Public-Private Partnership Policy
PPP is a positive relationship between the government and private sector for delivering service by sharing the risks and rewards of the venture under contract.
The key benefits of using PPP to deliver services include:
o Expedited completion compared to conventional delivery methods
o Cost savings
o Sharing of risk
o Increase Revenue
o Improve quality and system performance from the use of innovative materials and management techniques
o Substitution of private resources and personnel for constrained public resources
o Access to new sources of private capital.
The spectrum of relationships in PPP contains several activities and actions. They are:
· Parallel activities
· Competitive activities
· Complementary activities
· Contractual services
· Cooperation and collaboration
Talking to expert and based on our judgment, we have come up with some remedies in order to address some of the issues of this sector.
· As with the scenario of Line Ministry, it is suggested that at least small projects should have requirements to be approved by this ministry. The projects should be divided as both large and small and implemented accordingly under different bodies’ approval.
· It is essential to create enabling conditions and supportive framework for encouraging investors by promoting new policies, regulations and laws. There should be different set of rules for large and small projects respectively.
· Tax exemption or minimum tax rate can be imposed on the amount invested by various individuals, financial institutions and joint ventures for PPP project implementation. Import tax benefit (lowest rate) to be granted to capital items under PPP initiative and profit from operating/managing to be taxed at the lowest rate for a specific period. The inclusion of tax incentive is thus a welcome development for attracting private sector.
· Coordination of Projects is a mandatory thing to do. The procedure of identification of projects up to the stage of selection needs to be simplified in a way, where bureaucratic process is reduced, involvement of private sector is increased and there is a right balance between role of bureaucracy and expertise from outside.
· In order to meet the financing needs, common allocation may be kept with the Ministry of Finance for meeting financial needs for PPP projects under all relevant ministries
To remain competitive in the global environment, Governments around the world are focusing on better ways to finance projects, build infrastructure and deliver services to attract capital and talents. PPPs are becoming a worldwide tool to bring together the strengths of both public and private sectors, and they are providing to be both feasible and effective.
Introduction
In order to become a middle income country by 2021, Bangladesh needs a rapid growth trajectory. To ensure this, GDP growth rate is mandatory. However, present average investment GDP ratio is 24-25%, which is lower than national savings ratio. For improving, the situation foreign investment is necessary; or, an alternative can be investment from the private sector by increasing public-private partnership and already there was considerable improvement in power, gas and telecom sector after implementing the PPP policy. The government requires investment in road, railways water and other sectors too. For this, the government introduced PPP budget through the national budget from fiscal year 2009-2010. Moreover, government has taken two initiatives in order to strengthen PPP: the first is to attract investment in projects, which need building infrastructure and expanding existing infrastructure, and the other is to create innovation and ensure sustainability of public service delivery to the compatriots. In order to fulfill the mission, the government requires implementing the strategies and a framework for operationalization of public-private partnership in big scale. In addition, clear-cut procedural guidelines need to be provided for transparency and building confidence in private sector players. PPP arrangement for any project depends on social and economic importance and potential of money that can be generated under such arrangement.
Concepts of PPP
· Public-private partnership (PPP) projects involve covering of public good provision, maintaining a natural monopoly by declining marginal cost and generate lumpy investment characterized by long gestation period.
· PPP is a positive relationship between the government and private sector for delivering service by sharing the risks and rewards of the venture under contract.
· Any project under PPP can have all stages of lifecycle from idea generation, design making, construction of infrastructure to delivery of service and maintenance.
· In order to implement the PPP projects, private sector plays active role from conception to operation and maintenance of the projects.
PPP mostly allows private sector to operate in areas of business where government controls the infrastructure or service before such partnership. The public sector plays its role by either purchasing the services solely or by being the facilitator of the project. The private parties provide for constructing, operating and funding the PPP projects and are paid according to the performance.
Through PPP, the government can simultaneously derive benefit from the innovative creativity and discipline of the private sectors.
Why Public-Private Partnership is needed?
For accelerating the implementation of high priority projects by packaging and procuring services in new ways, PPP is required. Again, the public agencies often turn to the private sector to provide specialized management capacity for large and complex programs. It enables the delivery of new technology developed by private entities. Moreover, this partnership encourages private entrepreneurial development, ownership and operation of related assets. Thus, allows the reduction in the size of the public agency and the substitution of private sector resources and personnel.
How are risk and rewards allocated in PPP?
Risks are allocated to the party that is best equipped to manage them. Thus, the risk of a project in this kind of partnership is allocated to the party that manages that particular risk the best. PPP contracts often include incentives that reward private partners for mitigating risk factors.
Applicability and Non-Applicability of Projects:
Applicability:
In order for a project to be applicable under PPP, it has to generate goods and services for public and fulfill at least one of the following criteria:
· A project cannot be implemented with the financing and expertise from government alone.
· Private party involvement will be able to improve the quality and efficiency of the project compared to government alone.
· There will be a source of competition among the private investors, which may result in decrease in price of providing the public service.
· Private investment will increase innovation in the project.
· There are no regulatory restrictions for private investment in the delivery of public service.
Non-Applicability:
A project will not be falling under PPP when:
· Only a simple function of public service is outsourced.
· A government owned enterprise is created.
· Government does borrowing from the private sector.
Key Benefits of PPP:
PPP provides benefits by allocating the responsibilities to the party – either public or private – that is best positioned to control the activity that will produce the desired result.
Through PPP, the government can simultaneously derive benefit from the innovative creativity and discipline of the private sectors.
The primary benefits of using PPP to deliver services include:
· Expedited completion compared to conventional delivery methods
· Cost savings
· Sharing of risk
· Increase Revenue
· Improve quality and system performance from the use of innovative materials and management techniques
· Substitution of private resources and personnel for constrained public resources
· Access to new sources of private capital.
The Spectrum of relationships in PPP
Parallel Activities: Public and Private Activities are carried out without any contact with each other or acknowledgement of the existence of each other.
Competitive Activities: The activities in the public and private sectors are carried out with same or similar objectives, targeting common clientele and competing with each other, which may mean either wasteful duplication of activities or enlargement of choices for the beneficiaries.
Complementary Activities: Activities or services from the public and the privates sectors complement each other in terms of nature and content of services or geographical and population coverage, either by design or incidentally.
Contractual Services: The government contracts private sector for providing specified services for providing specified services for agreed fees, with the contractor being accountable to the government authority.
Cooperation and Collaboration:Public and Private Actors work together on the basis of shared objectives, strategies and agreed criteria regarding assessing process and outcome; the partners also cooperate in developing common objective and strategies and criteria for assessment of activities.
The Partners
The public sector partners usually include Government, District Administration, municipal Authorities, Local Government Bodies, Para-State Corporations, State universities and research organizations.
The private sector partners include Commercial enterprises, Development focused Non-Governmental Organizations, cooperative societies, community based organizations, religious organizations, professional organizations, trade unions, research and academic institutions and households.
PPP Practices in Bangladesh
Bangladesh has a very rich experience on PPP, especially in respect of the scope and diversity of Non-Government Organization (NGO) activities in social services. Fast changing policy situation with globalization and deregulation recognizes increasingly important role of private sector in Bangladesh. The PPP program is aimed at ensuring a speedier but inclusive growth trajectory.
Prime Minister’s Office principal secretary Sheikh Wahiduzzaman said that the country lacks investment and PPP could be an instrument to attract it.
“Investment-GDP ratio is 24 per cent in Bangladesh but if we want to become a middle income country by 2021, we need 34 to 35 per cent investment,” he said adding such partnership (PPP) can be an effective tool in this regard.
The sectors of PPP in Bangladesh are:
· Health Sector
· Education Sector
· Infrastructure Development
· Tourism Sector
· ICT Sector
· Industries
Incentives to the Private Sector
The government is keen to provide various fiscal and non-fiscal incentives to the private sectors in order to launch the projects in the priority sectors. There is a need to consider and grant the monetary and fiscal incentives that can be provided to private sector. The incentives may be in the areas of reduction of cost and protection of return to the private sector.
Fiscal Incentives:
All PPP projects will receive the applicable incentives, provided by the government from time to time, which may include incentives like:
· Reduced import tax on capital items under PPP projects; and
· Tax exemption or reduced tax on profit from operating/managing for a specific time.
Special Incentives:
Any specific project may get special unique incentives with the approval of the CCEA (one of the institutional framework) which shall be declared in the RFP documents. Special incentives may be extended to PPP projects targeted for rural and underprivileged population. Special incentives may be given to non-resident Bangladeshis to invest in PPP projects. This is going to help and attract more such investments from these people as they may feel to do something for Bangladesh.
Private Sector Infrastructure guidelines
Under Private Infrastructure Committee (PICOM) of PPP only infrastructure related projects are related. They are: Grameen Phone Network Expansion Project, Pacific Telecom Network Expansion Project, Ranks Tel PSTN Project, DNS Satcomm Satellite Earth Station Project and M & H Telecom Interconnection Exchange Project.
The implication of PPP projects are seen from long ago. One of the earliest PPP projects in Bangladesh is Automation of Railway reservation and Ticketing System. In 1993-94 Bangladesh Railway awarded the national reservation & ticketing system to Technohaven on BOT basis. Technohaven built the system during 1994-95 and operated the system till 2002. During this period Bangladesh Railway’s inter-city passenger revenue increased from BDT 480 million to BDT 1.10 billion while reducing ticketing staff from 400 to less than 200. The productivity gain was more than 200%. It also reduced cost and harassment of the passengers.
In addition, under the “Support to ICT Task Force” programme (SICT) five projects were identified for implementation: land records, results of public exam, foreign and local investment related information, government forms, and payment of utility bills. Among the identified services-results of public exams, government forms and payment of utility bills were implemented successfully and scaled up. Among these three services, payment of utility bills is where the mobile telecom operators offer the facility to pay the utility bill through mobile phone and consumers pay for the service through charge for SMS. The infrastructure is built by the operators. This is an example of PPP has been implemented under BOO model.
Another prominent success in PPP project is ‘Chittagong Customs House Automation project’. The project was implemented by DataSoft and it was launched in October, 2008. This project was financed by different stakeholders such as Chittagong Chamber of Commerce & Industry (CCCI), Chittagong Customs House and DataSoft. CCCI invested BDT 10 million, Customs House BDT 14.3 million, and accumulated amount from other stakeholders and DataSoft was BDT 24.3 million respectively. The most important thing is that the government of Bangladesh didn’t have to pay anything for the system. The Automation System was developed to increase revenue and check irregularities through enhancement of its efficiency. Because of successful automation solutions provided by DataSoft, the 42 steps lengthy process has been curtailed to only 5 steps, Bill of Entry cost reduced BDT 180 to BDT 50. The introduction of full automation and user-friendly procedures helped Chittagong Customs House check the evasion of revenue of at least BDT 3.5 billion and double the revenue earnings which now stands at BDT 150+ billion a year. Also, it has reduced the cost of doing business by at least 70%, saving custom processing time by 80%, established transparency and level playing field for business and doing better in risk management.
The above examples show some of the previous successes of PPP projects that have been implemented and still running smoothly.
The Very Recent Prospects
According to the news up until March 15, 2012, the consultation process to finalize the detailed policies of public-private partnership (PPP) has been launched with 21 ministries. There had been a launching program at Sonargaon Hotel on March 15, 2012. According to the chief executive officer of PPP Office Syed Afsor H Uddin, “The process of consultation process has begun and it will continue for next six weeks. Initially the consultation begins with public sector and the PPP office would also have consultation with private sector to finalize related documents.”
According to Asian Development Bank specialist J Grant Hauber, all documents would be finalized by May. He hoped that the PPP law would be enacted in the parliament by the next fiscal. The PPP has three financing vehicles and those are PPP technical assistance fund, viability gap financing and Bangladesh Infrastructure Finance Fund, he said.
The PPP office has already identified seven pilot projects under different ministries. The projects are:
i. Setting up of haemodialysis centre,
ii. Setting up of international standard hotel tourism facilities,
iii. Kaliakoir hi-tech park,
iv. Mirpur low cost housing project,
v. Hemayetpur-Singair-Aricha road,
vi. Jatrabari-Sultana Kamal bridge project,
vii. construction of grade separator on Mirpur road.
Limitations of Private sector Infrastructure Guidelines
There are certain reasons for which the private sector Infrastructure guidelines could not implement further projects that could have been done. Bangladesh Private Sector Infrastructure Guidelines have nine important elements. The elements are discussed below along with their limitations.
Misnomer
There were guidelines issued for improvement of infrastructures with private sector financing management and operation. As per the guidelines a ‘Private Infrastructure Committee (PICOM)’ was formed. The eligible sectors in 2004 guideline were: telecommunication, energy, power, port development (sea, river and land), communications, airports and terminals, tourism industry, water supply and sewerage, industrial estate and parks, city and property development, land reclamation, dredging of rivers, health and educational facilities, waste management and urban, municipal and rural infrastructure. Accordingly the government welcomes PPP investment in the following areas: Power and Energy, Transport Infrastructure (roads, rail, ports, airport and water transport), Pure Drinking Water and Sewerage, Information Technology, Air Transport and Tourism, Industry, Education (particularly secondary and technical) and Research, Health and Family Welfare, Housing. Thus it is seen that the committee is supposed to deal with the other than infrastructure projects as well and thus the name of PICOM needs to be changed.
Scope for Proactive Role of Private Sector
The guidelines allow the private sector becoming proactive in proposing projects that they prefer. At the same time a line Ministry can also initiate call for PPP projects. While infrastructure project identification and call is relatively easier for infrastructure projects, such identification may be difficult for ICT projects for the line Ministry.
E-government projects and other development projects with intensive ICT components are relatively new for the government officials in the relevant agencies and Ministries. The capacity of handling PPP projects within the BOI and other relevant agencies are limited, which creates risks for parties, the government and the private entities willing to join the PPP initiatives. Thus, capacity building of the government officials is an essential component to reap benefits from PPP initiatives.
Monitoring the contingent liabilities of private infrastructure projects
The risk assessment framework currently present in the guidelines is though adequate and equally applicable for the PPP projects in ICT sector, but requires significant attention.
Technical Advisers for Private Infrastructure Projects
In order to protect the interest of the government and to ensure best possible design of services, the current provision of hiring technical advisers needs to be used effectively.
Commercial Aspects
The current guidelines allows that in a few flagship projects in a particular sector, the government is open to assume more risks This is very progressive and provides right signal to the possible participants in the private sector. However, government should be more proactive in order to handle the aspect because this will encourage more private investment.
Tender and Award Process
It is often not clear when a private company comes up with new idea and proposal, whether tender process will be applicable. Even if no tender is required in case of proactive proposal from private sector, there should be requirement foe legally binding undertaking about protection of intellectual property elaborated in the proposal as innovation is the key for ICT projects.
Financing and Incentives for PPP
Current guidelines expect 100% investment by the private sector. However, the position paper on PPP proposes some innovative ideas of financing PPP projects. The position paper mentions that the allocation for PPP is divided into three categories:
· Allocation for loan or equity.
· Allocation for PPP Viability Gap Funding (VGF) as subsidy
· Allocation for PPP Technical Assistance (PPPTA)
Therefore all of them require significant attention in order to improve the situation; keeping in mind that success rate should be noteworthy.
Tax Incentives
Government should give attention to this issue in the sense that it gives tax incentives to the Investor in order to encourage further investment. Currently this issue is not that well addressed and thus needs to be under limelight.
Remedies:
Talking to expert and based on our judgment, we have come up with some remedies in order to address some of the issues of this sector.
· As with the scenario of Line Ministry, it is suggested that at least small projects should have requirements to be approved by this ministry. Currently, all small and large projects are subject to the approval of Cabinet Committee on Economic Affairs. This though brings in the issue of cost sharing; still the projects should be divided as both large and small and implemented accordingly under different bodies’ approval.
· It is essential to create enabling conditions and supportive framework for encouraging investors by promoting new policies, regulations and laws: The approval process of complex and large projects in terms of financial outlay and geographical coverage and that of small projects should not be the same. This may discourage interest of innovative and small institutions to join the PPP initiatives as transaction cost for such approval process may be relatively high. So again, there should be different set of rules for large and small projects respectively.
· Tax exemption or minimum tax rate can be imposed on the amount invested by various individuals, financial institutions and joint ventures for PPP project implementation. Import tax benefit (lowest rate) to be granted to capital items under PPP initiative and profit from operating/managing to be taxed at the lowest rate for a specific time period. The inclusion of tax incentive is thus a welcome development for attracting private sector.
· Coordination of Projects is a mandatory thing to do. The procedure of identification of projects up to the stage of selection needs to be simplified in a way, where bureaucratic process is reduced, involvement of private sector is increased and there is a right balance between role of bureaucracy and expertise from outside.
· In order to meet the financing needs, common allocation may be kept with the Ministry of Finance for meeting financial needs for PPP projects under all relevant ministries. There is no need for ministry-wise allocation. The allocation of resources may be done on first-come first serve basis, which will ensure competition among ministries for rolling out projects. Once the project is approved both the PPP committee of respective ministries and Ministry of Finance; the formal contract may be signed between three parties.
General Risk Factors of PPP projects
PPP projects involve a plethora of risks. A key aspect of PPP structure is its ability to help transfer risks to parties that is best suited to manage it. There is a misconception that in PPP the public sector transfers all risks to the private sector that was traditionally borne by the government. This is not correct. Risks are properly allocated and distributed to parties who are experts in their specific fields on mitigating risks. Non-identification and improper allocation of risks to parties bring frustration, even breach of contracts. There are many risks that need to be borne by the government in PPP projects. Thus risk sharing is the other distinguishing characteristic of PPP. The success depends on the appropriate allocation of risks. Project risks therefore need to be identified very carefully and allocated to parties who are best suited to manage it at lowest possible cost. Risks have a price and each party in a PPP project have a different perspective and approach to assess risks. Furthermore, each party makes a price for their services taking into account a profit to compensate by bearing such risk.
Some noteworthy risks
Examples of PPP risks are as follows:
· Technical risk: due to engineering and design failures.
· Construction risk: because of default in construction techniques, cost and time overruns.
· Operation risk: due to higher operating cost and maintenance.
· Revenue risk: failure to extract resources, the fluctuation of prices and demand of product and services.
· Financial risk: due to inadequate financial cost and hedging of revenue streams.
· Force Majeure risk: due to acts of God, war and natural disasters.
· Regulatory/ Political risk: legal changes and lack of government support.
· Environmental risk: hazardous and adverse impacts on environment.
· Project default: failure of the project due to a combination of any of the above factors.
Handling the Risks
Identification and assessment of risk is therefore not an easy task as risk is interrelated. Risk mitigation helps parties to take action
(1) to reduce likelihood of risk materializing
(2) to reduce the consequences of event.
Therefore, it is understood that precise risk estimation and allocation to parties is of immense importance. It plays an important part in the cost of financing and success of PPP projects.
The government is one of the major parties in PPP. Though it is theoretically believed that PPP should be entirely self-supporting with no recourse or guarantees from the public or private sponsors, but practical guarantees are sometimes necessary. Private sector invests only to those projects from which they can gain profit i.e. financially sound. There are projects where economic benefits are more substantial than financial gains. Governments are especially interested to invest into these projects. In order to attract private sectors to these projects, governments need to give some support and guarantees to the private sector so that debt service obligations are made and smooth operation for revenue generation is ensured (i.e. no change in law and regulations). The private sector may also request government guarantees against market or commercial risk. It is essential for the government to appreciate that in order for most PPP infrastructure projects to succeed, they must shoulder certain risks such as political risk guarantee, underwriting minimum toll levels and protection against certain events of force majeure.
One of the interesting things is that, guarantees do not add any cost to a project and can be as simple as only assurance, such as no change in tax, no second facility and so on. However, the guarantee is not without cost to a government. It makes contingent liabilities which require careful selection, monitoring, accounting and provisions for budget to meet future guarantee calls. In PPP infrastructure projects, some risks are still left to the government which always prefers to pass as many of the risks as possible to private parties. The most widely used major guarantees against revenue risk are off-take and supply agreement.
Revenue risk includes demand and price risk. The concession period of any PPP infrastructure project is normally ten to fifteen years and more. It is very complex and needs meticulous care for analyzing demand and price upfront. Supply and off-take contracts are of central importance in this aspect. In order to reduce price risk, sponsors as well as lenders carefully examine supply contract with the project company. Major considerations are length of supply, availability, creditworthiness and whether the supplies are the major component of the product produced. It is possible to link the price of supply to the price the project company receives for its product (i.e. from off-taker).
Plans for PPP in the budget of FY2010 and its implementation
• There was allocation of Tk. 25 billion for PPP projects with government partnership in equity and loan assistance to different projects. The idea was to implement projects that are viable, sound, and easy to implement.
• There was adoption of some guidelines. For power and energy infrastructure, private partner may invest up to 70-75 %t of the entire investment. For health, education and social sectors, government may contribute major part of total investment.
• Finalize detailed action plan on how to proceed in a time bound manner; Streamline processes, regulations, requirements and legal hurdles.
• Enact new act to develop comprehensive legal and institutional framework for administration, monitoring, professionalism and accountability
• Remove weaknesses and limitations of Private Infrastructure Committee (PICOM) under PSIG 2004 in terms of its size, scope, and other institutional and organizational framework and structure
• Set up a dedicated unit for PPP budget formulation and implementation
• Create broader political consensus on needs and imperatives especially for large PPP projects with longer implementation periods.
There has been a lot of implementation of the plans yet a lot to be done in order to get more investment for the projects. A huge improvement was seen in the PICOM in terms of addressing the limitations. In fact, recognition of PPP and allocation of funds for the projects is a big achievement according to experts. Further improvements will come up in the near future.
A Case Study
PPP in TB Control<href=”#_ftn1″ name=”_ftnref1″ title=””>[1]
It started from 2003, when private practitioners were involved. In addition, in 2007, the garments sector was involved to tackle TB in workplace.
The private practitioners were involved to develop a public-private partnership model for effective involvement of Private Medical Practitioners (PMPs) in TB service delivery in Bangladesh, in order to improve access and quality of TB care. The guiding principles of such PPP include,
· Formation of Working Group
· Involvement of stakeholders at every step
· Joint planning and development of:
• Partnerships framework
• Guidelines and tools
· Mutual respect and trust
· TB care pathways for PMPs
· Joint regular supervision and monitoring
· Evaluation
Outcome of PPP in Dhaka,
· Case detection of TB had doubled (32% to 73%).
· Treatment outcomes rose from 84% to 91%
The overall results,
· Greater access, quality, and coverage
· Greater and effective involvement of PPs
· Guidelines and tools found appropriate for implementation
· Joint planning and monitoring led to sustained partnerships
· Growing commitment and confidence to implement PPP
· Increased willingness among all partners
Conclusion
Many countries, particularly ASEAN and SAARC countries have successfully implemented PPP projects. In so doing these countries have managed to increase production capacity without putting any pressure on government revenue and could achieve double digit growth rates. There is no other way for Bangladesh than to invest heavily in infrastructure to develop like these countries. There can be initial hiccups in PPP as with any new initiative, but prompt action would deliver desired outputs. For successful implementation of PPP projects, political support is critical and both the public and the private sector have to be enthusiastic and effective. There is no unique model or mechanism of implementing PPP; we need to revisit past operations and other experiences to identify what works and what does not and eventually come up with a prompt infrastructure plan.
<href=”#_ftnref1″ name=”_ftn1″ title=””>[1] (Ullah, 2011)