GeneralLand Administration

PPPs and their role in the Land Reform debate

Public Private Partnerships (PPPs) have been hailed as a saviour for providing requisite Private Finance for public purpose project funding. The world over, these initiatives have been engaged on with varying degrees of success. Public Private Partnerships (PPPs) became popular through the UK’s private finance initiative (PFI) scheme, but one question is whether such schemes deliver better value for money (VfM) than traditional government procurement, and whether such arrangements in the end result in better governance for citizens. After experience with hundreds of projects, it has been established that there are many examples of successful project delivery through PFI-type arrangements as well as many failures – so it is difficult to get accurate general lessons.

The reality is that international empirical evidence on PPP delivery is mixed. Privately funded infrastructure may not always have lower costs than traditional delivery methods. Judgements on how well these projects are governed are also mixed, with major concerns about excessive private investor returns and conflicts of interest between the public and private entities. Perhaps it is not surprising that many PPPs are not superior to traditional methods of building infrastructure – after all, big infrastructure projects are risky, and both traditional infrastructure provision and new private finance methods are imperfect.

Global evidence shows that PPPs are politically successful, but in some instances can be of debatable financial merit. The primary lesson from the global financial crisis was to approach the advice of financial experts with scepticism, especially when they themselves profit from a transaction. This lesson continues to be relevant today. Governments now need to be strong and make careful, well-informed and independent decisions. PPPs are certainly a high-profile political brand, and may work well for governments who want new infrastructure delivered quickly. But while they can be a good business proposition, there is also no guarantee that PPPs as a policy will improve the wellbeing of citizens.
What are the benefits?

  1. PPPs could increase and provide greater infrastructure solutions. Since the government doesn’t have to have the resources ready before engaging on any project, many infrastructure solutions can be implemented in parallel.

  2. It will offer faster project completion and reduced delays on infrastructure projects. Financing for the infrastructure projects is drawn from the private sector. Since the private investors require recouping their investment, the projects have to be completed and start generating revenue to payback the financing.

  3. The PPPs return of investment (ROI) is greater when compare to traditional methods, due to innovative design and financing approaches. The assumption of more efficient project implementation design normally adopted in running private ventures, implies that the private investor seek to get maximum ROI from the project.

  4. PPPs identify the expected life-cycle cost analysis and schedules the operation and maintenance component of the project, programming their cost and expected devaluation.

  5. Risks are weighted from initial conceptual stages to determine the feasibility of a certain project. Each project has inherent risk exposure that is especially critical in mega projects. Before embarking on the main project, the usual practice in PPP projects is a feasibility assessment study undertaken.

  6. The operational and project execution risk is transferred totally to the private sector, leaving the public component in a win-win situation. This is one of the beautiful parts of the engagement.

  7. PPP is a concept where early completion is expected under expected budget, reducing the claims and change order process

  8. PPP allows government funds to be re-directed to other important socio-economic areas. Since funding for projects is sourced from the consortia providing the service, any public funds available can be targeted to addressing other more pressing needs of the government.

  9. Reduces government budget and budget deficits. The government only requires the portion of funding to support the initiation of the project which is a small percentage of the overall costs. This means that the budget for the project being borne by the private entities making the actual budget burdens on the government substantially lessened.

  10. High quality standards should be obtained and maintain through expected life-cycle of the project. The benefits of private sector values in project management also bear in ensuring that the project implemented is of high quality. This is essentially driven by the fact that the private entities require to recover their investments when the project is operationalized.

  11. PPP allows a reduced tax payment from users. To meet investment demands in public projects, tax enhancement is the logical consequence. It is through these taxes that funds for undertaking public projects gets raised. Now since the funds are availed by the private entities, it means that the taxpayer has a fairly reduced tax burden.

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Does PPPs have drawbacks?

While the benefits seem quite convincing, there indeed are drawbacks in the conduct of PPP projects.

  1. Every PPP has risks involved, and the government will the pay the price to transfer those risks to the private sector. Risks are a cost and since the government is transferring its risks to the private sector, this happens at an additional cost to the overall project cost. These costs elevate the overall costs of the project.

  2. Certain situations can affect the purity of the process due to specialized areas being improved, reducing the number of contractors available to perform the requested projects. In some instances, the PPP model may not work, such as those that are a specialist nature and thus these cannot be undertaken using this model.

  3. Profits of the projects can vary depending on the assumed risk, competitive level, complexity and volume of the project being performed

  4. There is a slight risk that the proposed contracting alternative being offered is not the best-suited option.

  5. Government representatives must be highly specialized contracting experts. This is critical due to the delicate nature of the negotiation process. There is a tendency by the private entities to seek to maximise the ROI based on very low investments. If government has competent contracting experts, then the interests of the public will be safeguarded.

  6. PPP projects analysis shows that private-public partnerships cost, on average, 16 per cent more than a traditional contract. Thus from a taxpayer’s perspective, you will end up paying more for a PPP than you would through traditional public procurement.

  7. The reality of these projects and where the risk comes in is that profits aren’t guaranteed. If the contract is negotiated effectively and the private sector isn’t able to do things cheaper, they still have to do them, and they may have to operate for periods of time at a loss. That’s the risk that comes inherent in the project.

  8. The risk of a project going over the budget. If a government funds a project entirely with public money and it goes over budget, it can rely on taxpayers to cover the bill. However, if a private company can’t pay its debts under a PPP contract, it goes bankrupt.

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Which PPP is a better arrangement for land reforms realization?

  1. Per intervention payment model (Build Operate Transfer model)

In this model, the contractor is paid for every transaction conducted though the proposed solution for a certain number of months or years. For this model to work, there needs to be clarity on the definition of:

  1. What constitutes a transaction from the solution?

  2. What is the duration of the concessionaire?

  3. How many members of staff of the client are required to effectively work with the contractor?

The assumptions in this approach are:

  1. The contractor will deliver a ready working solution within the shortest possible time

  2. It will be possible to quantify the interventions based on an understanding of the specific tasks needed by the client at the commencement of the project

  3. The client does not need to pay any monies upfront and that the entire costs of the project will be borne by the contractor until the system is rolled out and interventions with the project outputs commence.

  4. The contractor fully understands the scope of the project, the exact requirements of the client and the duration required to complete the project.

  1. One off payment model (Build Transfer model)

This is the traditional tender approach model. The client makes payments to cover the costs of the project at the conclusion of the project.

The contractor responds to the call based on the requirements specifications provided in the tender documents.

The assumptions are:

  1. The client has the resources required to complete the project

  2. The contractor has the capacity and clarity of the requirements to be able to undertake the works

  3. The scope of works is clear and reasonably price-able

  4. The work can be phased out in time and in extent

  1. Consultancy model

In this model the client does not have detailed requirements and recruits a consultant to help drive the process of requirements collection.

Assumptions of this model:

  1. Consultants with the relevant skills in the area of expertise are readily available

  2. The project planning can incorporate a section where the consultant develops requirements and documents to be put out in bids

  3. The consultant can serve as a supervisor to the eventual tender winners to assure quality and compliance with standards.

What is best?
What I hope we have been able to bring out here is that there are many options available that can be extended to the land sector. What is critical though is clarity on how land data is managed under any of the options discussed. This is due to the sensitivity of land information and the allure that control for such data would offer.

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