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This guide of public sector accounting is focused on the advantages and disadvantages of Public-Private Partnerships (PPPs), after studying this guide or chapter of public sector accounting you should have achieved the following learning objectives:
- The advantages and disadvantages of Public private partnerships (PPP)
- The concept of Public-Private Partnerships (PPP)
- The role and responsibilities of parties to Public-Private Partnerships (PPP)
- Public-Private Partnerships (PPP) Process
- Public-Private Partnerships (PPP) contract Management
PRIVATE PUBLIC PARTNERSHIP ADVANTAGES AND DISADVANTAGES
One major responsibility of government in a country is to provide infrastructure (both economic, social, and community infrastructure) and services in order to provide a basis for economic growth and development.
However, fiscal constraints experienced by the various governments have resulted in the development of a new approach to providing and financing public infrastructure and services.
This new approach involves combining private sector expertise and financing in a form of partnership in the provision of this infrastructure and services.
This public sector accounting guide or topic or chapter is going to deal with the advantages and disadvantages of Public-Private Partnerships (PPPs) and parastatal organizations. And in this guide you are going to read about:
- Accounting for PPP agreement
- IPSAS 32 – Service concession arrangements: Grantor,
- Parastatal Organisation and
- Provision of Financial Administrative Act 2003, (Act 654) on public corporations.
Here are the Advantages and Disadvantages of Public private partnerships
Table of Contents
PUBLIC PRIVATE PARTNERSHIP ADVANTAGES
Here are the advantages of public private partnerships
- It attracts private capital investment (often to either supplement public resources or release them for other public needs).
- investment decisions under Public Private Partnerships contracts tend to be based on a long term view rather than short-time concerns hence focus is on long term development.
- risk and work are transferred to the party which is best able to manage it at the least cost achieving the best value for money.
- projects go through a competitive pricing process, meaning that the cost of public services is benchmarked against mark standards.
- the timing and costing tend to be more certain and therefore deliver better value for money. where public private partnerships or PPPs are not completed to budget, the private sector usually bears the costs.
- the cross transfer of public and private sector skills, knowledge and expertise can create innovation and efficiency.
- the private sector often brings with it greater construction capacity, labour capacity and resources than would be available to the public sector.
- payment to the private sector in public private partnership projects is usually linked to how they perform, creating incentives and efficiency.
- Public private partnerships projects are not subject to political interference and deferred payments for the government.
- Public private partnerships serve as a catalyst to provoke the larger discussion of and commitment to a sector reform agenda, of which public private partnerships or PPP are only one component.
PUBLIC PRIVATE PARTNERSHIP DISADVANTAGES
Here are the disadvantages of public private partnerships
- The number of parties involved and the long term nature of their relationships often result in complicated contracts and complex negotiations, and therefore high transaction and legal costs
- there is a risk that the private sector party will become insolvent or make large profits during the course of the projects, this can cause political problems for the public entity.
- the long term nature of public private partnerships or PPP project means that debt is incurred long before the benefits appear.
- Sometimes a public sector entity could borrow more cheaply alone than it could via the private sector. this has to be balanced against the fact that capital expenditure which at certain stages of the economic cycle will score against the various statistical measures of government borrowing.
THE CONCEPT AND OBJECTIVES OF PUBLIC PRIVATE PARTNERSHIPS – PPP
Here we are going to see the definition and ideas or the main general reasons behind public private partnerships or PPP. Now let steps into the concepts and objectives of public-private partnerships which include the definition or the meaning of public private partnerships, objectives, and many more.
1.1 MEANING OF PUBLIC-PRIVATE PARTNERSHIPS – PPP
What do you mean by public private partnership?
Public-private partnerships refer to all forms of the contractual arrangement between a public sector entity (known as contracting party) and a private sector party with the objective of providing public infrastructure and services to the public which would have traditionally been provided by the public sector, with the private sector party performing part or all of a governments service delivery functions, and assumes part or whole of the associated risks and reward over a significant period of time.
The risks assumed or share would involve financial injection and bring onboard expertise in carrying out the public private partnerships or PPP project.
The reward, on the other hand, would involve the private sector party receiving financial remunerations in accordance with predefined performance criteria and maybe in the form of receiving service tariffs or specified amount from the government budget in a form of periodic or contingent payment.
All PPP results in a contractual arrangement know as public private partnerships or PPP Agreements.
A PPP agreement is a formalized agreement between a public sector entity and the private sector party for the implementation of a PPP arrangement.
1.2 OBJECTIVES OF PUBLIC PRIVATE PARTNERSHIPS – PPP
What are the objectives of PPP?
Public-private partnerships (PPP) is carried out to achieve the following objectives:
- To encourage and promote increased private sector participation in the economic development of a country. Like Ghana
- To increase the availability of public infrastructure and services, and improve services quality and efficiency of projects.
- To increase the availability of financial resources, allowing the development of additional projects without recourse to public budgets
- To increase the efficiency of a project or reduce its costs, incorporating specific private sector technologies, know-how, management techniques, or innovative financial schemes;
- To allow funding structures that are more reliant on users and those directly benefiting from the project, thereby avoiding distortions generated by taxpayer funding through public budgets.
1.2 STAKEHOLDERS IN A PUBLIC PRIVATE PARTNERSHIPS – PPP ARRANGEMENT
The typical public private partnerships or PPP arrangement would have the following players
- Contracting Entity/Public Authority
This is the public entity that is ultimately responsible for the project and for the decision to carry out and design the public private partnerships or PPP scheme.
It includes government MDAs and MMDAs A, sub-vented agencies, government institutions, state-owned enterprises to the extent that they utilized public funds, public universities, schools colleges and hospitals, social intervention entities and any entity in which government or government entity have a controlling interest.
The contracting entity has the following responsibility;
- During the preparation of the scheme, the contracting entity is responsible for preparing the tender documents, managing the tender process or involve in direct negotiation, assessing the proposals submitted by the different bidders, selecting one proposal and formalizing the contractual framework.
- During the lifetime of the project, the contracting entity is responsible for the enforcement of the terms of the contract.
- In concessions, where there is a transfer of assets back to the public sector at the end of the contractual period, the contracting entity is responsible for arranging alternative management or operation of the services for the moment the transfer takes place.
- Public Private Partnerships or PPP Contractor / Private Party
This is the entity responsible for the development of the project in accordance with the terms specified by the contracting entity.
Is the main party responsible for delivering the services specified in the public private partnerships or PPP contractual framework, which can be provided by the public private partnerships or PPP contractor directly or by other third parties selected by the public private partnerships or PPP contractor?
The project public private partnerships or PPP contractor can be an existing company or be a special purpose company set up especially for the development of the project.
The former is often the case when the public private partnerships or PPP is structured as a project finance scheme ( that is a structure whereby the only guarantee for debt financing is the future cash flow expected from the project, without encumbering other assets of project sponsors).
- Public Private Partnerships Or PPP Operator
This is an entity that directly carries out the task under the public private partnerships or PPP project scheme. The project public private partnerships or PPP contractor can directly operate the infrastructure or where specific know-how is required (market or specialized technical knowledge), then an independent company can be brought on board to carry out the operation on behalf of the project public private partnerships or PPP contractor.
In such a case, the relationship between the public private partnerships or PPP operators in terms of capacity, level of services, or pricing policy must be clearly regulated in a specific contract.
- Public Private Partnerships Or PPP Financing Agents
Public private partnerships or PPP project scheme is usually financed from a private financing scheme.
Normally, the public private partnerships or PPP project requires an initial investment, which is later recovered through an income stream produced by the project returns. Therefore a finance scheme must be set up in order to compensate the cash flows over the lifetime of the project.
Basic sources of finance in a public private partnership or PPP project scheme may include the capital provided by the project public private partnerships or PPP contractor (equity), loans provided by bank (debt), and securities or bonds sold on capital markets as an investment product.