The writer is an award-winning financial advisory, trade and transformation consulting professional with almost two decades of enterprise leadership experience across EMEA.
Whereas the exact definition of public-private-partnership (PPP) differs between countries, in general, they refer to long-term contractual relationships between public and private parties, awarded through a competitive tendering process. Under this arrangement, the private party delivers over the contract duration public infrastructure and services, where (part of) the financing required is provided by the private partner, and where (sufficient) risks are transferred to the private partner and its remuneration is linked to its performance.
PPPs have emerged as one of the ways to overcome the constraints faced in developing countries, especially in sub-Saharan Africa (SSA), to develop infrastructure projects – such as roads, schools or hospitals. This is due to scarcity of public funds, corruption, poor planning, poor project formulation as well as inefficient capacities. PPPs enable governments to tap into private sector finance and ingenuity to finance critical infrastructure, improve project preparation, execution and management, and deliver efficient services to the citizens. They are, therefore, critically important in meeting the challenges of implementing the Sustainable Development Goals (SDGs) which encourage and promote effective public-private partnerships in target SDG-17.
While this may seem like a step toward development in Africa, critics fear that this form of partnership can only lead to either private companies profiteering from others’ misfortune or governments giving up their power over important government services and programmes. While this has been a debated issue for some time now, many developing nations see these partnerships as a way out of poverty. While these relationships have advantages for the host country, the private sector has much to gain from them as well. These partnerships can give both the company and the host country a much-needed boost in their development efforts and improve their finances. In some cases, private companies are even able to help improve the communities that they expand.
Critics argue that these partnerships give too much power to private companies. This is because the company, in this case, has the responsibility of maintaining a government-built infrastructure that they have little concern or interest in. This can lead to them being unable to provide the proper maintenance and upkeep of a project due to their lack of investment in it. As a result, the government may end up paying for the repairs on its own through taxes and collections from citizens.
This leads some critics to believe that public-private partnerships are only beneficial for those who are willing to break the law by abusing loopholes in legal contracts and making huge profits from someone else’s misfortune. While many contracts have clauses in them that prevent this from happening, there is very little enforcement on the matter. Even if these businesses are discovered and are proven to be abusing the legal system, they often get away with little to no punishment, while the host country’s government and people suffer.
The success of a public-private partnership depends on the motivation of all parties involved. The best partnerships are those that are done for mutual growth and interest — both parties working together to make each other better off. If any of these parties act with ulterior motives, then it can lead to disastrous results for all involved. Critics also argue that most private companies only focus on profit rather than growth when they enter developing countries. To combat this, some governments have taken a rather liberal approach in their policies regarding private companies, making them less attractive to outside investors. Withal, PPPs can step in to provide ease to this by promoting economic growth and development in Africa. PPPs can create jobs and stimulate local economies by providing the necessary infrastructure and services. They can also help to attract foreign investment and encourage the growth of small and medium-sized enterprises.
Another primary benefit of PPPs is the infusion of private-sector financing and innovation into the public sector. Private companies can bring new technologies, management strategies, and best practices to the table, which can help improve the efficiency and effectiveness of public infrastructure and services. Additionally, PPPs often involve the transfer of risk from the public sector to the private sector, which can help to reduce the financial burden on governments.
To maintain a healthy partnership between both public and private sectors, the host country must make sure that they can properly enforce all aspects of the agreement. If they cannot, it will get worse to the point where the company may try to find a way around their obligation to maintain projects that they feel are not profitable. The host country must also remember that at the end of the day, this is just a business transaction. A growing economy means more money for everyone involved, no matter what sector you belong to.
To balance the needs of the host nation with the interests of private corporations, however, is essential. Governments must make sure that they negotiate contracts in a fair and transparent manner, giving the public’s interests and rights top priority. Clear performance criteria, oversight procedures, and sanctions for non-compliance are all part of this.
Governments should also spend money developing their ability to control and manage public-private partnerships. This entails training qualified staff members who can supervise the execution of projects, track performance, and uphold contractual responsibilities. Governments may make sure that partnerships are carried out in a way that optimises benefits for the public by improving their institutions.
Furthermore, robust and transparent governance should not be considered as a replacement for public-private partnerships. To stop abuses and make sure the public interest is protected, governments must continue to play a regulatory role and provide oversight. Building confidence and preserving the integrity of these collaborations requires transparency and accountability in decision-making processes.
It is crucial to set up procedures for equitable profit-sharing to allay worries about potential profit-seeking activity by private businesses. Governments can negotiate revenue-sharing agreements that divide the project’s income among the local people and support social advancement. This can be accomplished through funding social programmes that cater for the needs of the populace, such as those in education, healthcare, or other areas.
Governments might also diversify their funding sources by enlisting a number of private partners or foreign financial institutions to reduce the risks associated with PPPs. By doing this, the risks can be spread out and the responsibility won’t fall primarily on one party. Governments may also think about including performance-based payment methods in contracts, which tie payments to the accomplishment of predetermined project milestones and results.
Although this subject of public-private partnerships has been debated and discussed for many years, no clear conclusion has yet been reached. Many governments have taken up the idea, but not as many private companies; and of those that have, much only works in a small percentage of African countries. Despite the confusion over where this type of partnership should go, there is no denying that it is a step in the right direction for developing countries on the continent — with many social and economic benefits. So, it is possible that this may be one of the best ways to move forward for Africa. However, with all the potential benefits and the many risks that it involves, it is important to understand the process thoroughly before making a decision.
Likewise, the creation of special economic zones (SEZs) is a powerful strategy for fostering economic growth and luring private investment in Africa. SEZs can be an effective instrument for establishing public-private partnerships because they offer an ideal environment for cooperation between public agencies and private businesses. They typically offer a promising avenue for promoting economic development.
Targeted economic zones, like Ghana’s Meridian Industrial Park, are excellent examples of how special economic zones can support the growth of public-private partnerships. These zones foster investment, employment growth, and economic diversification by fusing the strengths of the public and private sectors. By leveraging the strengths of both sectors and providing an enabling environment for investment, countries can attract domestic and foreign investments, leading to the development of industries and the creation of jobs.
Public-private-partnership models
PPPs can take on very different models, which include the following:
(i) Service contracts are a model where the government contracts the private sector to conduct specific tasks, such as revenue collection for 1-2 years. The model is used when services are already well managed and commercially viable.
(ii) Management contracts give the responsibility for operation and maintenance of a publicly-owned business to the private sector. The objective of management contracts is to rapidly enhance public provider core technical capacity and efficiency.
(iii) Lease agreement is a process where the private sector leases assets from government, provides services and maintains assets for 8-15 years. Lease agreements are used when there is scope for gains in operating efficiency but limited need for investment.
(iv) Franchise is a model where the private sector invests in operation and maintenance equipment and maintains built assets. This includes the collection of user charges and the payment of a surcharge (% of user charge) to government.
(v) Joint venture is when both the government and private sector jointly own a utility either through sales of some of the shares in the existing utility or through the creation of a new utility. Joint ventures are utilised in strategic sectors, where the government wants to closely monitor the activities of the private sector and provide management inputs to service providers.
(vi) Concession is a model where the private sector operates and maintains public assets and investments, but ownership remains with the government. The role of the government is then confined to regulating price and quantity. Concessions are used where large investment is needed to expand coverage.
(vii) Build-operate-transfer (BOT) model is one where the private sector builds and operates a public service company, such as a waste treatment plant for 20-30 years, after which ownership reverts to the government. In this model, government usually commits to buying part of output so that the government is both a customer and a regulator of the service. BOT is used where the existing public service provided cannot meet the projected demand and where projects require significant finance. Factors that determine the choice of PPP model a government may adopt include the degree of control desired by the government, the government’s capacity to provide the desired services, the legal framework for monitoring and regulation, and the availability of financial resources from public or private resources.
(viii) The build-own-operate-and transfer scheme (BOOT) is a model where the private sector company finances, constructs, owns and operates the infrastructure for a fixed term. The ownership company is allowed to make any decisions it sees fit during the ownership tenure, with minimal or no government interference. The company is also allowed to recover its total investment with reasonable returns. This would be done through the collection of tolls (in the case of highways) or fees, rentals and charges. At the expiry of the fixed term, the infrastructure is handed over to government, which would then takeover all responsibilities.
(ix) The rehabilitate-operate and transfer (ROT) is a model that involves rehabilitation of existing infrastructure, where the infrastructure is handed over to the private sector player for refurbishing, maintenance and reconditioning.
Social and economic benefits of public-private partnerships
Public-private partnerships (PPPs) have helped a number of developing countries by providing the means for billions of dollars to be spent on infrastructure projects. The success of PPPs can be seen in Western countries like the United States, which has been using them to increase its infrastructure and expand its economy over the past few decades. Here are some of the social and economic benefits to be derived from public-private partnerships:
- PPPs help stimulate economic growth by providing infrastructure through which economic expansion and growth can take place.
- PPPs provide more jobs as many companies will expand their business as they are doing with government projects.
- PPPs also encourage foreign investment, which can help to improve the country’s overall economy.
- PPPs provide the necessary services and infrastructure to improve the lives of people in developing countries. By providing this much-needed infrastructure, governments can improve the quality of life and increase life expectancy, resulting in a happier and healthier population.
- PPPs improve the lives of citizens by educating them on how to use these new services.
- PPPs give government employees an opportunity to obtain valuable work experience that they may not have been able to obtain otherwise.
- PPPs encourage foreign direct investment, which helps a country’s gross domestic product (GDP).
Potential constraints on the PPP
Some potential constraints on PPPs are the following:
- Accounting laws and practices, laws governing construction contracts, public works laws and conventions and so on may be inappropriate for private sector participation. Where this is the case, such laws and practices should be reviewed carefully and, if necessary, amended or modified to accommodate and encourage private sector involvement.
- Distortions in the overall incentive environment (the tax regime, import restrictions, labour laws along with banking, foreign exchange and foreign investment restrictions) and excessive regulation and restrictions can also inhibit private sector participation.
- Deregulating, implementing new structural reforms and managing private entry are both politically and technically difficult, particularly as many infrastructure services, such as district heating, electricity and water, are heavily subsidised. Although governments recognise the long-term economic need to raise tariffs to allow for cost recovery and long-term sustainability, it is frequently politically impossible for them to raise tariffs quickly. Consequently, governments may wish (in the short term) to provide subsidies to support cost recovery in some projects.
- An imbalance in the capacities of the public, private and community partners is the most common limitation on successful PPP arrangements.
- Absence of a cost-benefit analysis which itemises all costs and benefits, and enables a proper comparative assessment of alternative delivery approaches.
Public policies to support the private sector in efficient PPP arrangements
- Focus on existing PPPs that have worked well.
- Encourage foreign investment.
- Encourage foreign companies to grow by giving them incentives (e.g., tax breaks, deregulation).
- Set up a safety net for private businesses if the market does not respond to their products and services.
- Try to attract foreign firms that have acquired skills and experience in PPPs.
- Make sure that the legal system is in place, so investors know what they are getting into before they make a commitment.
- Ensure that the law properly defines the rights of both investors and host communities.
- Establish transparency, accountability and citizen participation.
Concluding recommendations
The following are recommendations on Principles for Public Governance of Public Private-Partnerships adopted by OECD in 2012, based on the proposal of the Public Governance Council relevant for successfully implementing PPPs in Africa.
- Establish a clear, predictable and legitimate institutional framework supported by competent and well-resourced authorities.
- Ground the selection of public-private partnerships in value for money.
- Use the budgetary process transparently to minimise fiscal risks and ensure the integrity of the procurement process.
- Incorporate PPPs in the existing development policy as one of the development strategies for development.
