Last week, we discussed the Privatisation Policy Framework Paper that was prepared in 1993 to guide the privatization that the Government had embarked on in 1988 as part of the Economic Recovery Programme entered into with International Monetary Fund.
We had concluded that the Paper is still relevant and useful, considering the privatisation activities currently being undertaken in respect of GUYSUCO. However, given that most of the State-owned Entities identified in the for privatisation have already been divested, it may be useful for the Paper to be revised to reflect the policy of the present Administration and its priorities as regards future privatisation, taking into account lessons learned from past privatisation activities.
In today article, we discuss another topic which is closely related to privatization. We refer to Public-Private Partnerships (P3s) which the Government has indicated that it wishes to embark on. On 26 April 2018, the Minister of Finance tabled a Public-Private Policy Framework Paper in the National Assembly. The Paper identifies the following projects that are being considered for P3: Demerara Harbour Bridge; Linden-Lethem road link; deep water harbour and container port; hydro plants and energy farms; plantation agriculture; modernising and dredging of Port Georgetown; milk plant; information technology; and agro-industrial and small manufacturing arks.
P3s in Perspective
The Canadian Council for Public-Private Partnerships (CCPPP) considers a P3 as “a cooperative venture between the public and private sectors, built on the expertise of each partner, that best meets clearly defined public needs through appropriate allocation of resources, risks and rewards. Margaret Rouse, a contributor to the CCPPP, defines it as “a funding model for a public infrastructure project such as a new telecommunications system, airport or power plant. The public partner is represented by the government at a local, state and/or national level. The private partner can be a privately-owned business, public corporation or consortium of businesses with a specific area of expertise”.
A third definition, offered by Partnerships BC, an agency created by the Province of British Columbia to manage P3 delivery, is that:
A public private partnership is a partnership arrangement in the form of a long-term performance-based contract between the public sector (any level of government) and the private sector (usually a team of private sector companies working together) to deliver public infrastructure for citizens. A public private partnership could be any kind of infrastructure or service such as a new hospital or bridge or highway, a new type of technology that delivers services in a faster and more efficient manner, or a new federal government building – anything that citizens typically expect their governments to provide.
In essence, a P3 is a partnership or cooperative arrangement between a public-sector agency and a private-sector agency for the delivery of a service or the development of an infrastructure, based on a mutual understanding that the latter is better placed to deliver the service or infrastructure more efficiently and is more equipped in terms of financing to do so. Equally important is the determination of ownership of the service or infrastructure throughout the life of the project as well as the accountability arrangements in place to ensure that the best value for money is provided to all stakeholders.
Rationale for entering into P3 arrangements
The main concerns about the conventional approach to infrastructure works and service delivery relate to over-dependence on procurement based on lowest costs; insufficient capacity and expertise in the public sector; significant cost and schedule overruns; unsatisfactory quality of construction works; sub-optimal performance; high operational and maintenance costs; and lack of value-for-money. The focus also tends to be on the capital cost, with little consideration going towards costs throughout the life of the project.
In recognition of these concerns, the UK Government in the late 1990s set up a task force comprising representatives of industry, especially those who were successful in transforming their own industries, to develop specific actions needed to improve quality, customer satisfaction, timeliness and value-for-money for infrastructure works and service delivery. The Task Force issued its report entitled “Rethinking Construction” containing 90 recommendations. A key recommendation is the application of an integrated approach where contributions are made from all key stakeholders, including engineers, design professionals, users, contractors and those responsible for operations and maintenance, before a specific option is selected.
Another important consideration relates to the financing of the cost of the infrastructure works or service delivery. Understandably, governments are reluctant or unable to provide the initial financing, especially when they are incurring fiscal deficits, leading to higher levels of public indebtedness. That apart, while the cost of government borrowing is lower than private sector borrowing, it has been argued that the cost savings due to higher levels of efficiency as well as innovation associated with private-sector participation, are likely to more than offset the higher cost in a P3 arrangement. It has been further argued that the public-sector partner derives the greatest benefit in a P3 that includes the private-sector partner being responsible for the operations and maintenance of the infrastructure over the life of the project.
Distinction between a P3 and Privatisation
It is important to note that a P3 is not privatization. The main difference relates to ownership of the infrastructure asset/facility, accountability arrangements, and responsibility for risk. According to a publication by the Philippines Government, when a publicly-owned asset is privatized, the ownership is permanently transferred to the private-sector agency which is better placed to manage the asset more efficiently. However, regulatory control remains with the public-sector agency. Accountability for the provision the service is transferred to the private-sector agency while the public-sector agency gets paid for selling its assets. All risks associated are assumed by the private-sector agency.
In a P3, the public-sector partner retains ownership of the infrastructure/asset, except in cases of Build-Own-and-Operate and Rehabilitate-Own-and-Operate contractual arrangements. The public-sector partner defines the extent of private-sector partner’s participation and remains accountable to the citizenry for the provision of the service. The private-sector partner gets paid for delivering the asset or facility. Risks are assumed by the party that is best able to manage and assume the consequences of such risk. From a private sector perspective, the higher the risk assumed, the greater will be the reward. Therefore, the transference of risk to the private-sector partner is likely to result in a higher cost of capital which in turn has implications for the overall cost of the project.
Models of P3s
There are various models of P3s depending on which of the two partners is responsible for the ownership and maintenance of the assets. Rouse identifies the following:
(a) Design-Build (DB): The private-sector partner designs and builds the infrastructure to meet the public-sector partner’s specifications, often for a fixed price. The private-sector partner assumes all risk;
(b) Operation & Maintenance Contract (O & M): Under contract, the private-sector partner operates a publicly-owned asset for a specific period of time. The public partner retains ownership of the assets;
(c) Design-Build-Finance-Operate (DBFO): The private-sector partner designs, finances
and constructs a new infrastructure and operates/maintains it under a long-term
lease. The private-sector partner transfers the infrastructure to the public-sector
partner when the lease is up;
(d) Build-Own-Operate (BOO): The private-sector partner finances, builds, owns and
operates the infrastructure indefinitely;
(e) Build-Own-Operate-Transfer (BOOT): The private-sector partner is granted
authorization to finance, design, build and operate an infrastructure (and to
charge user fees) for a specific period of time, after which ownership is transferred
back to the public-sector partner;
(f) Buy-Build-Operate (BBO): This publicly-owned asset is legally transferred to a
private-sector partner for a designated period of time;
(g) Build-lease-operate-transfer (BLOT): The private-sector partner designs, finances
and builds a facility on leased public land. The private-sector partner operates the
facility for the duration of the land lease. When the lease expires, the facility is
transferred to the public-sector partner;
(h) Operation Licence: The private-sector partner is granted a licence or other
expression of legal permission to operate a public service, usually for a specified
term. (This model is often used in IT projects.); and
(i) Finance Only: The private-sector partner, usually a financial services company,
funds the infrastructure and charges the public-sector partner interest for use of
Pros and cons of P3s
P3s should not be regarded as the solution to the problems associated with the traditional mode for infrastructure development and service delivery. P3s are generally more suitable for large projects that require highly-skilled workers, innovation, and significant cash outlay to get started. In Canada, the threshold is around C$40 million. However, it is necessary for a careful analysis of the specific circumstances of the project to be carried out to determine whether the conventional approach or a P3 should be adopted. This includes value-for-money analysis to determine which delivery mode is likely to “give the best value in return for the public investment”. The analysis includes comparing the full cost of delivery of a project using the conventional method with the various models of P3s, inclusive of financing costs as well as placing a value on the associated risks involved as regards each option. The option that delivers the infrastructure works at the lowest cost is considered the best option in terms of value for money.
A recent report commissioned by the American Public Works Association and the American Council of Engineering Services concluded that the use of the Qualification Based Selection (QBS) approach in selecting engineering consulting firms gives better project results in terms of innovation and quality engineering, not to mention fewer change orders and less delays. This conclusion is applicable to both the conventional method of delivery and the P3 approach. The report noted that “capital cost growth on the projects where QBS was used was reduced by 70% when compared to projects where other methods, such as lowest fee, were used to select the consulting engineer”.
Given its expressed desire to adopt the P3 approach to certain infrastructure development and service delivery, the Government needs to be extremely careful not to repeat the mistakes of the past, such as in relation to the defectively constructed Skeldon Estate Factory, the cash-strapped Berbice River Bridge and the aborted Amaila Falls Hydro Electric Project where there were concerns about the high cost of the project. One hopes that careful and comprehensive analyses will be carried out of the conventional approach and the various P3s models to determine which option is most suited in terms of ensuring the best value for money for the investment to be undertaken. The involvement of key stakeholders before any decision is made is also crucial to successful implementation.