Public Private Partnership – Definition, Types, Strengths and Weakness

The Concept of Public Private Partnership

The concept of Public Private Partnership (PPP) has been described in several ways. The Agency theory, which is often called the principal-agent theory, shows the affiliation between the principals and agents and emphasize that the principals have the basic task of choosing and controlling their agents. The theory that sees parties engaging in exchange as contracting is called transaction cost theory. It emphasize that contract should account for both personal and social expenses while reaching a contract and further noted that the process of contracting could be costly because it includes cost of structuring, bonding, monitoring, negotiation and residual loss due to principal agent problem.

Partnership under evolutionary theory, is about efficiency and prudent utilization of available resources, which is aim at plummeting replication in the overhead expenses. The exchange and dependency theory, highlight on integrating disjointed policy landscape. Others viewed Public Private Partnership as a mechanism for management, financial arrangement and development. To others, Public Private Partnership is just a language gimmick because it is privatization in another way.

In spite of the many perspectives on Public Private Partnership, it has been defined as an arrangement between two or more parties who have agreed to work cooperatively toward shared and/or compatible objectives and in which there is shared authority and responsibility; joint investment of resources; shared liability or risk taking; and ideally, mutual benefits.

Types of Public Private Partnership

There are several types of Public Private Partnership. There are several classification of Public Private Partnership, which include; collaborative partnership that allows each partner to have power in decision-making process; the operational partnership, on the other hand, emphasize more workload sharing than in decision-making; the contributory partnership is where support such as funding is provided by one partner and become less involve in other operational matters. In the case of consultative partnership, it is more of providing policy advice to public organisation.

Contracting in Public Private Partnership

Public Private Partnership has no “one-size-fits-all” principle in designing contract because that lies on the objective and sector of the project. At any rate, contracting in PPP is largely done based on output specification approach. In this case, the basic standard services to be provided are defined by the public sector while the private-sector is responsible of deciding how to meet and improve the basic standards.

In Public Private Partnership, there are several types of contracting and risk factors always define the nature of the system of contracting. The following are some of the kinds of contracting in Public Private Partnership:

  1. Build-Operate-Transfer (BOT) Contract: In this type of contract, the private sector is responsible of building; operating and managing the assets while the public sector took over after the expiration of the contract.
  2. Design-Build-Finance-Operate (DBFO):  The private sector, in this type of contract is responsible and in-charge of all the stages of a given project for the provision of public service
  3. Concession Contracts:  In this type of contract, the private sector is responsible of financing, constructing new or modernizing an existing facility and operate such facility for given period. The public sector took over after the expiration of the contract
  4. Operation PFI:  In this type of contract, services are sold directly to the public sector by the private partners instead of charging user fees. In this case, the private sector receives commitment of future payment from the public sector from the service being provided.
  5. Management Contract:  In management contract, the private sector operates and manages a public sector facility or asset and is remunerated through a fixed fee or other incentives based on meeting performance target.
  6. Lease Contract:  Unlike management contract, in lease contract, the private sector operates and manages public facility but is allowed to charge final users. In this case, operation and risks are the responsibility of the private sector.
  7. Joint Venture:  In this type of contract, both the private and public sector jointly create a company for the provision of public service. This allows both partners to own shares and have representative of the board.
  8. Affermage Contract:  In this type of contract, the public sector is responsible of providing major capital in the investment while the private sector provide a small portion of that and allows to recover it by charging operating cost.
  9. Collaborative Partnerships: These are often non-legal relationship between public and Private sector in order to achieve a common objective. These are usually in form of knowledge exchange or sharing of other resources.

Payment Mechanism in Public Private Partnership

Payment mechanisms are crucial elements in Public Private Partnership contracts. This is the way in which the public sector is able to allocate risks and incentives on a given contract to the private sector. There are basically three payment methods. These are; Cost-plus, fixed-price, and incentive payments.

  1. Cost-Plus Payment: In this payment system, the public sector usually reimburses a private partner for a documented construction project or operation cost carried out including a fixed fee.
  2. Fixed-Price Payment: In this approach, the private sector received a fixed payment from the public sector for the services provided after certain basics and quality standards have been achieved.
  3. Incentive Payment: This type of payment has two components – that of a fixed amount and another payment as compensation for the cost incurred.

Apart from the above, there are other types of payments to the private sectors which combine user charges and contribution from the public sector.

Strengths and Weaknesses of  Public Private Partnership

Public Private Partnerships have it own strengths and weaknesses but this varies from project to project. The strengths of the PPP, is that PPP allows for leveraging of public funds, better management, allocation of risks, better incentives to perform, improved effectiveness, alternative revenue sources, access to economies of scale or scope, encouragement of multi-use infrastructure and improved service responsiveness. PPP allows the pooling of resources, it enhances effectiveness and efficiency through coordination, it creates legitimacy for government policies, it allows optimum allocation of risks, it gives value for money, speedy delivery of services; encourages trustworthiness, promote transfer and sharing of technology, facilitates training and create development avenues from business sectors.

The disadvantages of Public Private Partnership are that; the PPP has sometimes unclear goals and difficult to enforce performance standards where there is bad customer relation. Similarly, the PPP are undermined by resource cost problems and unequal power relation which leads to tension among partners. For instance, some groups may try to impose their will against majority view.

It is also argued that Public Private Partnership sometimes impede on other projects or services because funds meant for other services are diverted. Further, PPP failed if there is lack of support or capacity from the organisation. Though PPP provide value for money, inefficient capacity from the regulators impede on effective implementation of the Public Private Partnership.

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