Framework of PPP Application in Public Housing Project in China

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Table of Contents

Introduction
Principles of application
Lessons from the United States
Project structure and responsibilities of stakeholders
Sources of finance, and capital structure
Key risks and their corresponding mitigation measures
Other key considerations of the concession
Conclusion
Works Cited

Introduction

Public-private partnership is considered as one of the best ways of helping a country to achieve its developmental goals. One of the areas where this approach is highly used is in improving the housing sector.

Numerous countries like the United States and Britain have successfully used public-private partnership to provide proper housing facilities to their people. Some of the reasons that are making countries to opt for public-private partnership include the inability by governments to provide adequate financial support and the desire to curb public inefficiency (Jacobson and Choi 637).

Through public-private partnership, a government overcomes the challenges of overstretching its financial resources. Moreover, it helps the government to utilize the skills possessed by private sectors. With the numerous benefits associated with public-private partnership, this paper aims at coming up with a public private partnership framework for China.

The paper will outline some of the general principles of application framework for public housing, outline some lessons learnt from other countries like the United States, and give the roles of all stakeholders. In addition, the paper will outline the possible sources of finance and risks associated with public-private partnership and give some measures for mitigating the risks.

Principles of application

When applying for a public private partnership in a public housing project in China, the parties to the partnership ought to consider numerous principles. These principles include the due diligence and contract administration (Jacobson and Choi 638-642). Integrity is crucial in any public-private partnership. Hence, for the housing project to be successful, the partners should come up with a detailed due diligence process.

In the due diligence, the partners should clearly outline how the varied events of the project should take place. Besides, they should show how all the project’s activities would take place and the evaluation criteria that the project would use to gauge its progress. One of the factors that lead to the failure of public-private partnership projects is the lack of transparency when evaluating the progress of the project (Jacobson and Choi 643-650).

One of the parties to the project might feel that the other one is shortchanging it by not disclosing all the details of the project. For the housing project to be successful in china, the government and the private investors should embrace transparency when evaluating the project.

In every public-private partnership, there must be a signed contract (Jacobson and Choi 652-657). For the success of the public-private partnership in public housing project in China, the parties should come up with a signed contract. The contract ought to outline the responsibilities of each party in the partnership.

The contract should be developed with a lot of care and carefully managed throughout the project cycle. In a bid to ensure that no conflict arises during the partnership period, the contract should identify the responsibilities and accountabilities of both the government and private investors. In addition, the contract ought to stipulate the target dates for the project and the performance standards as well as factors that might lead to termination of the contract.

Lessons from the United States

A study of public-private partnership application in housing projects in the United States and Australia indicates that any government intending to use a similar approach should consider numerous success factors.

One of these factors is complimentary/compatibility of skills among the crucial parties (Jefferies 451-457). The housing project would only be successful if the parties to the project have the relevant skills. The Chinese government should thus get into partnership with private investors that have adequate skills in housing projects.

Such a partnership would help in ensuring that both parties come up with proper budget, operations processes, and plan well for the project prior to commencement. Failure to collaborate with the right party may lead to conflicts emerging in the course of the project thus leading to the project being terminated prematurely.

Another factor that would ensure the success of the housing project is coming up with efficient approval process. The American government succeeds in public-private partnerships because of establishing an efficient approval process for all its projects. Consequently, to ensure that any project is completed on time, it is imperative that the project is approved on time (Jefferies 458-461). Failure to have an efficient approval process may lead to the persons implementing the project failing to meet the deadline.

On the other hand, they may fail to follow all the procedures during the project implementation process in an attempt to meet the deadline, thus not meeting the required standards. Proper resource management is vital for the success of any public-private partnership. The American government and private investors ensure that the both parties to any joint project are accountable for the available resources (Jefferies 462).

Holding each party accountable for the project’s resources ensures that the parties utilize the resources as required. For China to succeed in running its housing project through public-private partnership, the government and private investors have to come up with policies that ensure that all parties to the partnership utilize the available resources efficiently.

Project structure and responsibilities of stakeholders

Numerous project structures exist for public-private partnership including joint ventures, service contract, management contracts, and lease contracts (Chowdhury et al. 247). The best option for the housing project in China is the joint venture structure. A joint venture involves both the government and the private investors running and owning the project.

In most cases, projects owned entirely by the government suffer from political influence (Chowdhury et al. 248-253). Therefore, to ensure that the Chinese government succeeds in providing proper housing facilities to its people, it would be imperative to come up with a joint venture project with private sectors or investors. In this case, the government would not have absolute powers over the project, and thus it would not manipulate the project to meet political goals.

The project ought to have a clear corporate governance to ensure that the government does not influence the project politically. Private investors ought to assume the operational roles. In most cases, private investors have all the required expertise (Chowdhury et al. 254-259); hence, the Chinese government should structure the project in a manner that the private investors assume the operational roles.

In the public-private partnership, the Chinese government should assume the role of establishing the project’s targets, establishing a favorable environment to ensure that the project is completed on time, and assigning the level of independence that the private partners ought to have in the project. In addition, the government should assume the role of addressing all the political hurdles that might hamper the success of the project.

On the other hand, the private partners ought to assume the role of project implementation. Normally, private investors bring in their expertise in any public-private partnership (Chowdhury et al. 260). The same case would apply in a public housing project. Private investors have the knowledge on how to cut down on operational cost; therefore, the Chinese government ought to give them the role of running the project to make sure that it does not incur unnecessary costs.

Sources of finance, and capital structure

The public-private partnership financial structure is decidedly intricate. However, public-private partnership projects mostly comprise of two sources of finance. These are the equity financing and private debt financing (Trafford and Proctor 117). In the proposed housing project, it would be imperative for the partners to source their finance through debt financing.

The private partner is supposed to assume the full project’s debt financing cost. Debt financing would provide an appropriate incentive for the private investors to make sure that the risk of cost escalation linked to the debt is well addressed and operations are in accordance with project expectations.

Key risks and their corresponding mitigation measures

Every project is susceptible to risks and thus it is imperative that the parties implementing the project identify the possible risks and come up with measures to mitigate them in time. The risks that are likely to affect a public housing project implemented through public-private partnership in China include the political risks, high revenue or demand risks, land risks, and currency risk (Trafford and Proctor 118-124).

Public-private partnership projects are vulnerable to political interference from government agencies seeking to satisfy their political ambitions. Besides, it might be hard for the parties to acquire land for construction of houses, thus making it hard for them to go on with the project.

A public housing project would require a lot of time to complete. Consequently, along the way, the parties may realize that the initial budget is not enough to complete the target project. Changes in currency value and inflation may lead to the project requiring extra funding above the initial budget (Yongjian et al. 491-496). Therefore, to overcome all these risks, the parties to the partnership ought to come up with mitigation measures.

In a bid to mitigate the effects of political risks, the Chinese government ought to assign the private partner the responsibility of running the project. In this case, the government would have no influence over how the project is managed thus overcoming its political influence.

On the other hand, it would be advisable to put into consideration the unforeseeable costs when establishing a budget for a public-private partnership project (Trafford and Proctor 125-128). The budget ought to be flexible to cater for all miscellaneous expenditures that might arise during the project implementation course.

The risk of currency fluctuation is hard to mitigate. Nevertheless, by allocating extra fund to the public-private partnership project, it would be possible for the Chinese government and private investors to address the risk.

The extra fund would help in catering for any extra money required for the project due to inflation. All these measures would facilitate in ensuring that the parties to the housing project are armed with the requisite measures to deal with any emerging risk, thus ensuring that the project runs as expected.

Other key considerations of the concession

Despite coming up with measures to deal with potential risks during project implementation, it would be hard for any public-private partnership project to succeed if the parties to the project do not reach a consensus regarding asset ownership, land acquisition, and government incentives among others (Yongjian et al. 481-489). The public housing project partnership in China ought to be a joint venture.

This would make sure that the government and the private investors co-own the project thus ensuring that no one claims absolute ownership of the project. On land acquisition, one of the parties may opt to acquire land while the other meets the cost associated with the supply of construction materials. For the partners to minimize the cost of building houses in China, they ought to negotiate on the appropriate government incentives.

Conclusion

Today, most countries are opting to use public-private partnership in offering most of the essential public facilities like housing. For successful partnership, the partners ought to consider numerous principles. They should establish a due diligence process. The process would outline the project implementation strategies.

In addition, the partners would sign a contract that would outline the role of every stakeholder in the project thus avoiding chances of conflicts between the parties. The factors that would contribute to the success of a partnership in the housing project in China include the compatibility in skills among the partners, efficiency in the project approval process, and accountability in resource management.

Moreover, to succeed in the housing project, the partnership ought to be a joint venture. This form of partnership would ensure that both parties commit themselves to the project. The Chinese government ought to assume the management roles and leave the private investor with the role of implementing the project. Debt financing would be the most appropriate method of sourcing funds for the project.

The risks that are likely to affect a public housing project implemented through public-private partnership in China include the political risks, high revenue or demand risks, land risks, and currency risk. Proper preparation prior to project implementation would help in mitigating these risks.

Works Cited

Chowdhury, Abu Naser, Chen Po-Han, and Robert Tiong. “Analyzing the structure of public-private partnership projects using network theory.” Construction Management and Economics 29.3 (2011): 247-260. Print.

Jacobson, Carol, and Sang Choi. “Success factors: Public works and public-private partnerships.” International Journal of Public Sector Management 21.6 (2008): 637 – 657. Print.

Jefferies, Marcus. “Critical success factors of public private sector partnerships: A case study of the Sydney SuperDome.” Engineering, Construction and Architectural Management 13.5 (2006): 451-462. Print.

Trafford, Sue, and Tony Proctor. “Successful joint partnerships: Public-private partnerships.” International Journal of Public Sector Management 19.2 (2006): 117-129. Print.

Yongjian, Ke, Wang ShouQing, Albert Chan, and Esther Cheung. “Understanding the risk in China’s PPP projects: ranking of their probability and consequence,” Engineering, Construction and Architectural Management 18.5 (2011): 481-496. Print.

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