In a PPP, the government’s contribution can be in the form of capital investment (available through tax revenue), transfer of assets, or other commitments or in-kind contributions. The government may provide capital subsidy on public goods such as infrastructure in the form of one time grant; provide revenue subsidy including tax breaks, and provide guaranteed annual revenues for a fixed period.
In such partnerships, the government also addresses issues related to social responsibility, environmental awareness, local knowledge and the requirement to mobilize political support. During active collaboration with the private sector, the government should ensure that social obligations are met and priority sector public investments achieved.
Similarly, in a PPP the private sector should make use of its expertise in commerce, management, operations, and innovation to run the business efficiently. The private partner may also contribute investment capital depending on the form of contract. For both stakeholders, the structure of the partnership should be designed to allocate risks to the partners who are best able to manage those risks and thus minimize costs while improving performance.
WHY PPPS
There is an inherent constraint in the public sector with regards to service delivery in the water, transportation, energy and telecom sectors. Public pressure too results in lower prices and loss-making services. There is inefficient spending and budget shortfalls because of overstaffing, mismanagement, and corruption. Available funds, technology, and human resources don’t keep pace with demographic change. Limited ability to invest restricts the public’s access to diversified products and services. PPP is, therefore, warranted since private sector organizations can attract and offer new services. Private sector’s governing principles minimize cost overruns and exhibits relatively more transparency. As private sector involvement increases, so does the quality of the project and knowledge transfer.
The more PPP projects are launched, the higher the rate of GDP growth since doing so brings capital into the market, creates long-term employment, drives consumption, generates more wealth and sustains economy. It is important to construct safeguard measures since small markets and political instability may carry a fair amount of risks for investors. The bottom line is, at every step, private investors’ interests must be balanced with public safety and access.
“With the right circumstances, PPP’s can be winning partnerships; governments meet obligations without debt, the public receives better or more services, and the private sector is presented with a wider market.”
Nepal still needs to develop a mutually agreeable PPP modality by assessing the existing obstacles for the alliance. Popular models under PPP scheme are joint ventures; strategic partnerships to make better uses of government assets, Design-Build-Operate and Design-Build-Finance-Operate.
As compliance to public safety norms should be made mandatory, PPP policy and regulatory framework needs to be finalized as early as possible. There are varieties of models under the PPP. Some are contractual schemes with a marginal involvement of the private sector. Other schemes show greater allocation of risk and responsibility to the private sector.
RISK AND OPPORTUNITIES
There are significant risks involved. Micro enterprises and many small and medium enterprises operate informally. These small and medium enterprises have innumerable barriers to growth. The lack of competitive pressure shields larger firms from market forces effectively nullifying the need to innovate and become more productive. Risk in construction is common primarily due to cost overrun (late delivery of the assets, price fluctuations etc). The other risk is financial, associated with interest rate fluctuations and exchange rate variations, which can affect the overall cost of financing. Equally important is risk-related to a decline in overall demand.
The PPP is expected to bring together social priorities with the managerial skills of the private sector. Effective PPPs recognize that the public and the private sectors each has certain advantages, relative to the other, in performing specific tasks. PPP relieves government’s burden of large capital expenditure and transfers the risk of cost overruns to the private sectors.
Studies have shown government can tap private sector for capital, technology and expertise to finance, develop and manage public-sector infrastructure projects for water, transportation, energy, and telecom. State and private partnership is an effective instrument to bridge the gaps between demand and resources, quality and accessibility, and risks and benefits.
“With the right circumstances, PPPs can be winning partnerships; governments meet obligations without debt, the public receives better or more services, and the private sector is presented with a wider market.”
CONCLUSION
A recent national level conference (Oct 22-23, 2008) in Nepal jointly organized by Government of Nepal, Federation of Nepali Chambers of Commerce and Industry (FNCCI) and UNDP agreed that the PPP concept could be utilized in all sectors that are of varying scale and scope. It was thought that replication was possible, with due adaptation to the conditions prevailing in Nepal.
Redesigning the old model of PPP with a strong regulatory framework should help facilitate the partnership cultures in new sectors as well as in the areas of garbage disposal and hygienic drinking water, where Nepal has partnership experience.
Given the importance of PPP to competitiveness and socio-economic development, it is imperative that an enabling environment be created through establishing a high-level commission on PPP. There should be proper planning and the development of appropriate regulatory framework and transparency in partner selection process. Also important is clearly-spelt-out policy on the responsibilities, authorities, accountabilities and ownership of concerned stakeholders.
It is important to scrutinize all elements to effectively structure the financing for PPP arrangements. As Nepal is heading toward a federal structure, a thorough understanding of how PPPs can be designed to stimulate the local private sector and encourage local economic development is warranted. Before doing so, one should learn the processes to identify PPP opportunities and the key elements that go into a PPP pre-feasibility study.
Nepal has experiences in small scale PPP projects. However, huge resource requirements are inevitable under the proposed federal structure. This reiterates the need for developing homegrown model for initiating PPP even in resource-intensive mega projects. Therefore, the forthcoming three-year plan document should create enabling environment for partnership formation.
bishwambher@yahoo.com
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