|In 1996, the community succeeded in funding improvements by obtaining outside financing. Tariffs pay for operation and maintenance costs, but future expansion will involve additional external financial support or direct financing. This example shows that organized communities can operate and maintain water systems if they have the necessary institutional support and technologies they are able to understand.
Quito, Ecuador – Community Based Provision of Waste Services
The community group, Barrio El Carmen, in Quito presents an interesting example of a partnership between the government and a community group for the provision of solid waste management services. This low-income neighborhood of about 250 families is located in the southern portion of Quito. With political support from a city council member, and some promotional assistance from a local religious organization, the neighborhood is operating an alternative method for solid waste management, based on communal effort and micro-enterprise initiative. Households sort their waste, which is then collected by members of the micro-enterprise. The micro-enterprise sells the recyclables to traders or companies, and most organic waste goes to local farms for compost. Non-recyclables and the remaining organic waste are collected on a weekly basis by the municipality and transported to the city’s dumpsite.
To promote this initiative, the municipality has doubled the amount of money earned by the micro enterprise through the sale of its recyclables, investing those resources in local projects selected by the community. Since the program began, an illegal dumpsite in a nearby gorge has disappeared, allowing the area to be used for recreational activities. Several surrounding neighborhoods have now asked the Barrio El Carmen to manage their solid waste.
G. Summary of Five Common Public-Private Partnership Options
Table 1 provides a summary of the five common PPP options discussed above. It breaks down each option by asset ownership, degree of regulatory intensity, source of investment, potential for labor concerns, and the estimated time scale for contract preparation.
Table 1. Summary of Five Common Public-Private Partnership Options
ServiceBOTConcessionJoint VentureCommunity-BasedAsset ownershipPublicPublicPublicJoint CommunityRegulatory IntensityModerateHighHighModerateModerateSource of InvestmentPublicPrivatePrivateJointNGO, Private or PublicLabor ConcernsModerateHighHighLowLowTime Scale for Contract PreparationModerateHighHighHighLow
H. Tailoring Public-Private Partnerships to the Local Context
As the examples above illustrate, PPPs are context-based. The methods used by other cities will not necessarily work perfectly for your communities. Collectively, however, these examples of PPPs provide a rich “menu” of ideas and models from which your local government can choose. Flexibility is key. It needs to be present in the choice of parties to play the different roles, as who will best serve varies from city to city. Flexibility also needs to be present in the choice of response in order to maximize effectiveness and optimize system efficiency. The most successful cooperative arrangements come from a flexible, opportunistic approach, drawing from experiences in other cases. For example, smaller municipalities often have projects that are too small in scale to attract a significant collection of private investors. These municipalities may have more success by offering multi-sectoral contracts, or by joining forces with neighboring municipalities in the bidding process, thereby offering potential private sector partners better economies of scale.
Often the best PPP option does not fall neatly into one of the categories described above, but combines components from various more traditional PPP options. For example, Cartagena is a joint venture with an operating contract to run the new treatment plant; concession contracts may include the construction of a new treatment plant; or community-based provision may develop into a more formal service contract with the supporting NGO or local micro-enterprise.
III Fundamental Issues Underlying PPPs
A. Building Strong Foundations
Strong foundations for PPPs are based on complementary goals and an enabling regulatory and political environment. Partnerships can only work to the extent that the goals of the major stakeholders are mutually compatible (i.e., acceptable services for acceptable prices and levels of return) and understood and accepted by all parties. In addition, partnerships need legislative, administrative, political and social environments that support the process of developing the partnership and achieving its objectives over time.
Government, business, and community leaders must understand and respect each other’s goals. As a government, you may initially have difficulty accepting the profit motive of private businesses, just as companies may be tempted to walk away from the more administrative decision-making processes used in the public sector. Local communities may not have patience for your need to address other areas of the city.
To resolve these differences, all parties must focus on the broader, complementary goals to be achieved. It is important to realize that public and private goals do not necessarily need to be the same for partnerships to work – they must merely be compatible. For example, both the public and private sectors want to raise general standards of living – governments and communities to alleviate poverty, businesses so that more people can afford their products. Both sectors also want to build more links at the local level, particularly in “emerging markets” – businesses to support market growth, governments and communities to promote development and idea exchange. Both want to provide efficient service – governments and communities to keep costs low and to increase coverage, businesses to increase profits.
An enabling regulatory, legal and political environment is the cornerstone of sustainable private sector participation. Early on, the public sector must establish an appropriate legal framework for contract procurement and private sector investment. It is very important that mechanisms be put into place to minimize the likelihood or appearance of corruption. Unpredictable and unfair procurement and investment processes reduce both political acceptability and the interest of many private investors.
The government must also establish clear regulatory frameworks and implement appropriate tariff regimes and subsidy mechanisms. The creation of a regulatory framework alone, however, does not necessarily guarantee effective regulation. As all local governments are different, the public and private sectors will face a steep learning curve as they try to define and regulate their relationships with each other and their roles in providing services. In particular, the public sector needs to define a clear allocation of responsibilities between the national and municipal governments, and a clear statement of its role as a provider and regulator.
In general, private sector companies prefer that the contract serve as the major regulatory mechanism, and that local governments have very limited regulatory discretion once it is in place. Highly specific contract terms that establish duties, performance targets, rules for changing prices, and dispute resolution procedures, allow the private sector better to predict the profitability of the venture and decide what it is worth bidding for the contract. Given these preferences, governments will have to make important judgements about the degree of regulatory discretion they are willing to give up, particularly for long-term contracts. Once again, corruption can be a concern here, this time in terms of public acceptance of the PPP.
Some governments raise concerns about an imbalance between their limited means and capabilities as regulators and the capacity of experienced private operators. Decentralization has tended to aggravate this imbalance by giving municipalities more responsibility for providing public services from fewer resources. In situations where municipalities are limited by financial constraints and have little enforcement capacity, the central government may need to provide financial and regulatory support. In any case, mechanisms that strengthen public administration and regulatory bodies are necessary to reduce this imbalance and improve the public sector’s negotiating power. Such reforms might include changes to the legal system that improve enforcement of regulatory frameworks or macroeconomic reforms to alleviate poverty and reduce inequality.
Bad political climates caused by the pressure of election cycles, the potential instability of new democracies, personal agendas of government officials, and the special status of some services (particularly access to water), can also create barriers to starting or maintaining public-private collaborations. Governments must provide assurances whenever possible to private sector partners that such political factors will not disrupt their contractual partnerships.
B. Importance of the Public Acceptance
Government and business leaders cannot build partnerships alone – political and social acceptance of private sector involvement is essential. The people must see private sector participation as beneficial for the partnerships to last over time. Public support of private sector involvement over the long term will depend primarily on the delivery of promised services and benefits at reasonable costs. Therefore, it is of the utmost importance that mechanisms be developed to ensure that the organization providing the service, whether it is the public or the private sector, is accountable to its customers.
Public support will also depend on the ability of the partnership to meet the needs of all stakeholders. For example, public sector workers can be a source of tremendous opposition to increased private involvement in the provision of services. Contracts should ensure the employment or placement of public employees and local residents to the greatest degree possible. There are a variety of options for placing public employees. These include transfers to the private sector operation, contracting workers for use by the private sector operator, placement in other public jobs, and offers of severance packages to workers who are not interested in the other options.
Public support will depend in part on the provision of affordable and sustainable services to historically disadvantaged sectors of the population. Service coverage requirements should always be part of the contract proposal evaluation criteria. Options for making this work include multi-level services and corresponding multi-level tariffs, which allow higher income areas to cover the costs of lower income ones.
C. Moving from Public Sector to Private Sector Management
In entering into public private partnerships, governments generally switch from being a provider to a regulator of the service. This means that governments must become sophisticated in their understanding of what private firms can and cannot offer. Governments must ensure that basic social needs are met while the individual goals of the other parties are honored. Such role changes often require substantial capacity building, which may include the following:
Strategic planning, financial modeling, and infrastructure investment planning;
Developing financial packages for the contract;
Setting effective tariffs and service levels;
Managing contracts and monitoring contract compliance; and
Re-prioritizing budgets to adjust for new development priorities.
Private sector involvement does not relieve the municipality of its responsibility to ensure adequate provision of the service. Given the nature of environmental services such as waste and water, it is inevitable that public regulation of the private involvement will be necessary. Developing such regulatory frameworks can be challenging. Governments must find the appropriate balance between making a partnership attractive to private firms and protecting the rights and interests of their citizens.
Regulations must not just be designed to protect public interests, but must also create the conditions under which private firms can operate effectively and efficiently. For example, the municipality can increase private sector confidence by demonstrating that it will implement its commitments predictably. This might include, for example, undertaking tariff adjustments or purchasing land. Wherever possible, governments should develop public sector regulatory frameworks that will facilitate similar future projects.
D. Pricing Issues
Before getting involved in a PPP, governments should be aware of some key pricing issues. Pricing issues are a particular concern for long-term PPPs such as BOTs, concessions, and joint ventures. At the beginning, the public sector often does not have any way to know what the true long-term costs and benefits of the package will be. Even when information is available, it is rarely incorporated into pricing structures.
Other pricing concerns include the use of subsidies and the political acceptance of the higher prices that typically accompany private involvement. Under concessions and other large-scale privatization efforts, the private operator often inherits inappropriate tariff structures that give operators and consumers the wrong incentives. Experience shows that unless clear tariff adjustment policies are built into the contract, political factors will continue to affect tariff setting after the private sector becomes involved.
The method for determining tariffs should be transparent and should specify objective criteria that would initiate adjustments. For example, if low tariffs cause private operators to lose money when providing service to the poor, then service to the poor will suffer. The public sector must correct these disincentives by making it profitable to serve the poor using tools such as subsidies. Given the social benefits associated with urban environmental services, for which private partners are not necessarily fully compensated, such public sector financing of these investments should be justified.
E. Contract Procurement Issues: Ensuring Transparency and Evaluating Performance
Most governments have rules requiring some form of competitive bidding for the procurement of any private sector good or service. In addition, most international lending institutions and assistance organizations require the use of competitive bidding procedures as a condition of the loan or assistance. Governments generally cite three reasons for using a competitive bidding procedure:
It ensures transparency in the contract award;
It provides a market mechanism for selecting the best proposal, typically resulting in the lowest costs; and
It stimulates interest among a broad range of potential investors.
Traditional procurement of basic operation and maintenance and service contracts can be a relatively straightforward process – due in large part to the high level of certainty regarding the nature of the services. Under conditions of certainty, such processes have generally worked well to inhibit corruption and get the best possible value for the government.
Despite these successes, the structures and time scales associated with more complex PPPs such as BOTs, concessions and joint ventures, make the traditional ‘competitive bidding’ procurement process a less efficient vehicle for forming contractual relationships between the public and private sectors. Four characteristics of traditional procurement help to explain why:
Traditional public tender is designed to work under conditions of certainty – large-scale PPPs start and generally evolve under conditions of uncertainty;
Traditional public tender is designed only to get the lowest price for a given product or service – large-scale PPPs often involve multiple design proposals and look for criteria other than the lowest prices (including use of local firms and fostering local economic development);
Traditional public tender generally prohibits informal communication between the public and private sectors – communication is the cornerstone of a successful large-scale PPPs (particularly joint ventures) and must start at the earliest possible stage of the process; and
Traditional public tender is a time-intensive process. Private sector groups are results driven – they are engaged in the partnership to improve their bottom line. High transaction costs and long delays in contract awards will serve as barriers to private sector participation, particularly for smaller scale service contracts and joint ventures.
Despite the inherent incompatibility of traditional procurement practices, fear of corruption and high costs make governments and lending institutions reluctant to embrace alternative procurement procedures. Effective cooperation among governments, businesses, NGOs, and others is difficult to achieve under the best conditions. It is close to impossible if there is not a high level of trust, or at least predictability, in the process.
If people think there are irregularities going on, many will be unwilling to invest their time or resources. Even the appearance of corruption will dissuade many private investors from involvement. A recent World Bank study shows a negative correlation between investment and growth and corruption (as perceived by private investors and businesses). In addition, the presence of corruption has been shown to greatly increase the cost of any public service to the public. Therefore, any procurement process that does not control corruption will never get a good value for the public. The credibility of the parties involved, as well as the transparency of the process used, are critical determinants of long-term success. Getting the service at a good value is the key objective.
Alternative procurement options such as direct negotiation must be designed to prohibit corruption and get the best value for the public. Mechanisms for prohibiting corruption might include: imposing stricter penalties on civil servants who accept bribes; penalizing firms that paid the bribe and prohibiting them from contracting with the government for a specified period; and encouraging local and international NGOs, as well as the media, to play a ‘watchdog’ role in the procurement arena. Mechanisms for ensuring good value might include benchmarking costs against the similar provision of services in other cities, and providing for periodic cost renegotiations.
IV Basic Guidelines for Entering into a PPP
While PPPs by their nature are dynamic and tend not to conform to a simple model, for the purposes of generating some basic guidelines it is helpful to view the PPP development process in four stages:
Analysis of different PPP options.
Soliciting private sector participation.
Establishing a durable partnership.
A. Project Preparation
The government should assess the current infrastructure service. This type of analysis will include an internal review of the following: (1) existing assets including infrastructure, capital and tariff regimes; (2) current service coverage; (3) general customer satisfaction; and (4) current balance sheet (revenues vs. costs).
The government should outline broad goals for improvements. These include setting coverage objectives and service standards, as well as ensuring transparency, efficiency and customer satisfaction.
If it appears that private sector participation might be an option, the next step should be the development of a multidisciplinary review team. The review team should then conduct a more thorough evaluation of the current system and evaluate the technological, financial, social, political and legal feasibility of various solutions. It is important that the review team identifies and actively involves key stakeholders such as local residents, NGOs, development committees, and community organizations in a meaningful way throughout the process. It is also of the utmost importance that this process be transparent and that the views of all stakeholders be actively solicited.
Smaller municipalities may need to contract out some of these assessment services. Such contracts should be issued using a competitive bidding process when possible to help ensure the government is getting the best possible advice.
B. Analysis of Different PPP Options
Once the assessment is complete, the review team should establish a clear set of feasible infrastructure improvement priorities. It is important that the goals of broad coverage, affordable services, transparency, efficiency, and customer satisfaction be kept in mind throughout this process. The review team can then evaluate various PPPs options against these lists. This process may involve the use of cost/benefit models.
When exploring different PPP options, governments should engage in open dialogues with a range of potential private sector partners. Traditional public procurement requirements can sometimes serve as barriers to this type of communication. Where this presents a problem, governments should consider alternative forms of procurement.
Governments may want to consider a possible role for third parties. Third parties can act as a catalyst for or facilitator of the project development. They often provide a vehicle for developing a trust and confidence level between the public and private sector parties that helps to resolve problems. Third parties also provide increased transparency and mitigate the likelihood of corruption, as all decisions must be justified to them. Many experts agree that the more people that are accountable for a decision, the less likely corruption is to occur. Third parties can also teach governments about the successes and challenges faced by other governments struggling with similar problems.
C. Soliciting Private Sector Participation
Soliciting private sector participation generally involves procurement procedures. This means that governments will have to determine what type of procurement process will get them the best value for the best service, while avoiding corruption. Presently, the two main options are competitive bidding and direct negotiations (see Section III.E. for a more complete discussion of the limitations of various contract procurement options).
In any PPP procurement, every effort must be made to ensure that all guidelines encourage innovation and reward creativity to the greatest degree possible. One way to encourage innovation is to minimize specific requirements in bidding documents while specifying the desired end goal of the project or service – allowing the private sector to develop the best possible ideas for meeting the goals.
One concern with performance-based design criteria is that the government may not be able to discern which projects will be the most effective at actually meeting the standards. Finding ways for governments to evaluate multi-factor design proposals is an issue that needs closer analysis. In the short-term, however, third parties and expert review panels can greatly assist the government in making such decisions. In addition, one inherent benefit of joint ventures is that prospective private sector partners are not likely to propose projects that they do not firmly believe will work, as the private sector partner is not just a contractor with the government, but a financial partner. As such, if the proposed project fails, the private sector partner gets no return on its investment.
While finding ways to encourage innovation is good for the project if it builds capacity, it may not be viewed as good by private sector partners who may fear that they will not be compensated appropriately for their ideas or “intellectual property” in the event they are not awarded the contact. Procurement processes must address the issue of intellectual property rights. Often this is done by compensating private sector organisations if the government uses their idea, even if they are not awarded the contract.