Building innovation capacity via PPP
Continued from yesterday
There is a clear distinction between a PPP arrangement within which
the private sector partner supplies infrastructure and services on
behalf of the public sector for a contract period, and the sale to the
private sector of public sector assets (i.e. privatisation).
PPP policy principles
A Government's first task is to develop a set of policy principles
for the use of Public-Private Partnerships. Its introduction reflects a
government's desire to improve the quality, cost-effectiveness, and
opportuneness of public services in the public's best interest.
The PPP principles are based on three core principles: Value for
money, Accountability, and Transparency. An agency within the Government
needs to be set-up to provide advice on the practical implementation of
the PPP principles. A PPP is described as a method of procurement. It
obviously involves the use of private sector capital to fund an asset
owned by the public sector, which is used to deliver outcomes to the
public. Generally, PPP are used for major asset and infrastructure
PPP reconfigure the procurement process by placing emphasis on the
service or capability that the public sector requires rather than the
asset(s) used to provide them. Typically, the responsibility for
delivery of the service or capability is shared between the public and
In simple terms, in a PPP, the private sector invests in the creation
or acquisition of the asset(s) required to facilitate the delivery of a
service or capability. The public sector provides payments to the
private sector that are contingent on their performance, allowing them
to recover their initial investment.
PPP provides significant advantages compared with other forms of
* It can contain incentives for the public and private sector
partners to achieve the optimal allocation of the associated risks
* It can allow the public sector to focus on delivering the core
service or capability it is required to provide. The private sector
partner is responsible for supplying the supporting infrastructure and
* It can facilitate better life-cycle planning by transparently
recognizing the costs and risks associated with the whole life of the
required service or capability, and
* It can effectively implement the 'payment for performance'
principle by placing the private sector's remuneration at risk,
contingent on their ability to meet the public sector's requirements.
In advanced countries, a number of PPP policies have been implemented
in many jurisdictions and in many industry sectors including transport,
health, education, justice, defence, energy and utilities.
Value for money
PPP should be used where they can offer superior value for money
relative to other procurement methods. It should be noted, as with other
procurement methods, that the lowest priced option does not necessarily
represent the best value for money.
Value for money is determined through a comparative analysis of the
benefits, costs, and risks of the available procurement alternatives.
Assessing the value of these variables requires a degree of judgement
and the use of both quantitative and qualitative, and costs, benefits
and risks analysis.
Value for money from PPP can manifest itself as:
* The delivery of a service or capability at a lower cost,
* Greater certainty of the financial outcome due to less exposure to
significant risks and
* Increased benefits to the end-users of a service due to the public
sector's focus on service delivery rather than asset procurement.
PPP also provide an opportunity to combine separate but related
contracts. This is advantageous because it:
* Simplifies the public sector's contract management task
* Improves accountability by concentrating responsibility for service
delivery in a single place; and
* Generates efficiencies by creating incentives for the owner of an
asset to design or acquire it such that future operating and maintenance
costs are optimised with capital costs so that total costs are minimised,
providing better value for money.
In some cases, only part of an asset's capacity is utilised by the
public sector during the delivery of a service or capability. PPP
provide an opportunity for the private sector to utilise the full
capacity of the assets it would own, by simultaneously selling capacity
to the public sector and other parties. Utilising the full capacity of
assets in this way effectively lowers the cost to the government's
service or capability.
Innovation and Efficiency
PPP allows the public sector to think of procurement in terms of the
outputs to be delivered rather than the inputs to be used. The private
sector has an incentive to seek more innovative and efficient ways of
delivering the required outputs.
As PPP, arrangements are long-term in nature, the opportunity for the
public sector to access new technology and best practice operation and
asset maintenance can result in significant cost savings for the
government and higher quality services for end users.
It is paramount that there is a clear understanding of the key
objectives to be realised using PPP: good quality services, cost
effective delivery, clear customer focus, enhanced service diversity,
enhanced incentive, better asset utilisation and project delivery on
time bring wider economic benefits to stimulate our private sector and
contribute to increased employment and economic growth through building
our innovation capacity to serve the nation. The writer is Fmr. Senior
Policy Analyst, Ministry of Trade and Economic Development, Govt of