The Advantages of Private Sector and Low Carbon Projects - Research Proposal Example

 The Advantages of Private Sector and Low Carbon Projects Defining the private and public sector is an essential stage in understanding current practices and their role they are given in development policies. Private Sector constitutes private investors who run profit enterprise and private foundations plus they are long standing privileged partners of official development policies (Development Cooperation Network, 2011, pg.1). Public Sector consists of governments and all publicly controlled or publicly funded agencies, enterprises and other entities that deliver public programs, goods and services (The Institute of Internal Auditors, 2011, pg. 2). Low Carbon projects involve technologies in a variety of fields including building, infrastructure, transport, renewable energy, nuclear power, biomass, hydrogen, waste management, forestry, carbon capture and storage, and fossil fuel. (Torrie & Bryant, 2013). There is growing public revenue in low carbon projects especially in developing countries. Private sector still play a major role in forging the future of low carbon technologies while the public sector sets up a strong policy framework that attracts private capital investments. The public sector’s role is to leverage private finance to contribute to incremental cost of low carbon policies (Overseas Development Institute, 2011, pg. 2). It designs contracts for private investors and ensures that they are distributed in a compatible way. The private sector has brought various advantages in development of a country. The involvement of private sector improves the efficiency and success of infrastructure projects. A number of investable projects allow large investors to omit a greater share of their resources to infrastructure (Ehlers, 2014, pg. 1). Furthermore, there is a vast resource of capital markets which are underutilised and this would significantly boost infrastructure finance. A variety of financial instruments for infrastructure finance would attract a more lucrative broader group of investors and a diversification of risks. Secondly, private investors would help financing and ensure the projects are done effectively. For properly designed contracts, private investors have the incentive to ensure that the project is executed effectively (Ehlers, 2014, pg. 1). Especially because it ensures that the likelihood of their investment is safe and profitable. For example, privately financed power plants in the Philippines eliminated 10 hour daily blackouts and an annual loss of $1 billion. With the help of private sector, the stagnation of public aid has been alienated. Private capital flows in developing countries have grown in 44 billion in 1990 to $234 billion in 1996. Additionally, foreign investments have reached $90 billion with fixed rates of 15% in investments in developing countries (Ehlers, 2014, pg.1). A large amount of these investments have gone to infrastructure and the private sector investment has grown over the past decade. It frees government dollars plus prevents it from allocating troubled areas of the economy as it transfers risk away from the public partner. Leveraging private capital creates funding for the state and local governments who can now address the needs of infrastructure, leading to economic growth and job creation. The participation of private sector in the development of infrastructure helps the provision of public services grow upwards. A private concessionaire in Buenos Aires improved water and sanitation services, increasing tariffs by 27% and increasing coverage by 10%. This leads to economic liberalization, privatisation, and technological and financial innovation. It is the only way of meeting the growing infrastructure needs of developing countries. The promises private financing provides the existence of long-term market and ensures offers for high perceived risks. Some of the private sector risks include demand for services provided may turn out to be lower than expected (Panayotou, 2012, pg. 51) while tariffs may be low and not permitted to adjust to reflect costs plus the condition of infrastructure may turn out to be worse. A private contractor may be unable to earn reasonable costs or return costs. Therefore, private sectors are more active where projects in low carbon development are tracked more closely. First of all, private sectors are made up of local and foreign-owned enterprises operating at different scales from large corporations, small medium enterprises to microenterprises operating at the informal sector (Whitley & Ellis, 2012, pg. 1). In developing countries, they play a critical role in all sectors related to Low Carbon Development (LCD), and taking a leading position in partnering with the private sector. There are a number of significant resources and capacity for investment in the private sectors. They have managerial capability, high levels of efficiency, and operational power to harness low carbon development goals. This is necessary given the rate of change of developing countries to move to low carbon development, and its potential is crucial (Whitley & Ellis, 2012, pg. 1). Private capital has over $180 billion used to build infrastructure projects to leverage state funding. Public sector efforts to reduce infrastructure deficit is critical but can be limited (IFC, 2012, pg.1). Support from private sector has helped the public sector to design interventions. This is to ensure longer term sustainability for the project. For example, the private sector involvement in intervention design is the Critical Mass Initiative of the World Economic Forum (WEF), this convened stakeholders during the development of the Climate Public Private Partnership (CP3) fund announced in 2012, co-financed by the government of the United Kingdom and the Asian Development Bank (ADB), to mobilise private investment in low carbon development (Whitley & Ellis, 2012, pg. 16). Investors from private sector together with public sector create millions of jobs. The private sector provides nine out of ten jobs in developing countries. Small and medium enterprises provide more than half of jobs worldwide (IFC, 2013, pg.1). In developing countries SME’s provide over 66% permanent and full time employment. Eighty percent of registered manufacturing establishments in Bolivia, Argentina and Mexico have less than 10 workers. At the same time, about 90% of manufacturing industries employ 5 to 49 workers in India, China, Korea, Indonesia, Philippines, and Taiwan. Small and medium enterprises are responsible for 45% of formal employment, while more than half of employment is accountable for the informal sector. With private investment there has been a lot of positive economic growth. The private sector acts as a stimulant of providing investment projects. It plays a critical role as a stakeholder for economic development. Mobilising private investment in developing countries leads to economic growth. It provides jobs, goods, a source of income, and services to improve the lives of people and helps them escape poverty (IFC, 2011, pg.1). The private sector supports poverty reduction, inclusive growth, access to critical goods and basic services by provision of tax revenues. Positive outcomes in the economy come with the inclusion of the private sector. Projects funded by the private sector have had positive influence on job creation, networking of people via communication and infrastructure, the ability to reach small and medium enterprises, generating government revenues, assisting farmers and providing health care and education. This has a great impact in developing countries as well as it improves the people’s living conditions. Mobilisation of private investment is essential for development (White, 2005, pg. 1). Additionally, private capital compliments public funds. The government still retains the asset ownership and the public sector supervises infrastructure assets funded with private capital. The government receives direct revenue as well as sets the standards. Many utilities are regulated and private firms that can handle transferring risks are chosen to handle them. Private capital can be reinvested into infrastructure and other long term public goods that can provide long term economic benefits to the public sector. Private capital who are from leasing assets or have invested in new projects may allow local and state governments that will be able participate in shared requirements that fund projects in the absence of tax revenues. The public sector oversees and sets the safety and operating standards of assets, at the same time the services are developed and operate by public investments. The government also sets the requirements for private firms who want to participate in the concession. The public sector should ensure that they provide the right conditions so that the private sector will reap those benefits. Projects can be long term as the private investments can provide a lot of funds. Therefore, the legal and political procedures have to be appropriately set. This helps to reduce political risks. Private capital investment contributes to less debt in an economy. It allows local and state governments avoid undertaking increasing debt to fund projects (Kearsarge Global Advisors, 2008, pg. 7) Interests payments are then reduced and states and municipalities can finance other goods and services. On the same note, private capital means less capital for taxpayers. Citizens benefit as they do not have to rely on tax revenues to support infrastructure spending or debt servicing (Kearsarge Global Advisors, 2008, pg. 7). Private investment leads to healthy competition. Private funds have executed hundreds of privately financed projects driving economic growth and protecting public interest. Private firms provide greater access to funding. The private investment provides billions of dollars to new infrastructure, as well as, leveraging funds from the government. Public funds may ‘crowd in’ private capital by compensating private investors for what would be lower than their risk-adjusted rates of return (Overseas Development Institute, 2011, pg. 1) and public funds may not be ready for project delivery. In other words, private investments provide greater value for money. The private sector can bring much more efficiency at a lower cost such as construction, operation and maintenance, finance construction, and innovation in design. Evidence is shown through the success of private sector global practices. As a result, the private sector has greater accountability. It plays a very important position since whether a business fails to meet the demands of the concession agreement, the agreement would be completely terminated bringing financial loss to the private sector (Kearsarge Global Advisors, 2008, pg. 7). The private sector also provides a long-term efficiency. Investment projects are of high quality and the end user is provided with a safer and improved quality service. Government procurements do not account for future costs of maintaining their investment projects. Furthermore, private sector investment could lead to global and regional integration. Private sector global practices have boost productivity and growth in less developed countries leading hence an enhanced growth process. This leads to improved trade, creation of integrated product chains and promotion of regional infrastructure networks (Kearsarge Global Advisors, 2008, pg. 7). Despite all the benefits private sector, there are also limitations attached to it. For example, private loans are subject to economy scale. In order to attract private investment one has to go through intermediaries or banks, which are subject to economic scale. Therefore, small investment projects can incur large transaction costs. Secondly, private investments may not be attracted to spend on high cost green technologies. The returns on green urban developments are lower than the alternative investment options. At the same time, low carbon technologies are still developing and the negative effects of dirty industries are not accounted. Technology costs are higher than high carbon alternatives (Whitley & Ellis, 2012, pg.3).This means dirty technologies are still supported. Although a few countries have introduced carbon taxes to eliminate the externalities of fossil fuels, many countries are still accustomed to fuel subsidies that increase fossil fuel consumption. This is because newer technologies have high risk investments for urban green projects. Start-up costs for low carbon technologies are higher than the conventional ones. Harsh business conditions may hinder private investments. Conditions such as weak enforceability of contracts and agreements, unstable political climate, and absence of capital costs and intellectual property rights are a barrier to private funding. Social gains from an investment are often higher than private gains. Private investors underestimate the true investment therefore social returns are less from such investment. Additionally, transferring management from private sector to public sector fails to shift risk to the appropriate parties. Private firms are responsible for management and construction, but ownership belongs to the state firm after a period of time. Traffic forecasts and feasibility studies are over optimistic (Scriber, 2011, pg. 7). The private sector focuses more on making profit and less on social objectives, unlike the public sector who initiate adjustments that are socially viable in the presence of emergencies. In private sectors, there may be a lack of transparency. The functionality of the enterprise does not indicate full information in stakeholders and the private sector. Therefore, the private sector can supports corruption. It can compliment illegitimate ways of accomplishments of business deals and accomplishments of licences among private bidders and government (Kousadikar & Singh, 2012, pg. 20). There are also cases lobbying and bribery which tarnish the practical applicability of privatisation. Private sector is also known to have a high employee turnover. A lot of investment is required to train less qualified staff with the latest business practices. Therefore, conflict of interest can exist in private sectors between management and stakeholders and this may interfere with the performance of the enterprise. Private sector enterprises also cause price inflation. Private sectors who have not obtained government subsidies can affect the common man (Kousadikar & Singh, 2012, pg. 20). There are cases of abuse of public interest in private sectors. National utilities are not nationalised in for public interest other than they are being nationalised by private companies to make profits (S-cool, 2015). Utilities are considered as products and services available to the whole public. Under a private company, unprofitable but essential services are more likely to close down or be marginalised in the least. These services are being subsidised in favour or profitable services. Furthermore, private companies engage in monopoly competition. Due to unhealthy competition, natural resources are wasted in industries. At the same time, private sector companies create negative externalities. Utilities from private companies create negative externalities such as pollution leaving a hazard in the environment. Unlike public companies that regulate output and ensure that it is at a socially optimal level (S-cool, 2015). Profit making is the main priority of private companies, damaging the level of social externalities. However, Putting a price on carbon emission, through a national or sectoral cap-and-trade program or another policy instrument, goes a long way to improving the attractiveness of low-carbon investment options for investors (KPMG, 2014, pg.1). Carbon finance should be more available in countries (Merk, Saussier,Staropoli, Slack, & Kim, (2012), pg. 2) Private companies cause a loss in the economic scale. They split nationalised companies into small companies that cannot take advantage of the economic scale as large companies do (S-cool, 2015). Private companies can also cause unequal redistribution of wealth. The government is selling state assets, which belongs to everyone, to the wealthy subset of the population (S-cool, 2015). In correlation, the private sector may cause job losses. Liberalisation and privatisation can be expected to have profoundly altered the structure of public-service sectors (Pique, 2009, pg. 6) Private companies are meant to be efficient, or reduce the cost of operating them. A large number of employees may be sacked as an effort of saving costs in a private company. The private sector causes the government to lose out on potential dividends. Private companies are profitable; therefore, the government misses out on their dividends which go out to wealthy shareholders. Private companies mostly engage in short term profit. Private shareholders do not want to engage in long-term projects. For example, in the UK, private companies would rather invest in existing plants than new energy sources (Pettinger, 2011). Exploitation by private firms is seen through increase in price for goods and services, and termination of workers to reduce the cost of production. A private company may terminate its services before the before the end of a contract due to bankruptcy, loss of profits or change of ownership. This leads to loss of vital resources with the public agency. Furthermore, there could be increased costs since the projects were incomplete and did not meet the standards of the public agency. The public sector provides a variety of advantages to the society. Firstly, it promotes a balanced growth. Public enterprises develop its economy in all regions. This engages a balanced growth as developments are promoted in regional, economic and social basis (Soni, 2012). The public sector promotes a long period of planning. Unlike the private sector, the public sector is better positioned to plan for future development in the industry (Soni, 2012). It also has facilities for economic development. Profits from public enterprises can be used to economic development schemes for the state. Plus, the public sector has greater public welfare. Not only do public enterprises work to make profit, but also to help the national economy as a whole. There is equal distribution of wealth when it comes to public secors. The public sector helps to promote equal distribution and reduce inequalities of wealth and income among people with the help of to the government. Enterprises have better coordination. Better control of public enterprises leads to better coordination among industries which are controlled by the public sector. There is abolition of monopoly in public enterprises. The State controls public enterprises therefore the possibility of power being shared by a few hands is eliminated. As a result, public sector enterprises lead to a greater economy. Working in public enterprises promotes unified control and large scale operation. Private sectors promote better relation with labour force. Workers in public enterprises have better job security and working conditions. Plus, consumers are offered with better deals. Public sector consumers have the advantage of being well protected plus their interest is well taken care of (Soni, 2012). Higher prices paid by the consumers go to the community at large. Public enterprises utilise local resources. Public enterprises are established throughout the country therefore it is easy to allocate raw materials and local labour available. A country can achieve self-reliance through public sector enterprises. The public sector assists the domestic industry thus the industry becomes self reliant and eliminates foreign goods. The public sector leads to the establishment of strategic and heavy industry. Industries such as these require heavy capital, and private industries are not interested in such. Furthermore, industries such as the defence industry cannot be run by private enterprises. And there is balanced production in public enterprises. They strive to make profits hence there is an excess in production. Public industries are controlled by public authorities, therefore, there is balanced production required by people. This eliminates the concentration of wealth to a few hands. One of the disadvantages of public sector is lack of initiation and efficiency. Slow working and inefficiency result from lack of profit motivation. Alike to Government offices, public enterprises do not see the profit. There is lack if incentives for employees to perform (Learnthings Ltd, 2003). Governments are under pressure to improve public sector performance and at the same time contain expenditure growth (Curristine, Lonti & Joumard, 2007, pg.1). In public sectors there is a great possibility of political interference. Influence of politicians may lead public enterprises not to function effectively and smoothly. As a result, efficient operation of conduct is hampered. Additionally, public sectors have a reputation of having slow growth. Public sectors are not easily prone to expansion and modernisation as they undertake a long period of establishment (Soni, 2012). Furthermore, they get less return for their investment. There is also poor management exist in public enterprises. Influence from government and politicians interfere with management and projects are no longer carried out as planned. Furthermore, private financing is fostered by the government which can restrict the scope of development. Moreover, there is lack of flexibility in public enterprises. This comes as a habit of slow decision making which is prevalent in many countries. Thus, implementation of these decisions takes a long time. This leads to delays in projects, therefore, delay in economic development of a country. The private sector takes more of a managerial approach to projects undertaken while the state owns these projects. Both the private and public sectors have advantages and limitations over each other when it comes to economic development. However, with well established concessions, both parties undertake towards economic and social development in a state. Private enterprises are efficient and track their accounts, while public sector are balanced and ensure social development as well. Public and private partnerships are fostered as private capital has the capacity to undertake projects, and the public leverage the projects to them. Both have limitations as well, the private sector is more geared towards profit making rather than social development while public sectors report slow growth due to slow decision making and interference from the government. Furthermore, in order to reduce costs, private firms may terminate workers, while public sectors lack flexibility to embrace new technologies in their industries. More state owned assets are being sold to the private sector. Privatisation may also the more focussed to the wealthy sunset of the population driving assets away from the general public. This therefore brings the conclusion that public and private partnership need to improve the quality of their agreements so that the general population do not lose state wealth to the wealthy group. . References Curristine, T., Lonti, Z., & Joumard, I. (2007). Improving public sector efficiency: Challenges and opportunities. OECD Journal on Budgeting, 7(1), 161. 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