Public-private partnership budget

Syeed Ahamed

Published in the Daily Star on 18 May 2009.

THERE have been some strong media speculations that the coming budget will introduce Public Private Partnership (PPP) to Bangladesh. This will have lasting implications for our development.

Off-budget financing of development programs is not a new phenomenon. Over the past few decades, many governments encouraged off-budget financing by private sectors to meet the growing public debt. In 1992, the Conservative government of John Major first introduced a systematic PPP program in the UK, which was later continued by the subsequent Labour governments.

The PPP initiatives may include a variety of joint ventures, including part-ownership of state-owned enterprises by the private sector, private financing in government projects, and contracting out of particular services (including construction and maintenance of infrastructures).

For instance, the government may hire a consortium of private entrepreneurs to establish a power plant and in return offer the consortium a percentage of its revenue earnings. This way, the efficiency of private capital can create a synergy with the credibility of public service.

However, balancing the public sector’s goal to provide quality services and the private sector’s interest to withdraw return on investment is very difficult. As the new government is approaching its first national budget, it is important to highlight some of the prerequisites of a PPP budget.

 

Proactive regulatory framework
It is essential to have a well-defined legal framework for the regulation and transparency of PPP enterprises. The PPP budget will require a proactive regulatory framework, with appropriate checks and balances, to prevent corruption.

Countries such as UK, Canada, India and Singapore instituted rigorous regulatory frameworks and responsible public bureaucracies before initiating their PPP budgets.

Bangladesh, in contrast, has a reactive legal structure, which fails to prevent corruption and aims to penalise the dishonest after a felony is committed. Since the government aims to initiate PPP projects in the next fiscal year, prompt action will be required to establish a comprehensive policy and regulatory framework for competitive and transparent bidding, sharing risks and rewards, and dispute settlements.

 

Synergy, not deregulation
Bangladesh’s experience with deregulation and foreign investment has not always been very encouraging — having witnessed privatisation scandals of the 1980s or treaties like GATCO. Therefore, ensuring transparency and accountability of the PPP contracts will be vital. The objective of public private partnership is to produce an outcome greater than the sum of its individual parts. Hence, the focus should be on synergy, not deregulation.

 

Sharing risks and rewards
It is essential to identify the risks associated with a PPP project, and to use an appropriate legal framework to distribute the risks, resources and rewards (3Rs) among the public and private partners.

According to a 2008 OECD report, legal and political risks are most efficiently borne by the government while the demand and supply related risks are well handled by private partners.

However, if the risks are not legally allocated at the commencement, a private entrepreneur (anticipating a loss) may quit a PPP project leaving the entire burden on the government.

 

Procedural delay
In a 2004 Report, the US Department of Transportation noted that the government faces “an initial sharp increase in workload” in adapting and preparing the procedures for PPP projects.

Since the government aims to initiate PPP projects in priority areas such as in power and health, with a goal to speed up the outcomes, the procedural delays of PPP may jeopardise the government’s goal.

Therefore, establishing a comprehensive and transparent legal framework in the quickest possible time will be the major challenge for the PPP budget.

 

Value for money, not deficit and profit
During the early 1990s, when the prime focus of PPP was to reduce budget deficit, many PPP projects resulted in poor but expensive services for the citizen. Later, focus of PPP budgets shifted to efficiency in the delivery of public services.

Termed as “value for money” (VfM), this new focus aims to offer the most efficient and effective public service by combining the respective expertise of private and public sectors.

Regulatory vigilance will be required to prohibit PPP initiatives from becoming the public sector’s cost cutting and the private sector’s profit maximising ventures.

 

Social responsibility
Education and health are two critical areas where the government’s responsibility to provide quality services must take precedence over the profitability of the services. If rural areas fail to attract private investment, the government may consider offering capital grants to make PPP projects commercially viable in these areas.

Bangladesh can take lessons from other countries where health and education related projects are implemented under public/social/private partnership (PSPP).

Public Private Partnership is a generic model, which can yield both positive and negative outcomes based on its usage. If the public sector’s corruption and the private sector’s greed create an evil twin (witnessed during some episodes of privatisation), then development will be imperilled. But if the respective expertises of public and private sectors create a synergy, it will hasten development.

The choice is ours.

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