Leadership (Abuja)
Rowland Ataguba
14 January 2009
opinion
E is observed in higher education, and where the public sector contracts with private hospitals to provide surgica operations. In primary health care, arrangements C and E are both observed where some GPs own their own premises, others work in health centres owned by the National Health Service.
The prison service uses all of the arrangements A, C, and E, while the majority of prisons operate according to model A, some are now privately owned and managed, others are still publicly owned, but management is contracted to a private-sector company.
There is however a wider debate raging about the role of government in the production of public services and as demonstrated above, increasingly governments are willing to roll back and allow a far more central role for private capital in the provision of public services. Notwithstanding, there have been philosophical arguments about what some consider as, the abdication of government responsibility in protecting the weak or disadvantaged and conversely its empowerment of the unfettered exploitative tendencies of private capital.
In Nigeria, this has centred more on the perceived problems of opaqueness in transactions and allegations of nepotism and corrupt practices in the provision of public services. Where services have so deteriorated such as in the railways, it becomes difficult to defend its continued longer term sustainability as a public sector provision.
In theory all the arrangements A to F may be possible on the Nigerian railways but a number are unlikely to be feasible given the prevailing circumstances of lack of institutional capacity. A is the status quo which has failed, though less to do with the model than issues of institutional and environmental integrity. Now, where efficiency and innovation are central concerns and respond well to competitive pressures, quality and price can be relatively precisely regulated when necessary, and consumers are able to meet directly most of the cost of delivery, then regulated private-sector delivery is appropriate.
It is debatable whether all the enterprises that were privatized and those slated for privatization in Nigeria fulfilled these criteria, but the privatization programme has been motivated, at least in part, by the belief that private ownership would increase efficiency, although political dogma and macro accounting convenience have also been significant imperatives.
Any way it is viewed, the public sector remains the bulwark in the provision of public services and systemic integrity is a key ingredient in assuring private capital provides the necessary impetus for efficiency gains and value for money at the heart of the objectives of the seamless delivery of public services. Thus, when the SPV known as Investors International London Limited (IILL) bid $1.32bn for 51% of the then publicly owned telecoms company, NITEL, it quickly became apparent that it had not adequately allowed for the risk attendant to operating in a Nigerian environment where the public sector interface could be deemed a potential downside and exponential cost centre. It is therefore no surprise that IILL was unable to raise the required financing from the market to meet its commitment having emerged as the preferred bidder.
The subsequent valuations of NITEL probably reflected the risk more realistically and unfortunately in a less hospitable climate. The interface between private capital and the public sector spans a wide spectrum from regulation, law enforcement and the judiciary, through statutory undertaking, law making and legislative oversight and until there is confidence that the public institutions work efficiently and serve the public good credibly, then efforts to encourage private capital infusions into the public services may meet with limited success.
The term privatization is generally used when ownership of assets is moved to the private sector and the funding for the activity comes predominantly directly from consumers. However, the government may also adopt a halfway house of Public Private Partnership (PPP), contracting with the private sector for the provision either of services to consumers, or of important inputs to the production of these services (models B - E).
The PPP model is output based over a defined period, thus enabling the public organization to focus on setting policy and the outputs it wants to achieve rather than the means of delivery. It involves a transparent and competitive process to drive efficiencies and innovation to produce the most economically advantageous solution. It also involves the categorization and allocation of risk to the party best able to manage, control and absorb it. Other key features include, the whole life approach, value for money, benchmarking and unitary payment.
In a typical PPP transaction, the public institution contracts with a special purpose vehicle (SPV) which in turn procures the building of a relevant asset and its subsequent servicing from specialist sub-contractors. It is not unusual for the specialist sub-contractors to have an equity stake in the SPV.
Within this general model, the delivery mechanisms differ according to the form and length of contract and the extent that specific physical assets are tied to the enterprise (or project). The term "Private Finance Initiative" (PFI) normally refers to cases where there is significant asset ownership by the private sector and, as a result, contract durations are very lengthy. The terms "contracting out" or "franchising" are usually reserved for cases where there is less (if any) specific asset investment and, as a result, contract terms are shorter (e.g. 3 or 5 years). Now the form that a PPP takes determines the duration of the agreement, as well as the parties that receive the rewards and benefits. This will affect the overall risk adjusted net present value (NPV) that will be returned to each party.
With nearly 700 closed deals, the U.K PPP model now has a proven track record which has become a reference point for its adoption across the world.
The PPP model however is not without its difficulties. The model for instance is inflexible and works best where it is possible to precisely define the outputs at the outset and is not well placed for projects where technology or customer demands is constantly evolving, such as projects involving significant investment in IT.
PPP is also susceptible to higher than usual procurement costs especially as a result of the practice of competitive dialogue which increases procurement durations thereby further raising the cost of an unsuccessful bid and the cost to the procuring authority (i.e. the public organization).
In the U.K, the treatment of PPP expenditure has also met with criticism as a means for the government to hide debt off balance sheet in preference to prudential borrowing. With the adoption of International Financial Reporting Standards (IFRS), these items are now to be moved to the balance sheet, thus assuaging the critics. The government has also accepted that the PPP model is ineffective in some circumstances and is increasingly considering alternative approaches.
An alternative to PPP is what is known as "Strategic Partnerships", where the parties (public-public or public-private) aim to achieve strategic goals rather than a defined set of outputs. The BSF (Better Schools for the Future) and LIFT (Local Improvement Finance Trust) programmes are the best known British Strategic Partnerships.
In these instances, it is believed that Strategic Partnerships are more efficient in procurement, produce scale economies, enable the public institution to focus on strategic long term objectives, enable flexibility and thus in-built continuous improvement, shared costs and rewards, better market appeal and supply chain management.
The Strategic Partnership model draws heavily on the lessons learned from PPP and shares many of its characteristics. It is therefore being increasingly recommended for large scale projects which are likely to grow in size in discrete phases, such as urban metros, especially in the light of the failure of Metronet, the London Underground PPP.
In a typical strategic partnership transaction, the public sector will procure a private sector partner in much the same way as the PPP model.
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