Public Private Partnership After Global Financial Crisis

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Table of Contents

The principles of PPP, its merits and demerits
Merits
Demerits
Format of PPP for a public health facility
Evaluation of PFI and PPP
Alternative basic procurement routes
Examples of PPPs
Conclusion
References

The principles of PPP, its merits and demerits

One of the principles of PPPs is to have the public sector gain access to private sector resources. The resources are in the form of expertise and finance (Public-private partnerships, 2013). The private sector has more innovative ways of raising a large amount of capital without causing inflationary pressure on the local currency. The private sector has experience in running facilities efficiently and profitably.

The size of capital required is one of the reasons for PPPs. The public sector client has more needs. It becomes unreasonable to put a large number of funds on one project when other projects are lacking. The private sector provides the largest amount of capital by pulling resources from several large organizations. Yescombe (2007, p. 30) explains that a PPP has to be of a bigger size to avoid a situation where procurement costs become a large proportion of the project.

Another principle of PPPs is that projects are expected to be operated for a long period of time. It should be about 25 to 30 years. During this period, the project is designed, built, and operated by the private sector. The private sector is able to pay back loans, interest, equity, and dividends.

A service charge becomes another principle of PPPs. The income streams are also used to operate and maintain the facility.

The PPPs are started on the basis of capital costs not incurred by the public immediately. It enables the public to use the facilities that they could have waited for a much longer time before the public sector could have found revenues and expertise to make the services available. It allows the public to use what the public was unable to afford due to a long list of priorities.

Merits

PPPs allow the public sector to gain access to a high level of expertise and finance that the public sector lacks (Public-private partnerships, 2013).

The strong relationship built enhances problem-solving and innovation capabilities. PPPs are recognized for the sharing of risk and developing solutions together between the public sector and the private sector (Greve and Hodge 2013, p. 2). They are also recognized for the timely completion of projects.

Large debts by the private sector do not have a negative impact on economic growth. Economic growth supported by a large public debt ratio to GDP destabilizes the growth rate (Greiner & Fincke 2009, p. 83). A period of high growth may be followed by a recession. Large public debt has pressure on inflation and affects economic stability.

Demerits

The private sector has experienced some difficulty in raising capital after the global financial crisis. Firms are more cautious about the use of innovative securities. Shendy, Martin & Mousley (2013, p. 7) explain that interest rates were pushed further after the global financial crisis by the withdrawal of large insurance companies from the financial market. As a result, the risk posed by holding financial assets has increased. The private sector accesses the funds at a much higher rate of interest than the public sector client. It may be less costly when the public sector client provides finance and the private sector provides expertise.

The private sector may require a speedy completion of the project which may compromise the design of the facility and quality of service.

The private sector is driven by profit motive which may cause financial manipulation. The private sector may inflate the costs of the facility to increase its returns. The public may be charged a higher service charge which may reduce the accessibility of services (Public-private partnerships, 2013).

PPPs are being reviewed in Portugal and Hungary because the unitary charges constitute a large proportion of the government expenditure. The governments entered into PPP agreements before the financial crisis. They did not accurately evaluate their impact on future budgets (Shendy, Martin & Mousley 2013, p. 10). Many PPPs may limit future cash flow.

Format of PPP for a public health facility

Build-Operate-Transfer (BOT) appears to provide the best option for healthcare facilities. Immediately after the health facility has been built, the public sector may not have enough medical practitioners to work in the facility. The private sector may use its experience to access more human resources to run the facility. The public sector may be able to run the facility after 25 to 30 years when the service term comes to an end.

If the project uses the Build-Transfer (BT) format, it may lack experience in running a new large healthcare facility profitably. New equipment and terms of service may also need the expertise of the private sector. In the BT format, the government may lack funds to operate the facility. BOT spreads the operations and maintenance costs over a long period of time.

Build-Transfer-Operate (BTO) may have an impact similar to the Build-Operate-Transfer. The BTO may be used strategically to control the level of service charge if the government makes unitary charges that subsidize user-fee. The private sector acts as a management contract. The use of BOT and BTO will rely on the one which lowers costs without reducing the quality of service. Quality in BOT is likely to be higher because of the profit motive of the SPVs. Service charges are also likely to be higher in BOT than BTO.

Build-Lease-Transfer (BLT) makes the public sector incur the cost of capital much earlier than in BOT and BTO. In BTO and BOT, the cost is transferred to many people and for a longer period. It reduces the impact of capital cost.

Build-Own-Operate-Transfer and Build-Own-Operate may make the health services available but may limit accessibility due to the possibility of a higher service charge. They are closer to a private sector business venture than to a PPP.

Evaluation of PFI and PPP

PFI focuses on service delivery which increases the chances of meeting project objectives. It reduces the risk posed by basic procurement routes. The three common risks include higher asset costs, lower-quality service, and delays in providing the facility. PFI charges the public for the service and an additional unitary charge from the government. The government and individuals share costs that increase affordability. There is a quality service specification that increases performance. The public sector has the ability to reduce payment when the quality does not match the specification.

There is a reduced risk on the side of the public. Asset depreciation costs and interest on loans are incorporated on the side of the private sector. PFI provides a viable route in offering health care services. However, at the end of the term, it may cost the public more than traditional procurement routes (Greve & Hodge 2013, p. 214). The SPVs acquire loans at a higher interest rate than Treasury bonds. Moreover, the SPVs may seek high profitability levels. When the government uses other basic routes, it may operate the facility as a non-profit making organization.

PPPs lack the service focus of PFIs. The public may incur costs of an asset whose useful life may end at the time of the service period. However, PPPs may provide the public sector with the benefit of ownership. The public sector may run the facility to increase accessibility after asset transfer using any suitable program. Service charges may be lowered after the transfer of assets.

In both cases, PPPs and PFIs provide the public with an opportunity to access services that the public sector was unable to afford. The cost of the project is spread over many years increasing the affordability of service.

PPPs and PFI allow the government to divert resources on other projects. When resources are spread over many projects, a shortage of funds may occur. It may leave projects incomplete which is more costly than the opportunity cost of unavailable services. Levy (2011, p. 57) explains that many of the companies involved in PPPs have multiple projects in different countries. Having multiple projects may increase the cost of raising capital and may affect project quality.

Healthcare costs are expensive which match those in the UK such that a hip replacement surgery averages £14,000 (Pallot 2010, para. 28). The high cost of medical services may make the PPP viable despite the high cost of raising capital. If the mandatory healthcare insurance policy is implemented, there will be reduced cash flow risk for the PPP.

There is a need for more hospitals in Dubai because of the high ratio between the numbers of hospitals/clinics and the population. Clinics and hospitals are estimated to be about 20 in Dubai. It gives a ratio of 1:78,000 clinics/hospitals to patients (Healthcare in Dubai, 2013). There is an emerging high demand for medical services in Dubai. It is attributed to a high population growth rate and emerging unhealthy lifestyles (Oxford Business Group 2008, p. 180).

There are delays and cancellations of projects that involve PPPs after the 2008 global financial crisis. The delays in raising funds are caused by the withdrawal of large financial institutions from large debts. Large banks that provided adequate finance have become more risk-averse. It causes SPVs to seek many medium-sized companies to generate funds through equity (International Trade Forum 2009, para. 8). The interest charged is much higher sometimes resulting in the cancellation of projects.

Shendy, Martin & Mousley (2013, p. 13) explain that a PPP framework that evaluates a value for money is necessary for its successful completion. The high cost of debt after the global financial crisis has made many PPPs unviable as they provide an expensive option for the public sector client.

Governments are working together with the private sector to raise funds in PPPs to make them viable. Co-funding is emerging as a new strategy in making PPPs viable. In the UK, the government has established a fund from which PPPs can borrow as a measure of last resort. The UK government has lent £2 billion to the private sector (Clements 2010, p. 17). Other countries that are using co-funding include India, France, and Colombia.

The public is reshaping its collaboration with the private sector through non-profit organizations as another innovative strategy. Greve & Hodge (2013, p. 214) discuss that the public sector is rethinking cooperating with the non-profit sector in the form of PPPs.

Walshe & Smith (2011, p. 308) discuss that PPPs should provide a legal framework to allow changes in the future. The Karolinska Solna (Stockholm) Hospital Project is an example that has undergone functional changes to increase service accessibility. The project has adopted an approach known as population capitation. The performance of the facility will be based on the number of patients among other factors. Unitary payment will also be based on the number of patients served among other factors. The Karolinska Solna Scheme is considered the largest healthcare project in Europe valued at 1.42 billion Euros using 2007 prices (Walshe & Smith 2011, p. 308).

Alternative basic procurement routes

Two of the basic procurement routes that match the Build-Transfer found in PPPs are the traditional route and the design-build route. The risk involved with these procurement routes is accommodated by the public sector. The private sector assumes less risk. The quality of structure may be reduced because maintenance and operations are transferred to the public sector client. The overall cost of the project to the public may be lower than in PPPs when the government raises capital instead of the private sector. Service charges may also be lower than in PPPs.

The government may also decide to make the facility a free-service facility under BT or design-build route. However, setting up free-service facilities is discouraged in health economics. They increase unnecessary out-patient visits which may create congestion. Changes in 2001 have made it necessary for foreigners working in Dubai to pay for their health care costs. Foreigners working in Dubai used to make up 75% of the number of patients in public hospitals (Healthcare in Dubai 2013, para. 9). There was congestion in Dubai hospitals. Only life-threatening conditions may be treated free of charge after changes made in 2004. Subsidies may cover room rates for those admitted to hospitals. BT is not completely a PPP scheme.

Management contracting may also be used to complete the healthcare project. The period of the contract may be extended to the operation and maintenance phase of the project for the route to match BOT or BTO. In management contracting, the healthcare facility would be built according to the expertise of the private sector. Funds are raised by the government. Management contracting is able to pull together a group of organizations similar to an SPV. Management contractors are able to provide the experience of the private sector in managing the factors of production.

PPPs are more beneficial than management contracting because PPPs raise capital on behalf of the public sector client. PPPs will operate and maintain the facility. PPPs will also share the risk of completing the project according to objectives in a timely manner. The disadvantage of PPPs over management contracts is the profit motive of the private sector in PPPs. They may not be interested in controlling costs because it is passed over to the public sector (Public-private partnerships, 2013).

Examples of PPPs

The government entered into a PPP worth US$1.8 billion with the Tatweer Group in 2002 (IBP USA 2007, p. 79). It is a scheme based in the Dubai Healthcare City (DHC) formed by specialists from different areas in medical training and research. They provide services as well as training students. It provides medical learning resources for students. It includes a post-graduate learning facility. It is affiliated with the Harvard Medical School for more experience. There are links to allow students to access the Harvard Medical School online library (Oxford Business Group 2008, p. 182).

In India, the use of PPPs in healthcare has been successful in the BT format. When the format involves the private sector operating and maintaining the health care facility for a service charge, there has been strong resistance from the public. Politicians, healthcare officers, and the general public consider such schemes as privatization of public health care.

In the Municipal Corporation of Delhi (MCD) and Arpana Swasthya Kendra case, patients agree that the PPP provides high-quality services that the usual public sector health care services. However, they dislike the user fee. Public health officers are also resistant to the requirement of reporting to the private sector management (Raman & Bjorkman 2009, p. 56). Poverty levels in India may not match those in Dubai. The success of PPP in Dubai may be based on consumers who are already used to paying service charges. Dubai is mainly formed of expatriates who may be happy to receive health care at a lower cost.

Another PPP scheme in India is the Karnataka Integrated Telemedicine and Tele-Health Project. The scheme involves specialist doctors working through information technology to give consultations on patients situated in further areas. They use the assistance of local doctors and digitized information. Only patients who need surgery are transferred to the specialist hospital. The objective was to reduce patient traveling costs. The project was criticized for its high cost of acquiring assets which makes it unviable if it were to be replicated in many parts of the country (Raman & Bjorkman 2009, p. 60).

Another example of PPP can be found in the construction of Abu Dhabis 327-km Mafraq-Ghweifat highway. The project was bid by three consortium organizations. The Irtibaat Consortium was composed of Macquarie Capital Group and its equity partners, Abu Dhabi Commercial Bank and Construtora Norberto Odebretch, alongside contractors NV Besix and Al Jaber Transport and General Contracting (Oxford Business Group 2010, p. 119). The other bidders were the Mafraq Motorway Group, and the MTD-CSCEC Consortium all of which consisted of several organizations each adding special resources. The main point, in this case, is the large number of organizations that form a consortium.

The road project was supposed to take 25 years. The Abu Dhabi government is supposed to make payments annually to the consortium that built the highway. The performance indicators used by the government are quality construction, and reduction in the number of road accidents. The project was expected to cost US$2.72 billion (DH 10 billion) (Oxford Business Group 2010, p. 119).

Conclusion

The increasing demand for healthcare services needs to be addressed with additional healthcare facilities. Dubai may not experience public resistance to user-fee-based services because patients, apart from UAE nationals, are already used to incurring the cost of the healthcare services. The government is subsidizing Medicare costs which may make it easier to incorporate unitary charges to subsidize service charges in the PPP facility. There are delays in projects that are financed by PFIs and PPPs after the global financial crisis. Firms and individuals are more risk-averse to holding financial assets. They demand higher interest rates for securities that are not guaranteed by the government. Delay in raising capital causes delays in building facilities and offering services. Co-funding may be used to increase the viability of the project.

References

Clements, B 2010, The impact of the global financial crisis on public-private partnerships, OECD, Paris. Web.

Greiner, A & Fincke, B 2009, Public debt and economic growth, Springer, Dordrecht.

Greve, C & Hodge, G 2013, Rethinking public-private partnerships: strategies for turbulent times, Routlegde, New York.

Healthcare in Dubai 2013. Web.

IBP USA 2007, Doing business and investing in United Arab Emirates Guide, International Business Publications, Washington, DC.

International Trade Forum 2009, The impact of the global financial crisis on public-private partnerships. Web.

Levy, S 2011, Public-private partnerships: case studies on infrastructure development, ASCE Press, Reston.

Oxford Business Group 2010, The report: Abu Dhabi 2010, Oxford Business Group, Istanbul.

Oxford Business Group 2008, The report: Dubai 2008, Oxford Business Group, Istanbul.

Pallot, P 2010, Expat guide to the UAE: health care, media release. Web.

Public-private partnerships, 2013, Unit 04, lecture notes.

Raman, A & Bjorkman, J 2009, Public-private partnerships in healthcare in India: lessons for developing countries, Routledge, New York.

Shendy, R, Martin, H & Mousley, P 2013, An operational framework for managing fiscal commitments from public-private partnerships: the case of Ghana, World Bank, Washington, DC.

Walshe, K & Smith, J 2011, Healthcare management (2^nd ed.), McGrawa-Hill, Berkshire.

Yescombe, E 2007, Public-private partnerships: principles of policy and finance, Butterworth-Heinemann, Oxford.

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