Partnership Organization - Private-Public Partnerships - Term Paper Example

Partnership Organization - Private Public Partnerships Contents Introduction 2 PPP (Private Public Partnership) 2 SPV (Special Purpose Vehicles) 3 Partnerships UK 6 Business Streams 8 Project and Policy Support 8 Managed Procurement 9 PUK Ventures 9 Structure 9 Performance management and evaluation 11 Financial performance 12 EPS 12 ROE 12 ROI 12 Performance against Key Business Objectives 13 Leadership and strategic planning 14 Conclusion 15 References 15 Appendix 19 Introduction The mode of governance is different in private and public organization. This difference is more dominant in their culture other than anything else. Public organizations are more bureaucratic in their systems as compared to private organizations (Quiggin, 1996). Therefore it is easy to say that project where private organizations have to interact with public organizations can be a disaster if proper considerations are not in order. These differences would extend to all operations including or more dominantly in joint ventures. These joint ventures have been a topic of discussion for mostly the wrong reasons. The lack of coordination and differences in structure has caused some expensive problems over the years. Therefore a need arises for an organization which can improve this coordination between these partnerships. As mentioned this is a complex task of bringing two very different systems together in an efficient manner (Quiggin, 1996). That is why it is imperative that such an organization should be a PPP itself, so it could understand the delicacies of issues arising from such partnerships. Partnership UK is such an organization which has the sole purpose of making these PPP more successful. Being a PPP itself it can better understand the issues involved in Private Public partnerships. PPP (Private Public Partnership) Private public partnerships have been given many names over the years and similarly their functions have varied across geography and time. These ventures can be called PPP or P3 etc. In essence private public partnerships are joint venture between government organizations and private bodies. These bodies are funded jointly by these two sectors. Usually these joint ventures take shapes of contracts between private parties and public sector organizations (Quiggin, 1996). Private parties provide services for the public sector and assume substantial financial operational and technical risk for the project. These contracts can be many forms, shapes and sizes. In some contracts service costs are not borne by the government and users are liable to pay for service use (Quiggin, 1996). In other agreements the government is liable to provide most or all of the cost being spent on a project. In other PPP projects private sectors makes the initial capital investment but the government or public sector is bound by contract to purchase services from the private sector. Another notable aspect of these projects is grants or subsidies given by the public sector to the private sector. These can be one time grants where a lump-sum amount is paid up front or at the completion. At other occasions reductions in material etc are made on certain items to make the construction venture more attractive to private parties. These subsidies and grants usually come for only projects aimed at creating public infrastructures. SPV (Special Purpose Vehicles) SPV are an important aspect of many Private public partnerships. SPVs are specially built entities usually as private limited companies or partnerships. These are built to fulfill narrow and specific objectives. The main aim of creating an SPV is to isolate the involved parties with risk and liabilities arising from a specific venture. Therefore SPVs are usually created by a consortium of companies rather than just one isolated company. Thus by creating an SPV the consortium will transfer assets (money, machinery, buildings, human resources etc) which are required for the successful completion of the project. Therefore all member parties usually have a fixed percentage as holding in an SPV. PPPs on similar footings usually create SPVs to operate and maintain assets being used in the project. In PPPs where government is an actual investor in the project a certain equity share is given to the government as well (Quiggin, 1996). In PPPs where the government has no actual stake in the project being undertaken, a contract in signed between the SPV and government entity. The SPV can facilitate a typical PPP in the following ways: Securitization: The most common advantage to a PPP would be securitization of receivables, deadlines and loans given away. A typical example would be of a contract between a SPV representing a consortium of private bodies with government or public sector to build a hospital. An SPV will ensure government that all parties are equally responsible for completion of the project in time. Risk sharing: Government project such as welfare projects etc can be very high risk. The level of risk a typical body in the private sector is willing to take is usually very low and different in nature. This makes PPP project unattractive to private parties as they do not want to expose themselves to undue risk. SPV plays a very important role here in ensuring that risk of both core business and PPP is isolate from each other. Finance: As each SPV acts as a different body altogether the credit ratings of Host Company is not affected, therefore they can start multiple projects at the same time and get funding (Quiggin, 1996). Asset transfer: Usually the government construction projects require heavy machinery to be bought which the government subsidizes. As there are many different companies involved in a large PPP construction project it becomes legally difficult to issue a subsidy. An SPV makes this job much simpler, the government simply issues a subsidy to the SPV which can than make purchase on behalf of all parties. For competitive reasons: In PPP project which include Research and development projects being undertaken jointly by government and private sector , SPVs assures that there are no issues due to any competition among parties involved. The research and development is in such cases ownership of SPV and both parties can jointly benefit from it. Tax: As mentioned government can sometimes attract companies to engage in PPP by providing special grants and subsidies. One such incentive is reduced or complete tax exemption. For legal purposes an SPV enables the government to restrict tax benefits to the project under PPP. Regulatory reasons: A special purpose vehicle can also be used by any PPP as an orphan structure to bypass or surpass any regulations or legislative restrictions e.g. such as regulations relating to nationality of ownership of specific assets. Partnerships UK Partnership UK (PUK) was initially set up in the year 2000. The body was built on the foundations of the treasury taskforce. The main aim was to establish a centre of excellence and eliminate previous wrong practices. The treasury task force previously was a Labor government initiative which was initiated in 1997 to revive the private finance initiative. This treasury task force was created within HM Treasury and consisted of two arms, both a policy arm staffed by Treasury and seconded staff, and a project arm headed up by Adrian Montagu and staffed by people from the private sector. The complex environment of the business world required a new more aggressive and innovative approach to managing PPPs in UK. The Partnerships UK is a PPP scheme or a private public partnership which has a public sector focus. The aim of this PPP initiative is to ensure that infrastructure is being renewed on a timely basis. This system therefore focusing on aging of different services being provided by the UK government such as Public Libraries, Railways, Public hospitals etc. Partnerships UK has the authority and responsibility in this case to identify areas where new equipment or buildings are needed to improve current levels of service for the general public. This has an indirect agenda of improving customer service through continuous feedback and audits. Partnerships UK also ensure that a stronger relationship of mutual trust and cooperation is nurtured between the public and private sector. Some typical ventures undertaken by Partnership UK are as follow and give an idea to what PUK does (Annual Report 2008): Supporting the close of the Ministry of Defense London estate project, Project Model ; Supporting the close of the Ashford Housing PFI project; Supporting the close of the Forest Holidays PPP; Completing a first successful year of the Operational Taskforce; Publishing SOPC4 – a revised version of the standard guidance on PFI contracts; A significant expansion in the capability of PUK to support Information, Technology and Change ( projects; Committing £5m to new portfolio investments in the Ventures business; The successful closing by Partnerships for Schools of seven projects in the Building Schools for the Future Completing the sale of PUK’s 50% shareholding in Partnerships for Health to the Department of Health Business Streams Partnership UK has three major business streams when it comes to core business activities they have different contributions to its value stream. Project and Policy Support This stream of business is basically based on development and maintenance of PPPs locally and internationally. Partnership UK under this stream does not only help local government to implement new PPP schemes but also advice foreign governments on development of PPP infrastructure. The project activity is managed under a DPA (Development Partnership Agreements). Using DPA Partnership UK creates a JV agreement with any public sector body and thus becomes a joint sponsor of a project. Managed Procurement Development of centrally managed procurement actives is the second stream of PUKs business. PUK Ventures The main aim of this branch of PUK is to invest in different businesses and create portfolios with low risk. Each year Partnership UK invests in more than 5 million pounds. The total portfolio investments by PUK stand beyond 25 million pounds. Structure Board Members: The Firm has five executive and seven non-executive directors. These include members of HM treasury and the shareholder executive. Private shareholders do not have any direct board memberships of the executive and non-executive members of the Partnerships UK board. Advisory Council: Another important element of the structure of Partnership UK is its advisory council. The council plays a very important role in maintaining the vision of excellence. As Partnership UK is a PPP in itself it also faces some issues with its own structure. The advisory council advises both on the issues arising from inside Partnerships UK and its public sector mission (Moszoro, 2008). Overtime advisory council has made some very valuable contributions to Partnerships UK. A very important element of the impact of advisory council is the code of conduct which has been produced in accordance with its advice. This code explains a set framework which allows Partnerships UK to maintain a customer focus and remove any conflict of interest the independent Advisory Council that oversees the work of PUK and ensures that it remains on mission. Annual reports: Each year we reports on activities and performance are published in annual Report and Accounts of Partnerships UK. Separately from the main annual accounts the Advisory Council produces its own independent report to maintain a sense of autonomy. Corporate and Social Responsibility: Partnerships UK has adopted a set of policies and practices designed to promote sustainability and preserve natural resources and the more general environment. Additionally, it has recently published its commitment to corporate and social responsibility. Performance management and evaluation Evaluation of employee performance is very important to an organizational system of doing business. Continuous feedback and evaluation does not only act as a way to reward or punish but is the primary tool for control in an organization. If this system is not made tight and bug free, a sense of injustice is developed within organization. The main tool for performance management is usually monetary or financial gains. This would however not be possible in a PPP setting, as the main aim is not to make money but improve relationships between Public and private sector. The importance of financial measure cannot however be completely ignored. Keeping in view that PUK also conducts other business streams such as portfolio investments it is very important to understand financial performance reflects actual performance in some projects (Moszoro, 2008). There are number of reasons which emphasize the need for financial measure of performance: Efficiency: A strong financial statement reflects efficiency in way of doing business. If the expenses are way over revenues this would reflect that sources are being misused by staff. This would also imply that ventures being undertaken by Partnership UK are not viable economically. Financial autonomy: The independence of bodies such as Partnership UK is very critical in most cases. If the firm is in loss and is not self sufficient than there are only two courses of action, either it is completely abolished or external funding is required to operate. Bodies such as IASC and Partnerships UK need the financial autonomy to increase their credibility as independent bodies not under any influence. Financial performance There are different methods to measure financial performance of an entity. The main methods revolve around trying to analyze the following key components: EPS The EPS (earnings per share) provide a very clear picture of what the business is earning with respect to the number of shareholders the company has. A high EPS shows a positive financial performance. ROE The most common financial measure in the world, ROE (Return on equity) shows what percentage is being earned on investments made in the business (Moszoro, 2008). This measure is more appropriate for businesses highly financed by equity. ROI The return on investment is a better measure for companies which have a higher proportion of debt financing (Moszoro, 2008). The values of measures such as ROI and ROE are compared with industry benchmarks such as LIBOR to analyze if the business is being successful financially. The income statement of PUK has been attached in the appendix which gives an overview of its recent financial performance. Performance against Key Business Objectives A much more appropriate performance analysis measure for businesses that are not aimed at earning high revenues and profits is measuring performance again key business objectives. PARTNERSHIP UK has a very efficient system of measuring key performance measure against business objectives. One simple example of this practice is setting a target of 5 million pounds for its portfolio investment stream. The business with such performance measure becomes more vision oriented (Quiggin, 1996). In many businesses where the aim is not earn a profit these performance measure tools is the most effective measurement option. They do not only provide a very real picture of the venture as compared to vision of the organization but also works as an internal management tool. The motivation factor here cannot be ignored. Studies show that effective performance management tool also act as motivational factors for employees to perform. This is because a direction is required for effective performance at any level in any organization. Leadership and strategic planning The leadership is not an easy task when it comes to PPPs. The leaders in such schemes should not only ensure that an effective public representation exists but also that positive contributions are only being allowed. The control over the organization becomes very difficult which makes strategic planning very difficult (Quiggin, 1996). The leader has to maintain a vision for both sectors and foresee demands of public sector when forming a primary strategic roadmap. Partnership UK like other partnership has faced many problems when it comes to good and dynamic leadership. The main reasons behind lack of leadership are the structure and operations of Partnership UK. As Partnership UK is a corporation it faces all the regulations and structural requirement of typical corporations such as BA (British Airways etc). This would mean that Partnership UK also has to conform to a BOD of directors and shareholders etc. This system of corporate governance is very effective but does limit the amount of power a leader can actually exercise (Quiggin, 1996). In other corporations however, there are many incentives such as high paychecks and compensation schemes (Quiggin, 1996). Partnership UK although has all the tough calls of a being a corporation for the view point of a leader or manager, but has none of the up sides. The quality and motivation of leaders in other organization therefore is much better as compared to PPPs. The strategic planning of Partnership UK is directly linked with its key business objectives. The business plans around these objectives and sets targets on how to achieve them. The lack of innovation can however be a damaging factor in a very dynamic business environment. The strategic planning process however is directly contingent upon performance of other PPPs being managed by Partnership UK and is thus full of innovation. Conclusion Partnerships UK have so far played a very successful role in bridging the gap between private and public partnerships. Government funding and support in regard can better improve its functions as a facilitator of PPPs. The success of Partnership UK is also a way forward for other PPPs. The practices being adopted by PUK should be adopted by other PPPs to improve their functions. One such initiative is introduction of independent directors to ensure that all decision making is unbiased. Such measures will ensure that Public Private Partnerships are very stable and have no management issues. Another very important factor to consider is designation or hierarchy of authority. The leadership in such cases is very important. The authoritarian style of leadership in our view is the best suited for such PPPs. This is because the difficulty is usually faced in managing lower hierarchy in PPP partnerships. An authoritarian style of leadership would ensure that decisions are fast and efficient. A greater public service improvement will be seen as time is a critical element of all services whether public or private. The task culture would also be very helpful. As we can see in Partnerships UK they have adopted a culture of Business Goals oriented performance evaluation. A task culture will ensure a project based thinking and bring people from the two very different sectors together by proving them a sense of shared identity on a project platform. This would overall improve the effectiveness of PPPs and decrease any management issues. References Apurva S, Alex, S. & Denzel, H. (2007). Designing and using public-private partnership units in infrastructure Lessons from case studies around the world. GRIDLINES Moszoro, G. (2008). Optimal Capital Structure of Public-Private Partnerships. IMF Working Paper 1/2008. Colman, J. (2002), ‘Mumbo jumbo and other pitfalls: Evaluating PFI/PPP projects. National Audit Office Economic Planning Advisory Commission (EPAC) (1995), ‘Final Report of the Private Infrastructure Task Force’, Australian Government Publishing Service, Canberra. Economic Planning Advisory Commission (EPAC) (1995), ‘Interim Report of the Private Infrastructure Task Force’, Australian Government Publishing Service, Canberra. Harris, C. (1996). Financing infrastructure: private profits from public losses. Audit Office of NSW House of Representatives Standing Committee on Communications Transport and Microeconomic Reform, (1997), ‘Planning not Patching: An Inquiry into Federal Road Funding’, The Parliament of the Commonwealth of Australia, Australian Government Publishing Service, Canberra. Industry Commission (1996), ‘Competitive Tendering and Contracting by Public Sector Agencies’, Australian Government Publishing Service, Canberra. Quiggin, J. (1996). Private sector involvement in infrastructure projects. Economic Review Spackman, M. (2002). Public-private partnerships: lessons from the British approach. Economic Systems. Strauch, L. (2009). Public Private Partnership in European Road Infrastructure: PPP as Investment Asset Following the M6 Road Project in Hungary. VDM. Monbiot, G. (2000). Captive State, The Corporate Takeover of Britain. Macmillan Annual Accounts. (2007). Partnership UK Annual Accounts. (2008). 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