – the Government should therefore determine whether the greater costs involved are justified. A number of the PPP and implementation units around the world have developed methods for analysing these costs and looking at Value for Money, e.g., UK Treasury.
- There is a cost attached to debt – While private sector can make it easier to get finance, finance will only be available where the operating cash flows of the project company are expected to provide a return on investment (i.e., the cost has to be borne either by the customers or the Government through subsidies, etc.)
- Some projects may be easier to finance than others (if there is proven technology involved or the extent of the private sectors obligations and liability is identifiable), some projects will generate revenue in local currency only (e.g. water projects) while others (e.g. ports and airports) will provide currency in dollar or other international currency and so constraints of local financial markets may have less impact.
- Some projects may be more politically or socially challenging to introduce and implement than others – particularly if there is an existing public sector workforce that fears being transferred to the private sector, if significant tariff increases are required to make the project viable, if there are significant land or resettlement issues, etc.
- There is no unlimited risk-bearing – private firms (and their lenders) will be cautious about accepting significant risks beyond their control, such as exchange rate risks/risk of existing assets. If they bear these risks, then their price for the service will reflect this. Private firms will also want to know that the rules of the game are to be respected by the government regarding undertakings to increase tariffs/fair regulation, etc. Private sector will also expect a significant level of control over operations if it is to accept significant risks
- Private sector will do what it is paid to do and not more than that – therefore incentives and performance requirements need to be clearly set out in the contract. Focus should be on performance requirements that are out-put based and relatively easy to monitor.
- Government responsibility continues – citizens will continue to hold government accountable for the quality of utility services. However, the government will also need to retain sufficient expertise, whether the implementing agency and/ or via a regulatory body, to understand the PPP arrangements, carry out its obligations under the PPP agreement, and monitor the performance of the private sector to enforce its obligations.
- The private sector is likely to have more expertise and have an advantage in the data relating to the project after a short time. Therefore, it is important to ensure clear and detailed reporting requirements imposed on the private operator to reduce this potential imbalance.
- A clear legal and regulatory framework is crucial to achieving a sustainable solution.
- Given the long-term nature of these projects and the complexity associated, it is difficult to identify all possible contingencies during project development. Events and issues may arise that were not anticipated in the documents or by the parties at the time of the contract. More likely than not, the parties will need to renegotiate the contract to accommodate these contingencies. It is also possible that some of the projects may fail or may be terminated before the projected term of the project, for a number of reasons, including changes in government policy, failure by the private operator or the government to perform their obligations or indeed due to external circumstances such as force majeure. While some of these issues will be able to be addressed in the PPP agreement, it is likely that some of them will need to be managed during the project.
(Any five points @ 1.5 marks each = 7.5 marks)