Public-private partnerships
Description
A public-private partnership (PPP) is a long-term contract between a private party and a government entity, for providing a public asset or service, in which the private party bears significant risk and management responsibility, and remuneration is linked to performance.[1] PPPs enable the public sector to mobilize additional financial resources and to benefit from the expertise and efficiencies of the private sector.
PPP models differ with respect to the degree of sharing of resources, responsibilities, and risks. Typical models include a public service concession, joint venture, and management contract. More recently the PPP concept has broadened to incorporate a wider range of actors and cooperation models including:
Output-based aid (OBA) models: OBA contracts and outcome mechanisms aim to serve the needs of the BOP through innovative tools such as development impact bonds or pre-financing mechanisms.[2] Development impact bonds aim to incentivize private sector investment in critical areas of need. Outputs could include, for example, connection of BOP households to electricity grids or water supply systems. Pre-financing mechanisms are incorporated into OBA contacts as to help cover the period between project start-up and project delivery.
Inclusive models: As local capacity and resources increase and countries gain experience with PPP instruments, an increasing number of partnerships are being led and driven by the local private sector partners including smaller (social) enterprises, community organizations, or NGOs.
PPPs are best leveraged in sectors or industries where there is a direct impact on the well-being of the BOP, including water, energy, health, infrastructure, and agriculture. These can be designed in such a way that requires the private sector to engage with BOP communities and offer goods and services at a level and quality that the BOP need and can afford.[3]
Points to Consider
Award procedure: PPPs entail more discretionary evaluation criteria than traditional public procurements, which increase complexity as well as the risk of corruption. Project results may be compromised by official preference for local participation, preferred sub-contractors or suppliers, and the employment of poorly qualified local staff.
Overlapping interests: PPPs work best if the goals of all parties are aligned and interests of key participants are skillfully designed, negotiated, and packaged.
Regulatory frameworks: A strong regulatory framework to balance the interests of government, the private sector, and beneficiaries is important. In particular, this includes the right of the private sector to levy cost-recovery tariffs; a level playing field between incumbent public providers and applicants; and an effective monitoring mechanism to ensure long-term delivery and service quality. The challenge is to balance the need for flexibility in order to provide for unexpected circumstances with protection against undue political interference and the need for predictability.
Case Example
Philippines: Partnering to bring water to BOP communities
Following an acute water supply crisis in 1997, the Government of the Philippines privatized the Metropolitan Waterworks and Sewerage System and to partition its operations into two concessions. A consortium of partners forming the Manila Water Company (MWC), presented the winning bid. The group was awarded a 25-year concession for the water and wastewater system in Manila’s east zone, which provides service to over 6 million people.
The concession included targets to increase water and sewer coverage, achieve 24-hour supply, meet water quality and environmental standards, and decrease non-revenue water. To ensure that the company would meet the targets, MWC was obliged to post a $70 million performance bond that permitted the government to withdraw up to $50 million from the bond for non-compliance.
As low-income consumers are an important demographic within the service zone, MWC developed the Tubig Para Sa Barangay (TPSB) program which translates to “Water for Poor Communities.“ The program is a partnership between local government and communities to extend water supply to BOP communities that had not been served previously. Partnerships typically involved local communities in the design and planning of water facilities and allocated much of the operational, maintenance, and fee collection responsibilities to community representatives. Local governments provided hands-on assistance with design and construction, small subsidies or wavering of permit fees, while MWC covered most of the initial capital expenditure.
Today, MWC has successfully met all of the targets in its concession. By 2011, a total 4,156 kilometers of pipeline had been laid and MWC was providing to service to over one million households and reaching over six million people. Approximately 1.7 million people were serviced through the TPSB program.
Through this unique PPP, these low-income customers now have 24-hour access in 99 percent of the distribution area, at water pressures high enough to conveniently use faucets and enable indoor plumbing.
Sources:
- International Finance Corporation (IFC) (2012). Manila Water Company. In Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio (pp. 40-41). Washington, DC: IFC.
- Rivera, Virgilio Jr. C. (2014). The Case Study of Manila Water Company: An Exercise in Successful Utility Reform in Urban Water Sector. In Tap Secrets: The Manila Water Story. Manila: Asian Development Bank and Manila Water.
Further Examples
Additional Resources
- Global Partnership on Output-Based Aid (GPOBA): GPOBA funds, designs, demonstrates, and documents OBA to improve the delivery of basic services in developing countries.
- Public-Private Infrastructure Advisory Facility (PPIAF) at the World Bank: PPIAF is a multi-donor trust fund that provides technical assistance to governments in developing countries in support of the enabling environment conducive to private investment, including the necessary policies, laws, regulations, institutions, and government capacity.
- The PPP Knowledge Lab: An online resource on public-private partnerships curated by multilateral development finance institutions and multi-donor entities.
- PPP Network: A peer learning and knowledge-sharing platform.
- Center for Global Development (CGD): Development Impact Bonds: CGD has partnered with UK-based Social Finance to explore and share information about Development Impact Bonds.
[1] The term public-private-partnership as applied here does not include other type of development partnership arrangements such as information sharing, voluntary contributions by the private sector to public ends or jointly run research & innovation projects. More information about PPPs
[2] For example, development impact bonds remunerate the private sector based on social outcomes rather than on financial performance.
[3] Dutch Ministry of Foreign Affairs (2013). Public-Private Partnerships in Developing Countries. [A systematic literature review.] Policy of Operations and Evaluation Department (IOB) Study No 378. Netherlands: Dutch Ministry of Foreign Affairs.