Jaipur | Business Remedies | The financial crisis of 2008 onwards brought about renewed interest in PPP in both developed and developing countries. Facing constraints on public resources and fiscal space, while recognizing the importance of investment in infrastructure to help their economies grow, governments are increasingly turning to the private sector as an alternative additional source of funding to meet the funding gap. While recent attention has been focused on fiscal risk, governments look to the private sector for other reasons:
> Exploring PPPs as a way of introducing private sector technology and innovation in providing better public services through improved operational efficiency.
> Incentivizing the private sector to deliver projects on time and within budget.
> Imposing budgetary certainty by setting present and the future costs of infrastructure projects over time.
> Utilizing PPPs as a way of developing local private sector capabilities through joint ventures with large international firms, as well as sub-contracting opportunities for local firms in areas such as civil works, electrical works, facilities management, security services, cleaning services, maintenance services.
> Using PPPs as a way of gradually exposing state owned enterprises and government to increasing levels of private sector participation (especially foreign) and structuring PPPs in a way so as to ensure transfer of skills leading to national champions that can run their own operations professionally and eventually export their competencies by bidding for projects/ joint ventures.
> Making the country more competitive in terms of its facilitating infrastructure base as well as giving a boost to its business and industry associated with infrastructure development (such as construction, equipment, support services).
> Supplementing limited public sector capacities to meet the growing demand for infrastructure development.
> Extracting long-term value-for-money through appropriate risk transfer to the private sector over the life of the project, from design construction to operations/ maintenance.
Potential Challenges of Public Private Partnerships
There are a number of potential risks associated with Public Private Partnerships:
> Development, bidding and ongoing costs in PPP projects are likely to be greater than for traditional government procurement processes – the government should therefore determine whether the greater costs involved are justified.
> There is a cost attached to debt – While private sector can make it easier to get finance, finance will only be available where the operating cashflows of the project company are expected to provide a return on investment (i.e., the cost has to be borne either by the customers or the government through subsidies, etc.).
> Some projects may be easier to finance than others (if there is proven technology involved and/ or the extent of the private sectors obligations and liability is clearly identifiable), some projects will generate revenue in local currency only (eg. water projects) while others (eg. ports and airports) will provide currency in dollar or other international currency and so constraints of local finance markets may have less impact.
> A clear legal and regulatory framework is crucial to achieving a sustainable solution.
Written & Edited By:
Charu Bhatia
