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Financing Health and Social Services through PPP

  Jun 20, 2013

By Dr Ben Ngoye – Director Institute of Healthcare Management, SBS

Public-Private Partnerships (PPPs) may have different meanings to different people, but in essence they relate to the provision of public infrastructure or services, through an arrangement that involves the transfer (and sharing) of risk between the partners. The concept arose in the West, from concerns by the public on the rising public debt, and was initially limited to one-off deals. Private sector participation in these deals was limited to separate planning, design or construction contracts on a fee-for-service basis. Devolution has placed an enormous burden of responsibility on county governments amidst high expectations for quality services by the public, but without attendant resources. PPPs could therefore be one way through which both the national and county governments can make services available and accessible to the populace under such resource constraints.

What then are PPPs? The working definition I propose builds upon those used by Canada and India who have significant experience with PPPs as enviable models for infrastructure and service provision. PPP are defined herein as ‘A cooperative venture between the public and private sectors aimed at providing a public service, that is built on the expertise of each partner, and in which there is appropriate allocation of financial and technical resources, and sharing of risks and rewards’. PPP therefore span a spectrum of models that progressively engage the expertise or capital of the private sector. At one end, there is contracting out as an alternative to traditionally delivered public services, while at the other end, there are arrangements that are publicly administered but within a framework that allows for private finance, design, building, operation and possibly temporary ownership of the asset. It is important to also note that PPP is not an outsourcing of functions by government, neither is it the commercialization of a public function through the creation of a parastatal. It is also not the donation of a public good and neither does it represent borrowing by the state.

Though many models and structures exist, the following, whose definitions are borrowed from the Indian experience, may be of interest to the national and county governments.

Build Transfer (BT): a contractual arrangement whereby the concessionaire undertakes the financing and construction of a given infrastructure or development facility and after its completion turns it over to the Government Agency or Local Government unit concerned, which shall pay the proponent on an agreed Schedule its total investments expended on the project, plus a reasonable rate of return thereon. This arrangement may be employed in the construction of any infrastructure or development project, including critical facilities which, for security or strategic reasons, must be operated directly by the Government.

Build-Lease-Transfer (BLT): a contractual arrangement whereby a concessionaire is authorized to finance and construct an infrastructure or development facility and upon its completion turns it over to the government agency or local government unit concerned on a lease arrangement for fixed period after which ownership of the facility is automatically transferred to the government agency or local government unit concerned.

Build-Operate-Transfer (BOT): a contractual arrangement whereby the concessionaire undertakes the construction, including financing, of a given infrastructure facility, and the operation and maintenance thereof. The concessionaire operates the facility over a fixed term during which it is allowed to charge facility users appropriate tolls, fees, rentals, and charges not exceeding these proposed in its bid or as negotiated and incorporated in the contract to enable the concessionaire to recover its investment, and operating and maintenance expenses in the project. The concessionaire transfers the facility to the Government Agency or Local Government unit concerned at the end of the fixed term.

Build-Operate-Share-Transfer (BOST): a contractual arrangement whereby a concessionaire is authorized to finance, construct, operate and maintain, share a part of the revenue (with the government agency) and transfer the infrastructure facility at the end of the period. The proponent is allowed to recover its total investment, operating and maintenance costs plus a reasonable return thereon by collecting tolls, fees, rentals or other charges from facility users.

Though many other models exist we have chosen the above because the end result is transference to the public entity. In the types discussed above, they can be modeled in a way that the cost of using the service is borne exclusively by the users of the service and not the tax-payer; or while the capital investment can be provided by the private sector according to the contract terms, the service can be provided by the government and the cost of that service provision borne in part or in full by the government. Government contribution to these ventures could be in kind e.g. with the transfer of an existing asset, or in the form of a revenue subsidy thus alleviating the need to apportion actual cash.

Why choose PPP? PPP provide an avenue to finance projects, build infrastructure and deliver services. They allow public sector agencies an opportunity to tap into private sector technical, management and financial resources to achieve public service objectives. They allow public agencies to access innovative technologies and specialized expertise whilst supplementing in-house capacity and providing opportunity for cross-pollination of ideas and skills transference. By providing private capital to finance government programs and projects, PPPs free public funds for core economic and social programs.

However, in order to enhance success in PPP, it is important to learn from the experiences of the several active PPP markets around the world, including Canada, India, Australia and the UK. What tends to distinguish the leader countries is that PPP activity is conducted through a comprehensive government program rather than on a one-off basis as has been the case in the USA. In this regard, the legislation and policy framework needs to be developed and/or strengthened and formal procedures for the assessment of and engagement in such ventures must be established. Responsibilities must be allocated to the party that is best positioned to control the activity that will produce the desired result, and the spirit of collaboration and ethical and social engagement must be nurtured. Public and private partners must be encouraged to work together for social welfare first and profit second. Social audits will also need to be integrated at all levels and stages of the project to discover and address ethical, social, cultural and commercial issues, and as a means of securing trust between the partners, and with the public. Alongside trust, PPPs will need well-defined project concepts, clear contractual agreements and concrete objectives, and strong risk monitoring and evaluation frameworks.

Managed well, PPPs can be successful vehicles for the delivery of public services in the health and social, as well as other sectors, at all levels of government; and can be valuable contributors to our country’s economic health.


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