Ppp Analysis Yojana March 2013

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YOJANA March 2013 61

H E T E R M‘Publ ic Pr ivatePar tnership’ or

‘PPP’ has becomea buzzword o flate in the policy

circles, and is being increasinglyresorted to as a preferred mediumfor provisioning of public services

both within the industrialised andlow-income countries. While thePPPs are more commonly foundin the transport infrastructuresector, such as roads, airports,

and ports (primarily due to thecommercial pricing models), theyare also invoked in water supplyand sanitation, tourism, education,health, and other social sector

programmes, albeit to a lesserdegree. A signi cant difference ishowever observed in the nature ofPPPs across these sectors. In manycases they appear to be glori edforms of service level agreements

rather than ‘partnerships’ as arede ned in the normative li teratureon PPPs.

Engagement with the privates e c t o r f o r p r o v i s i o n i n g o finfrastructure facilities has becomeincreasingly popular in the past few

Public Private Partnerships (PPPs):Analysing the factors behind their growth

ANALYSIS

Manisha Verma

The economic perspective in

favour of PPP is that they present an attractive alternative

to the market and contractualised

relationships and are viewed to be

broader in scope than privatisation and a qualitative

leap from traditional contracting

decades. India too has joined the bandwagon of countries adoptingPPPs for delivery of services under

various infrastructure sectors. It isclaimed that India has the maximumnumber of projects within PPP inthe transport sector. Its experiencein highways and expresswayshas been substantial. All nationalhighways in the present phaseof NHDP (National HighwaysDevelopment Programme) are

being implemented within PPPmode. Recently, the empowered

Group of Ministers on infrastructurehas decided that 95% of road

projects in the current year will be through PPP. Several airportsare being built with private sector

participation, while some metro-rail projects, such as the Hyderabadmetro, are also opting for thisapproach rather than the traditionalway of public sector delivery.According to the Economic Survey2010-2011, against a target of 30%of private sector participation ininfrastructure sector, the achieved

gure was 34%. An investment ofUSD 1 trillion has been envisagedfor infrastructure during the 12thPlan; of this USD 500 billion is

The author is Civil Servant, working in the Government of India. She has a PhD from the Institute for Development Policyand Management (IDPM) at the University of Manchester, UK.

T



62 YOJANA March 2013

expected to be contributed bythe private se ctor. These guresdemonstrate the primacy given to

private sector participation at the policy level.

Against this background,this article attempts to providetheoretical insights into the conceptof PPP, and analyses the reasonsfor its growth and acceptance as amode of service delivery in manycountries.

Growth of PPPs

There have been instances ofthe State engaging with the private

sector towards provisioning of publ ic services th roughout theknown history- the case of Mathew,

pr iv at e ta x- co ll ec to r fr om th eBible; public street lamps in 18thcentury England were cleaned

by private contractors; the railcompanies of 19th century Englandand the US were privately owned;82% of Sir Frances Drakes eetof 197 vessels, which conquered

the Spanish armada, were owned by contractors. Toll roads andtoll bridges, privately owned andoperated, has been around sinceantiquity. Toll roads carry mentionin writings of the Greek historianand philosopher Strabo (63 BC-AD 21) in Geographi a during thetime of Caesar Augustus, wherehe records existence of tolls onthe Little Saint Barnard Pass.

Historical development of PPPsin infrastructure had its beginningin Europe in the demand for masstravel and long distance commercein second half of 17th century.France pioneered the concessiontype model in 17th century whichwas extensively used in the 19thcentury to finance and develop

public infrastructure.

However, Publ ic Pr ivatePartnerships as are known intheir current form started inthe Organisation for EconomicCo-operation and Development(OECD) coun t r i e s and the

USA. These gradually spreadto the low-income countries.Reliance on PPPs as a preferredmode of service delivery rose tosignificant proportions duringthe 1990s, peaking around 1997.Governments under PresidentsCarter and Reagan in the USA andMargaret Thatcher in UK promotedwide range of partnerships at alllevels of the State. Among allthe countries adopting PPPs, UKhas had the maximum number of

projects implemented under thePublic Finance Initiative (PFI)initiated in 1992. PPPs have

been now included in legislationin many countries such as theurban policy legislation of UKand USA, industrial policies ofFrance, and economic development

pol ici es of It al y, Net her lan dsand UK. While Netherlands,Australia, Hungary, Italy, Japan,Korea, Spain and France havehad substantial experience inimplement ing infras t ructure

projects under PPP, countries likeChile, Brazil, Singapore, India,and Canada are actively exploringthis mode of delivery of publicservices. PPPs form the core of

European Union (EU) initiativesfor economic competitivenessand are the preferred frameworkf o r d e v e l o p m e n t o f t r a n s -European transportation. Recentlythe European Commission hasadvocated greater use of PPPsfor provisioning of infrastructuralservices and bringing in innovationin service delivery.

Understanding the context ofPPPs

Different def in i t ions andi n t e r p r e t a t i o n s h a v e b e e nassociated with the term Public-Private Partnerships. These dependupon the context within which theyare initiated and operated. Simply

put, the term PPP tradit ionallyimplies engaging with the privatesector for provisioning of publicservices and infrastructure suchas roads, airports, ports, healthservices, garbage and wastemanagement. Such services have

be en hi st or ic al ly pr ov id ed by

the government through publicworks agenc ies . Accord ingto some, PPP is a frameworkfor describing all cooperativeventures between the State andthe non-State agencies, both for

pro t and not-for-pro t. Withinthe limited context of transportinfrastructure sector, PPP isde ned as a long term collaborativeeffort between the government

and private agencies, wherein both pool in their differentiatedand specialised resources for

planning, design, construction,operation and maintenance ofinfrastructure services. They alsoshare investments, risks, bene tsand responsibilities. This featureof the PPP has been argued to formthe crux of the partnership. Thefacility thus developed eventuallyreverts back to the governmentafter expiry of the concession

period. In India this period rangesfrom 20 to 30 years.

A common misconceptionabout PPPs is that they involvethe private sector merely forfinancial partnering. However,PPPs are more about a service




procurement policy rather than acapital asset management policy;they do not do away with publicinvestment but merely supplementit. Within a PPP the private partneris involved in a broader ambit of

‘infrastructure investment’ whereneither the private sector nor thegovernment is the only owner.

PPPs are perceived to provide public services more ef cientlythan what the government couldaccomplish on its own. In theclassical literature on publicadministration, there is a distinctdivide between the roles and

responsibilities between the Stateand the private sector, often termedas ‘the market’. While someworks were to be taken up by thegovernment agencies due to theirsocial and economic mandate,some services were delivered

by the agencies. However, thetraditional conceptualisation ofthe state being the sole providerof services and goods for public

welfare came under severe strainin the decades since 1970s. In the1970s and 1980s, as the demandfor public infrastructure grew andgovernments became increasinglyfund starved, due to deficit

nancing and populist pressuresto hold prices below costs, theircapacity to provide suf cient andquality infrastructure was found to

be inadequate. The public utilities

were therefore largely neglected.In most of the developing low-income countries it was found that

public nance for infrast ructurewas generally inadequate and fullcost recovery of infrastructurecharges was becoming more of anexception than a rule. In additionto poor allocation of funds fordevelopment of infrastructure,

maintenance got even little, whichwas assumed to be funded by future

bu dg et s wh ich were ty pi ca ll yinsuf cient. Traditional methodsalso left a number of risks withthe public sector, regarding the

asset ownership. This is attributedto its monopoly position withno incentive for competition,

poor scal discipline and limitedscal autonomy to public bodies

and managerial inefficiencywhich increases production cost.Many governments attempted toimprove performance throughcorporatisation and performancecontracts which were largelyunsuccessful.

Furthermore, the governmentin its controlling and regulatingmode was found to be outdated,

pa th depe nd en t an d inf li ct edwith the pathology of politicized

bureaucracy. This was attributedto bounded rationality of decisionmakers, predisposition towardrigidity, extreme focus on rule rather

than the outcome, and growingrent seeking behaviour of policymakers. The government agenciescame to be widely perceived to beinef cient and inadequate becauseof their hierarchical and verticalstructures of management andincapable of delivery of quality

public services which could besustained over a long period oftime.

The private sector, on theother hand, was seen as a betterallocator of services, more ef cientin delivery and managementof services, and innovative,

exible and agile to respond tomarket changes. In the USA,the early enthusiasm towardsPPPs grew in the background of

‘privatism’, which dominatedAmerican thinking since early19 th century. This presumed the

private sector to be intrinsicallysuperior for delivery of publicservices. This new philosophy

was moored in neo-classical andnew institutional economics. Amarket focus coupled with ‘supplyand demand’ and ‘user pays’ ethostried to infuse entrepreneurialmanagement techniques from the

private sector to increase publicsector ef ciency through contractsand competition within the publicagencies and with private sector.It stressed on disaggregationof public services, measured

performance, output control andgrowth of markets, and hence,

price signals. What initially startedas infusing features of the privatesector in management of publicorganisations, in late 1970s,slowly transformed (in 1990s)into a much larger role of privatesector in providing finances,

manpower and technologicalresources during the constructionof the assets, and management ofthe services subsequently.

In the more recent discourseson PPPs, these have been viewedas new forms of governance. Theyare being analysed as ‘ governancenetworks ’ between the State andnon-State actors aimed towards

collaboration, co-production, co-management and communicativegovernance. They are beingviewed as an alternative way of

provisioning of public servicesthat combines the features of

both the State and the market,and as a response to limitationsto markets and hierarchies withregard to allocation of resources



64 YOJANA March 2013

and provisioning of services. Asa hybrid mix of the two forms,they typically mix virtues ofstate, like accountability, probity,legitimacy and transparency, andef ciency and quality attributes

of the market.

Moreover, they are argued torepresent a relational dimension ofthe State where the State extendsitself beyond its theoreticallydetermined boundar ies , and

partners with various agenciesin order to achieve its social andeconomic goals. PPPs also re ectthe welfare state being replaced

by the ‘competition state’ which behaves more like a market playerand takes the lead in spearheadingthe structural transformationof markets and brings about

policy ch ange s involving the private sector. This shift is beingattributed the changing meaningof what constitutes the ‘public’and the ‘private’ sectors. Thetraditional divides between thetwo domains are being blurred,and new forms of governancemodels are providing frameworksfor delivery of public services.

Categorising PPPs

PPPs are often classi ed into‘economic’ and ‘social’ blocksand are further distinguished as‘hard’ and ‘soft’. While roads,railways, telecommunicationand airports fall under the ‘hardeconomic’ category, areas likevocational training, technologyt rans fe r and Resea rch andDevelopment (R&D) facilitationare termed as ‘soft economic’.Water treatment, housing and

prisons and childcare are labelledas ‘hard social’ whereas social

security, environment services andcommunity services are includedin ‘soft social’ category.

PPPs are also distinguishedon the basis of stages in which

partnership is entered into. It can be ei ther in the ‘planning anddesign’ stage or at the ‘realisation’stage. As nancial arrangements,PPPs have been observed to takedifferent forms. There are variousterms for them, such as BOT (BuildOperate Transfer), BOO (BuildOwn Operate), Build Own OperateTransfer (BOOT), and DesignBuild Finance Operate (DBFO).

The DBFO model appears to bemost preferred PPP model acrossthe world.

Analysis of factors contributingto growth of PPPs

Many fac to r s have beenidenti ed for the growth of PPPs.These have been varied acrosssectors and countries, depending

on the context of the prevalentstructures within which PPPsoperate. As mentioned earlier, ona larger canvas, growth of PPPsis widely credited to the implicitassumption that the market standsfor better ef ciencies in productionand delivery of services, and

partnering with the market infusesreform, competition, disciplineand entrepreneurial spirit in the

government. PPPs re ect largerideological changes in debates ofgovernance and the transformationof the State-market relationshipwhere partnerships may not only

be the result, but also the cause ofthese changing equations.

PPPs have become the preferredalterative of many ‘third way’

governments which provides theman option to tread the middle path

betw een ou tr ig ht pr ivat isat iona n d n a t i o n a l i s a t i o n . M a n ygovernments attempt to ll the‘capability gap’ in areas where

they lack technical expertisethrough these alliances.

But the most signi cant reasonfor opting for a partnership is theresource dependency between thetwo partners. The new theoryof resource- interdependence is

based on the argument that to be effective, governments must blend their capacities with those

of the various non-governmentalactors. PPPs enable poolingof specialised complementaryresources of the two partners. They

provide easy access to pr ivatenance, managerial knowledge

and entrepreneurial skills of themanpower in design, constructionand management of assets andfacilities created. Specialisation

of the private partner helpsto reduce the final total cost.This enhances the efficiencygains due to improved resourceallocation, effective organisationand innovative solutions formeeting demands of specificsegments of users. Furthermore,e n g a g i n g w i t h t h e p r i v a t esector at the stage of problemde nition ushers in specialised

knowledge in the decision makingand policy process. Workingon design and execution of a

joint project ostensibly results inrapid dissemination of skills andinformation, reduced developmenttime and fewer errors.

P P P s a l s o e n a b l e r i s k -sharing with the private sector.




Infrastructure projects ofteninvolve r isks which thoughunvalued, are purported to carrya cost. These are all the more ina PPP- the multitude of actors,highly technical tendering, contract

evaluation and closure processesmake PPPs a complex procurementand investment process. Someof these risks can be transferredto the private sector, which is

perceived to be in a better positionto identify, evaluate and mitigateit at the lowest cost, thus loweringtotal project cost and resulting incost-effective services. Also, dueto their more exible and adaptable

forms of management, the privatesector can respond more nimblyto threats and opportunities ascompared to the public sector.

Ana lys ing th i s f rom the perspect ive of col laborat ivegovernance, it is claimed thatthat no single actor has theresources, knowledge or suf cientaction potential to handle issues

or dominate unilaterally. Allgovernments today face a vastarray of interests, and aggregationis seen as a functional requirementand reality. The new meaning ofgovernance does not point to state actors as the only entities in policymaking and allocation of resources.In this milieu, amorphous non-stateagencies possessing differentiatedexpertise inform the collective

policy process. In this mode, thegovernment collaborates withother actors for both formulatingand implementing policies. As newforms of governance, collaborationand not competition is the centraltheme of partnerships; as joint

ven tu res they s t ab i l i se thevolatilities in the market, andmitigate competitive pressuresinstead of exploiting them.

PPPs enable governments of thelow-income countries to tide overhuge public debt and introduceinnovation in design and deliveryof public service thereby ensuringits long term sustainability. Theeconomic perspective in favourof PPP is that they present anattractive alternative to the marketand contractualised relationshipsand are viewed to be broader inscope than privatisation and aqualitative leap from traditionalcontracting. Fiscal pressures haveoften led governments to look forinnovative solutions to maximiseeffectiveness in reallocatingresources. Due to the ‘buy-now,

pay-later’ attribute, PPPs are ‘offthe balance sheet’. This means thatPPP nances do not appear as largecapital expenditures in the year thatthey occur, but as series of smallerrevenue expenses over the life ofthe project. Evidence suggeststhat this helps increase Value forMoney (VFM) of the investment;keeps public sector budgets, andespecially budget de ciencies, incontrol; allows the public sectorto avoid up-front capital coststhereby, reducing expenditure onlarge capital intensive projects.Moreover, the scal space created

helps boost medium-term growthand generate fiscal revenue inthe future. Governments canallocate resources to other policy

priori ties as PPPs are financedoff the balance sheet. Accordingto few scholars, the partnership

model has been precipitated byeconomic globalisation which hasstructurally altered the nature ofthe welfare State. Governments areforced to reduce capital spendingwhile still having social goals.

According to some authors,as a public policy representingthe government’s wider approachtowards infrastructure delivery,PPPs carry a signi cant politicalundercurrent. Promise of fasterdelivery of infrastructure projectsand an immediate cut in capitalexpenditure has potential togenerate significant political

incentives, especially in the shortrun. PPPs enable politici ansto deliver more projects in ashort time, demonstrating policyachievement and acting as a toolfor harnessing short term politicalgains. Furthermore, politicianshave a tendency to argue theircases based on the successful casesrather than the failures. Politiciansare also seen to be gaining from

the improved relations with theconstruction business houses.

Conclusion

The article provided a briefdescription of the growth ofPPPs, and explained its basicfeatures. The reasons behind theacceptance and growth of PPPsas a new mode for delivery of

publ ic serv ices were explored

and analysed. The perspectives ofresource-dependency, economicefficiency, political imperativesand new mode of governance werealso examined. q

(E-mail: [email protected])

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Ppp Analysis Yojana March 2013

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