Leveraging Knowledge from the Private Sector - Essay Example

Introduction In many societies around the world, it has long been thought that there are some services, in particular, those that could benefit the whole of society and might be essential to the smooth functioning of life, ought to be handled by the government. After all, the government is supposed to be a neutral shepherd of the interests of all in society. Thus, road construction, water supplies, electricity, and social welfare, have, with little question, fallen under the government ambit for many years in many countries. This was the case in the United Kingdom, the United States, and indeed in scores of others. In recent years, however, there has been a shift, as government management of various services has tended to fall below expectations even as private enterprises continued to flourish. It has become clear that the profit motive is a prime mover when it comes to innovation, management, and the creation of systems that lead to efficiency and results. In their book, Public Private Partnerships: The Worldwide Revolution in Infrastructure Provision and Project Finance, Grimsey and Lewis “contend that the use of PPPs is rapidly expanding, driven by constraints in public budgets and rising demands for improved infrastructure” (Norment 461). Infrastructure, as defined by Grimsey and Lewis, however, goes far beyond the traditional bricks and mortar type of projects but rather embraces such services as community services and even financial management (Norment 461). This paper explores the issue of public-private partnerships both within the United Kingdom and internationally and considers the rational and benefits, as well as some drawbacks of this approach. In addition, the implications of this new approach to the development of public services are considered. Rationale and benefits The United Kingdom is far from the only country that is stepping up its use of public-private partnerships. The Netherlands has been involved in such partnerships for a while but the government has been treading carefully, preferring to use pilot projects as a prelude to more involvement in such relationships. Among the projects that have involved such partnerships in the Netherlands have been “the first PPP project for schools (which closed at the end of 2004) and a PPP project for the offices of the Ministry of Finance (the consultation phase is complete and the BAFO negotiations are about to start)” (Houthoff 1). In the case of the Netherlands, there are indications that the pilot projects have been successful, judging from an announcement by the Dutch ministry of finance in March, 2005, that the government “was seriously considering using PPPs for several new and larger project” (Houthoff 1). Leveraging knowledge from the private sector In Norway, the government takes a great deal of interest in the lives of the citizens in a way that is different from the experiences of people in, say, the United States. While the issue of spiraling divorce rates is a cause for concern in many countries, few have governments have taken a direct interest in helping citizens enhance their relationships. Norway, however, might be an exception. Education, in the view of the Norwegian government, is the key to building successful relationships among the population. As Thuen and Tafjord write, “The development and implementation of relationship education programs in Norway is, to a large extent, a partnership between the national authorities and a variety of private initiatives. The role of the national authorities encompasses two main features: placing relationship education on the political agenda, and funding the development and implementation of various measures” (Thuen & Tafjord 175). In 1994, the Ministry of Children and Family Affairs began a scheme that invited various organizations and local authorities to apply for funds to support relationship education. While there are secular groups involved in such education programs Christian organizations have not held back from taking advantage of the government grants to help spread their views on how to ensure successful relationships. The government gives clear guidelines to these private groups that have taken on the task of partnering with the government. Thus, “To receive funding from the Ministry, relationship education initiatives are required to aim to promote quality in couple relationships and prevent couple relationship problems. Funding is allocated both to developing activities and to the implementation of measures in local communities” (Thuen & Tafjord 175). Over time, many new players have entered the scheme, bringing the number of project initiatives to approximately 250 per year. “For the whole period, about 40 million NOK have been allocated to these projects, equivalent to about USD $6 million. Almost 80% of the funding has been directed toward small local projects, while relatively few development projects have received considerably larger amounts of money” (Thuen & Tafjord 175). An obvious question is whether this public-private partnership has been successful. As Thuen & Tafjord report, “The private/public partnership seems to be a successful formula for disseminating relationship education; this arrangement has led to widespread adoption of relationship education throughout Norway during the last decade. The Norwegian funding scheme seems to have made a strong impact by stimulating educational initiatives and making education programs accessible and popular (Bergem, Olsen, & Solvang, 2004; cited in Thuen and Tafjord 175). In the United Kingdom, Public/Private Partnerships has taken shape under the Private Finance Initiative (PFI). This places the emphasis on private contribution to public infrastructure, perhaps in the hope that this will help create a positive impression in the minds of the population with regards to the use of such schemes. On the one hand, “Complimentary reviews about PPP/PFI note the benefits it brings about in terms of its effect on economic development strategy. PPP/PFI procurement allows government and the private sector to learn from each other and create synergistic effects for both parties. It is even claimed that PPP/PFIs will become a cornerstone of the current UK Labour Government's modernisation programme, through the delivery of better quality public services, by bringing in new investment and improved management; and will provide a major boost to the construction industry (HM Treasury, 2000)” (cited in Li et al 125). Saving the government money Government usually has no shortage of schemes that require its attention. From the needs of kindergarteners to people in elder-care centres, most people think of the government when there is a difficult patch that they find it difficult to negotiate themselves. Even for able-bodied people, dependence on government is very much a reality as unemployment assistance programs are a big part of the lives of a segment of the population. The government considers it prudent to shift some of the financial burden required to manage and maintain such a wide range of services and schemes away from itself and onto the private sector. So, in one sense, public-private partnerships allow the government to use its stock of funds where the need is greatest and to depend on the private sector for funds to handle schemes that might otherwise have had to depend on the government. It is just such thinking that is behind the possibility of partial privatisation of the Northern Ireland Water Service over the next two years, in 2008. “Key to the funding of the Water Service, to be renamed Northern Ireland Water Ltd (NIWL), is the introduction of domestic water charging. The move is opposed by the public and local politicians, and partial privatisation would be less popular still. A non-payment campaign would make NIWL unattractive to private investors” (Hobson 5). The private sector offers contributions to the public sector that can be quantified. For those politicians and local citizens who complain, often the worry is that there will be less control or oversight on the private sector and possibly, also, that some jobs would be lost as the private sector brings in stringent methods that might cut off any fat from the existing system. As an example of the financial savings that the private sector can bring, one might consider the following: A consortium led by Thames Water and Laing O'Rourke has been selected as the preferred bidder for the Water Service's £122 million Omega wastewater public/private partnership (PPP). The Glen Water consortium will build a £42 million state-of-the-art treatment works for North Down and Ards, upgrade six existing plants and manage sludge disposal for the whole of Northern Ireland. The 25-year Omega design, build, finance and operate PPP covers around 20 per cent of Northern Ireland's wastewater treatment. It is 15 per cent cheaper than the Water Service's original estimate for the schemes. (Hobson 5) Efficiency In addition, while the government does have its experts, the private sector is able to attract talent in greater numbers because of the incentive schemes that they offer, including the possibility of profit sharing. In fact, if the government created any such schemes where its employees could earn very high sums the public might come out and say that the government is wasting money. In the private sector, however, often such high compensation is tied to performance, which means that, in many cases, a person might be saving or making the company in question millions of dollars to justify his or her own pay cheque. A report presented to the Department for Regional Development (DRD) regarding the Northern Ireland Water Privatisation scheme “recommended private sector participation because it could be "expected to achieve higher levels of efficiencies than a GoCo model" (Hobson 5). Quality infrastructure Furthermore, some private sector companies have expertise that go beyond merely building the infrastructure; they also have the expertise of management to go along with it, creating the need not only for the government to hire these companies to put up the needed infrastructure but also to engage some of these same private companies in the running of it. This hardly means relinquishing complete control. Through the terms of the partnership, the government can still maintain control, such as in demanding accountability, and in ensuring that the standards agreed upon are maintained over the long term. In such cases, the private sector has an incentive to ensure that standards are maintained because their continued benefit from the project in question, that is, the financial return that these private companies enjoy, is contingent upon their maintaining their side of the bargain, vis-à-vis the government. Grimsey and Lewis’ research led them to the conclusion that “an underlying impetus for PPPs is the increasing realization that the quality and range of infrastructure has a profound impact on economic growth in addition to serving a public need. In part, shifting this responsibility to the private sector is the result of "dissatisfaction with the performance of state-owned enterprises and the recognition that state-led development programs simply have not worked" (p. 30; cited in Norment 461). Other attractive factors associated with PPP/PFI project procurement include the transfer of risk from the government to the private sector. Such risks include those relating to time, cost and quality. When the government turns over a project to the private sector, issues such as whether the project will be completed on time and within budget become less the headache of the government and more the preoccupation of the company involved. The private sector, however, understands that with risk comes the potential for reward, so such transference of risk may not necessarily be perceived in a negative light in the private sector but as an opportunity to prove what a company is capable of and with it improve its chances for business success. Rather than perpetuating the impression that a government project can have unlimited access to funds, in the case of a partnership with the private sector, the terms of the deal are agreed to beforehand, giving the government a clear idea of the extent of its investment and costs. In fact, “In addition to gaining the capacity to cap final service costs, the public sector in PPP/PFI should be able to substantially reduce administration costs, since it will no longer have day-to-day responsibility for service delivery. Instead, the public client takes on a less intensive role of monitoring the performance of the private concessionaire and receiving periodic reports (Bennett, 1998) (Li et al. 125). Furthermore, another element that lends attractiveness to PPP/PFI procurement is that any debt attached to a project becomes attached to the project itself rather than to the government. The project itself needs to have within it the seeds for bouncing back into the black. In effect, “There is no recourse to public funding, nor can the debt be secured by the underlying asset value since for most projects ownership reverts to the public client after a pre-determined period. The revenue streams may comprise fees paid directly to the concessionaire by users (e.g. toll road fees), or fees paid by government on behalf of all potential users (e.g. fees per hospital patient serviced, or per school pupil accommodated). This non-recourse or limited recourse public funding is an important ingredient of PPP/PFI procurement (Carrick, 2000; Akintoye et al., 2001; cited in Li et al. 125). Also, with cost issues on the table, both the public and private sectors are able to consider various innovative ways by which to meet their respective responsibilities. This may be for the purpose of shortening completion time or even reducing the cost of the project without necessarily compromising on quality. When a private company knows, for example, that it is not only responsible for building a project but will also be responsible for its maintenance, the company is forced to consider design choices that will make life easier for them. After all, if there are design problems the same company will have to deal with it. Technology transfer While in the UK the issue of technology transfer is not a critical one, for some countries, especially those in the so-called Third World, partnering with private companies with unique or advanced technologies can open the way towards making the domestic sector conversant with such technologies. As Li et al. explain, in such cases, “Project procurement is arranged so that private sector partners with the desired technological expertise from more developed nations are enticed into joint venture type agreements with local companies (Nielsen, 1997; Trim, 2001) (Li et al. 125). Drawbacks The range of issues that demand the attention of government is wide-ranging. To have a government embroiled in lawsuits, to which the private sector is prone, could be detrimental to the overall functioning of a country. To some the government’s engagement of the private sector is tantamount to a dereliction of duty. For the private companies involved, the power of government could mean that they could have a feeling of powerlessness when they happen to come into disagreement. It is with this in mind that the government of Holland has developed a standard agreement between the government and companies that want to get into partnerships. It is hoped that with such clear guidelines in place there is likely to be less rancor and disagreement, along with the kind of distractions that could mean that government would turn its attention from other pressing areas of life into its dealings with one or two companies. As Houthoff writes, “a number of Dutch standard PPP documents were published, including the handbook DBFM for PPP projects and a DBFM Standard Contract for Roads that includes a standard form for a direct agreement. These documents should lead to further standardization of Dutch PPP project documentation and a reduction of the costs involved with PPP projects” (Houthoff 1). In the UK trade unions have been one of the critics of PPPs because they do not see in such partnerships much potential for job security of their members. Whereas governments are sometimes willing to go to great extent to ensure that workers are well paid or that their jobs are secure, the private sector is less willing to coddle workers and prefer to reserve the right to downsize for the sake of efficiency or cost savings. As Li et al write, “Critics…suggest that PPP/PFI/PFI is a controversial and problematic approach to capital development in the public sector (Ruane, 2000). In the UK, the trade unions, especially UNISON, have been trenchant critics of PPP/PFI and call for re-nationalisation, particularly for UK rail transport systems” (Li et al. 125). In some cases, lack of experience with regards to public/private partnerships may hamper the effectiveness not only of the relationships between the public and the private sector but also affect any projects in question. Indeed, “The concept of PPP is comparatively less well understood in countries with a strong public welfare policy; and even more so in terms of operational service delivery. Regulatory policy in this area may be very strict concerning public finance and expenditure. In such countries, governments have less experience in alternative ways to finance their projects. The lack of understanding and the need for better training by public officials involved in PPP/PFI projects is a major issue identified by Morledge and Owen (1998)” (cited in Li et al. 125). It is not only government, however, that may lack skill in such partnerships. The private sector may similarly lack experience in dealing with the government on the basis of a partnership. As Li et al., point out, “Financing, operating, maintaining and investing in a long-term asset are not familiar activities to construction contractors. For example, a short while after the facility opened, the concessionnaire for a toll road project in Australia experienced a breach of security in its electronic tolling system for the credit card account details of several thousand customers. The ensuing publicity reflected adversely on the competence of the concessionnaire and its state government partner in the BOOT project” (Li et al. 125). Unlike the Netherlands, which is working on a standard contract, the United Kingdom takes a case-by-case approach to dealing with the private sector on projects. For some private contractors the cost of entering into tenders for UK government projects can be considerable. This may leave companies that have expertise but lack financial resources out of contention thus depriving the government and the public of skills and expertise that may have benefited the society as a whole. Other drawbacks to PPP “ include the cost of assembling and setting up a consortium, and the cost of investing equity in the corresponding business entity that is created (Ezulike et al., 1997). Under current UK government guidelines, it is considered that the cost of developing a PPP/PFI project can be higher than that of an equivalent publicly funded approach (Saunders, 1998) (Li et al. 125) According to Li et al. the positive elements of PPP can be summarized as follows: * Transfers risk to the private partner. * Caps the final service costs. * Reduces public sector administration costs. * Reduces public money tied up in capital investment. * Solves the problem of public sector budget restraint (Akintoye et al., 2001). * Non-recourse or limited recourse public funding. * Reduces the total project cost. * Improves buildability. * Accelerates project development. * Saves time in delivering the project. * Improves maintainability. * Benefits local economic development (HM Treasury, 2000). * Transfers technology to local enterprises. * Facilitates creative and innovative approaches (Birnie, 1999; Government of Nova Scotia, 2000). * Enhances government integrated solution capacity (Sohail, 2000). On the other hand, the negative elements include the following: * Few schemes reach the contract stage. * Threatened by lack of experience and appropriate skills (Morledge and Owen, 1998; Ezulike et al., 1997). * Leads to higher direct charges to users. * Imposes excessive restriction on participation. * High participation costs are incurred (Ezulike et al., 1997; Saunders, 1998; Birnie, 1999). * High risk relying on private sector. * Confusion can arise over government objectives and evaluation criteria. * May lead to high project costs (Ezulike et al., 1997; Birnie, 1999; Public Services Privatization Research Unit, 2000). * Lengthy delays caused by political debate (Infrastructure Journal, 2001a, b). * Much management time is spent in contract transaction (Ezulike et al, 1997). * Lengthy delays can arise in negotiation. * Reduces project accountability. * Offers fewer employment opportunities. (Li et al. 125) Implications for the development and management of essential public services in the future It is unlikely that the trend towards public private partnerships will abate any time soon. Even though there are some negative elements involved in such partnerships, it is more likely that both the public and the private sector will seek ways to ameliorate conditions in this relationship. The relationship can be a boon both for the private sector, which benefits financially and takes advantage of new projects to increase the pool of in-company expertise and the public sector, which is freed from having to micromanage sprawling projects. It is also important for companies and countries that are engaged in public private partnerships to learn from one another. This way, mistakes can be avoided, creating the potential for successive amelioration of such partnerships over time, to the point where the promise of lean government can become a reality. This would necessitate that that the private entities that become involved with government live up to their side of the bargain. If this is not the case, it is likely that public sentiment will turn against these partnerships, especially where corruption rears its ugly head. Bibliography Halvarson, Karan. Review of “Defending Interests: Public-Private Partnerships in WTO Litigation” by Gregory C. Shaffer, Vol. 39 Issue 2 (Apr 2005):387. Hobson, Stava. “NI water could be privatized.” Utility Week, Vol. 24 Issue 24 (Feb 17, 2006):5. Houthoff, Buruma. “Government steps up PPPs.” International Financial Law Review, (2005):1. Li, Bing; Akintoya, A.; Edwards, P.J. & Hardcastle, C. “Perceptions of positive and negative factors influencing the attractiveness of PPP/PFI procurement for construction projects in the UK; Findings from a questionnaire.” Architectural Management, Vol. 12 Issue 2 (2005):125. 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