No Partnership Quick Fixes

Image: Flickr, World Bank Photo Collection
Image: Flickr, World Bank Photo Collection

Public-private partnerships have been hailed as a new way to conduct state business and harness the funding and expertise of the private sector.

But a new study shows they fail unless government plans well and fixes its chronic problems of non-transparent politically-manipulated procurement. African governments face a cash and capacity crunch. They need to dramatically improve public services but lack money and the technical and management capacity to deliver new roads, improved ports, efficient electricity plants, effective schools and desperately needed health services.

Nearly 600 million people in sub-Saharan Africa lack access to electricity; almost 300 million have no access to safe water and there are just over eight telephones (either mobile or fixed line) per 100 inhabitants. Unless something dramatic is done, the UN estimates it will take more than 150 years to cut African poverty in half. Theoretically, business could offer both the money and know-how to solve such problems. But how do you turn the theoretical into practical success?

For more than a decade, African governments have been experimenting with so-called public-private partnerships (PPPs) to involve business more effectively in service delivery. Their experiments range from simple privatisations to social-service delivery contracts to complex management contracts of prisons, roads, ports and utilities.

A new study by the South African Institute of International Affairs suggests success is possible, but PPPs are far from an easy panacea.

Something new, something old

Governments have always contracted with private business to build roads, make arms, deliver food and erect buildings. Governments simply define what they want to buy, request bids, pick a winner to carry out the task.

PPPs, although now a fashionable term for governments, are a more complex spin on that old system. What’s new is governments moving beyond purchasing goods to purchasing increasingly complex services from business. For example, the US military, which once managed all its logistics with soldiers, now uses business to prepare, deliver and dish up food, fuel, ammunition and spare parts to troops in the field.

More commonly, governments retain ownership of infrastructure or government assets while contracting the private sector to perform a specific function such as building, maintaining and operating a road or port, or providing basic services like water and electricity. Both sides benefit – government earns revenue from the lease of assets or gets a better value-for-money service, while businesses make a profit from government or consumer revenues.

Simple as that sounds, Africa’s PPP record in essential sectors such as power and water has been mixed. Efficiency gains have been accompanied by job losses, higher prices for consumers and, often, cancelled contracts. The private sector is not always more efficient and better service provision can be costly.

The eight case studies in a recent SAIIA report, Working Together: Assessing Public-Private Partnerships in Africa, show that those partnerships that have been most successful in Africa have been characterised by thorough planning, good communication, strong commitment from both parties and effective monitoring, regulation and enforcement by government. The issue of pricing is crucial both to avoid political fall-out and to ensure the viability of the contract for business.

Leaders need to talk openly with their citizens about their inability to continue to offer free, undervalued or heavily subsidised services. Everywhere in the world, the abrupt withdrawal of such services brings bitter protest, particularly in environments affected by accusations of corruption. Long before actually signing a contract, governments need to widely discuss in public their plans for holding the private sector accountable for providing these services.

PPPs – like full privatisation and other forms of government tendering – are vulnerable to graft and governments need to effectively tackle corruption before they can hope to get such partnerships right. Like any tender, a services PPP requires that contracts clearly specify what is to be done and what defines success and failure. Without such clarity, the more complex a PPP, the more room there is for abuse by unscrupulous individuals, firms or politicians. That points to a simple reality: As much as governments may need business investors to help sort out their massive infrastructure and services backlogs, those governments that cannot fairly and transparently manage basic tendering functions without political manipulation will never be able to write and properly manage a contract as complex as required in health, education or infrastructure maintenance.

Governments also need appropriate legal and regulatory frameworks, and to build capacity at various levels to plan, draft, implement and monitor successful contracts.

PPPs have generally been more successful in sectors such as ports, telecommunications, transport and eco-tourism than power and water. For example, the N4 toll road from South Africa’s Gauteng province to the port of Maputo, Mozambique, is touted as a good example of a transport PPP, while Tanzania’s 1995 power purchasing agreement has been called ‘public-private partnership at its worst’. This deal between the Tanzanian government and an independent power producer was beset from the start by allegations of graft, and was criticised for the high cost to the state, inappropriate technology and insufficient planning.

For governments to realise the efficiency and effectiveness gains of PPPs, they need to fundamentally improve their systems for dealing with the private sector. Under the right conditions, and in the right sectors, PPPs can offer value for money to governments and good opportunities for investors. But governments need to undertake thorough feasibility studies, develop appropriate and rigorous regulatory frameworks, tackle corruption and demonstrate strong political commitment. However, when they are under pressure to deliver, experience shows, politicians are prone to grasp at poorly conceived quick fixes without doing their homework.

South Africa’s experience

The South African government has led the way in implementing PPPs, with more than 50 programmes in development or implementation at national and provincial level, and 300 projects at municipal level. The government has learned from over a decade of PPPs and set up a PPP Unit at National Treasury in 2001 to regulate or oversee all such partnerships.

Sue Lund, senior transaction advisor at the unit, says that as a result of the lessons learned from negotiating deals with the private sector, the government subsequently adopted a step-by-step process to PPPs, rigorously regulated by the Treasury. This sets out the progression from inception (requiring the appointment of a full-time project officer and specialist transaction advisors), a feasibility study (which must obtain treasury approval), procurement (involving at least three treasury approvals), and contract management (which also entails treasury approvals if there are to be material amendments to the PPP agreement).

The feasibility study compares public sector provision with that of the private sector to ensure that government gets a cost effective service. Planners must involve the necessary stakeholders, consider a range of financing options, and identify the risks (the possibilities that things go wrong) in projects. The tests for the regulator at all phases are: affordability, value for money and appropriate risk transfer (to the private sector).

A lack of planning and effective regulation, as well as pervasive corruption, have often bedevilled African efforts to encourage greater privatisation. African governments have sought privatisation in order to sell off under-performing assets owned by government, to generate revenue, improve service delivery and reduce the managerial burden on the state. In some cases in Africa, the process has been so corrupt that promises remain unfulfilled and services have dramatically deteriorated after privatisation. Contracts have been badly written and economic assumptions poorly investigated, sparking both public and worker protest.

Public procurement processes – where government departments call for tenders – have generally lacked transparency and promoted cronyism and graft. Even with simple tenders, officials have found myriad ways to direct contracts to favoured bidders. Well-connected relatives and friends of politicians are routinely awarded lucrative supply contracts despite having inferior bids, high prices and inadequate expertise.

Since PPPs deal with far more complex services and the choice of company is not restricted to the single variable of price, they potentially provide greater scope for manipulations by businesses or government officials that are hard for the public and the anti-corruption systems to spot. South African Treasury officials argue that the involvement of independent transaction advisors should reduce the possibility for corruption but the system is not foolproof.

Clive Harris, a senior private sector development specialist in the Private Sector Advisory Services Department at the World Bank, writes that ‘corruption possibilities in equipment supply and construction contracts are probably as large as those related to the award of concessions’. Other forms of corruption documented in public utilities include jobs based on political connections or payments and ‘widespread graft by public employees who exact informal payments from customers in exchange for reduced utility bills or shorter waits for scarce connections’. But he also says that the private sector generally has more incentive to minimise costs and reduce leakages from corruption than the public sector.

A means towards an end

PPPs do not provide a ‘magic formula’ for development and are just one means towards the goal of improved infrastructure and better service delivery. Governments need to be mindful of how PPPs impact on the lives of the poor. Such partnerships are not incompatible with the needs of poor people if government considers a range of delivery options, and regulates the contract effectively. For example, prices can be capped at reasonable levels or assisted with government subsidies to maintain consumer affordability. Contracts also can include incentives and penalties to force companies to roll out services in poor areas.

The complexity and cost of such contracts means that African governments should approach PPPs gradually, building up capacity through smaller projects before tackling more ambitious ones. As South Africa has found, it takes a while to develop the skill and experience to generate successful deals. States should first start with small PPPs, such as building and maintaining government offices, as Botswana is doing, before tackling larger ones.

Capacity building

Institutions such as the SADC Banking Association and the regional and national development finance institutions as well as the donor community and NGOs have a vital role to play in building government (and private sector) capacity. Governments can also share their expertise and experiences and so help to develop their planning and implementation capacity.

Nepad also has a role to play in identifying blockages in the regulatory and legal environments in African countries. The African Peer Review Mechanism can highlight, on a country-by-country basis, the government structures, laws and capacities that need to be changed, reformed and developed. By creating a better investment climate for local and foreign companies, governments will then be able to forge partnerships that combine the best of the private and public sectors. – Peter Farlam

The full report is available on the SAIIA website under the Nepad Policy Focus Reports

12 May 2008
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