Building innovation capacity via PPP

Ravi Randeniya - BSc Eng MScE MBA

Continued from yesterday

There is a clear distinction between a PPP arrangement within which the private sector partner supplies infrastructure and services on behalf of the public sector for a contract period, and the sale to the private sector of public sector assets (i.e. privatisation).

PPP policy principles

A Government's first task is to develop a set of policy principles for the use of Public-Private Partnerships. Its introduction reflects a government's desire to improve the quality, cost-effectiveness, and opportuneness of public services in the public's best interest.

The PPP principles are based on three core principles: Value for money, Accountability, and Transparency. An agency within the Government needs to be set-up to provide advice on the practical implementation of the PPP principles. A PPP is described as a method of procurement. It obviously involves the use of private sector capital to fund an asset owned by the public sector, which is used to deliver outcomes to the public. Generally, PPP are used for major asset and infrastructure procurements.

PPP reconfigure the procurement process by placing emphasis on the service or capability that the public sector requires rather than the asset(s) used to provide them. Typically, the responsibility for delivery of the service or capability is shared between the public and private sectors.

In simple terms, in a PPP, the private sector invests in the creation or acquisition of the asset(s) required to facilitate the delivery of a service or capability. The public sector provides payments to the private sector that are contingent on their performance, allowing them to recover their initial investment.

Advantages

PPP provides significant advantages compared with other forms of procurement:

* It can contain incentives for the public and private sector partners to achieve the optimal allocation of the associated risks

* It can allow the public sector to focus on delivering the core service or capability it is required to provide. The private sector partner is responsible for supplying the supporting infrastructure and services

* It can facilitate better life-cycle planning by transparently recognizing the costs and risks associated with the whole life of the required service or capability, and

* It can effectively implement the 'payment for performance' principle by placing the private sector's remuneration at risk, contingent on their ability to meet the public sector's requirements.

In advanced countries, a number of PPP policies have been implemented in many jurisdictions and in many industry sectors including transport, health, education, justice, defence, energy and utilities.

Value for money

PPP should be used where they can offer superior value for money relative to other procurement methods. It should be noted, as with other procurement methods, that the lowest priced option does not necessarily represent the best value for money.

Value for money is determined through a comparative analysis of the benefits, costs, and risks of the available procurement alternatives. Assessing the value of these variables requires a degree of judgement and the use of both quantitative and qualitative, and costs, benefits and risks analysis.

Value for money from PPP can manifest itself as:

* The delivery of a service or capability at a lower cost,

* Greater certainty of the financial outcome due to less exposure to significant risks and

* Increased benefits to the end-users of a service due to the public sector's focus on service delivery rather than asset procurement.

PPP also provide an opportunity to combine separate but related contracts. This is advantageous because it:

* Simplifies the public sector's contract management task

* Improves accountability by concentrating responsibility for service delivery in a single place; and

* Generates efficiencies by creating incentives for the owner of an asset to design or acquire it such that future operating and maintenance costs are optimised with capital costs so that total costs are minimised, providing better value for money.

Sharing capacity

In some cases, only part of an asset's capacity is utilised by the public sector during the delivery of a service or capability. PPP provide an opportunity for the private sector to utilise the full capacity of the assets it would own, by simultaneously selling capacity to the public sector and other parties. Utilising the full capacity of assets in this way effectively lowers the cost to the government's service or capability.

Innovation and Efficiency

PPP allows the public sector to think of procurement in terms of the outputs to be delivered rather than the inputs to be used. The private sector has an incentive to seek more innovative and efficient ways of delivering the required outputs.

As PPP, arrangements are long-term in nature, the opportunity for the public sector to access new technology and best practice operation and asset maintenance can result in significant cost savings for the government and higher quality services for end users.

It is paramount that there is a clear understanding of the key objectives to be realised using PPP: good quality services, cost effective delivery, clear customer focus, enhanced service diversity, enhanced incentive, better asset utilisation and project delivery on time bring wider economic benefits to stimulate our private sector and contribute to increased employment and economic growth through building our innovation capacity to serve the nation. The writer is Fmr. Senior Policy Analyst, Ministry of Trade and Economic Development, Govt of British Columbia