Is Your Country Ready for Public-Private Partnerships?
Economic growth and development are intimately related to the delivery of public services. Governments are often seeking ways to finance the provision of public services to citizens while dealing with tight budgets, unreliable contracts, and stakeholders who each have potentially independent priorities. Bringing in the private sector as a partner or investor is a sought-after solution for these issues. The need to align public and private interests—while also properly allocating risks and managing liabilities—has made public-private partnership (PPP) a growing alternative to traditional public procurement practices.
While in many countries, PPPs have long been used to structure contracts and finance infrastructure, in others, mainly in emerging economies, PPPs are only now being looked at with increased interest. A motivated government with an appetite for bringing in private sector participation is essential in using PPPs to deliver public services. But in no way is motivation alone sufficient, nor is it a silver bullet. Prior to launching bids, a country and its public institutions must be ready to embark on an endeavor as anyone would be when beginning a new journey.
But what does it mean to be ready for a PPP? In simple terms, it means that the country’s government, its legal framework, and its budgeting practices are equipped with the right structures to support the development of PPP projects through their lifecycles.
Does the government have the capacity needed?
Cultivating a collective interest in PPPs is a necessary start, but so is having a clear picture of the existing institutional capabilities. Beyond wanting a PPP, an assessment of the government’s experience in PPP implementation is essential to achieve success. Do the key staff have experience in PPP project financing, procurement, and contractual agreements? Is the organization capable of handling a completely new and complex structure effectively to avoid missteps and pitfalls? Having a skilled workforce provides assurances to potential investors of sound implementation and healthy returns on investment in the project while also providing lower political risk.
The PPP project team will need relevant training based on practical lessons learned and best practices to gain the capacity-building tools necessary to navigate the road ahead—from gauging project feasibility to identifying key stakeholders to building and executing contracts and establishing sound governmental policy. IP3’s suites of online and in-classroom training programs in Public-Private Partnerships, Project Finance, and Regulation and Utility Management prepare staff to tackle projects and deliver results.
If the staff is enabled with the appropriate skills and the establishment of government policies is well-defined, then the base is laid for the next steps.
Is the legal and regulatory environment enabling?
Enabling laws, regulations, and institutions is essential. The legal and regulatory environment must be sufficiently conducive to PPPs, meaning legislation and regulations should support the procurement and implementation of projects as PPPs. At the same time, it is crucial that no law will impede the development of the project at any stage of its cycle.
An assessment of the country’s legal framework is necessary to understand if, for instance, the existing body of law allows for the concession of certain public goods to the private sector. Furthermore, the country should have procurement laws that ensure a transparent and competitive process. In ideal cases, these laws are not only enabling, but they also specify the processes for PPP procurement—what are often called PPP laws. In other instances, the country may have laws impeding concessions or procurement of public services as PPPs, a situation that would have to be addressed before the signing of any contract.
Can the government afford the project?
Once a stable enabling environment for the implementation of PPPs is established, it is important to look at the affordability of the project to the government. While PPPs can be excellent sources of private sector financing, it does not mean that the public sector is completely absolved of all funding for the project. There must be sources of funding available for the project preparation, procurement, and implementation phases.
At the initial stage of the project, the government will need to bear the cost of the procurement process. Depending on the project governance structure, it might also choose to fund some or all of the capital expenditure costs, which are investments in the construction of the facility, purchasing of assets and land, and interest during construction. During project implementation, government funds could be needed for availability payments (if that’s the revenue option in the PPP arrangement), and for risks allocated under the public sector, such as demand risks or contingent liabilities. Thus, all public sector commitments must be assessed prior to the start of the project, to allocate and mitigate potential risks and ensure value-for-money.
Tying it all together
PPPs are great tools for contracting and financing public service delivery in conjunction with the private sector. Still, they need an ideal environment to thrive. Without appropriate policies, regulation, capacity, and funds, the benefits of a PPP may go unrealized. An initial, pre-procurement readiness assessment is vital in understanding if a country is ready for PPPs. Additionally, a readiness assessment will review whether public institutions are able to anticipate and mitigate risks before embarking on large-scale projects to ensure better chances of success.
Making sure government staff has access to the tools needed to build its capacity on the PPP project cycle is the best initial action to ensure readiness. With over 25 years of experience specializing in Public-Private Partnerships, Project Finance, and Regulation and Utility Management, IP3 offers online, in-classroom, and custom training for professionals seeking effective learning solutions that deliver a strong return on investment. . Visit our Learning Services section and CONTACT US today to begin building your organization’s—and your country’s—future!
Dr. John M. Mutua (Ph.D. Economics)
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