Why Are Governments And The Private Sector Cooperating

Published Date: 02 Nov 2017

Introduction:

Public-private partnerships (PPPs) have existed since the time of Roman Empire [1] . They are now growing with rapid rate in many public projects, including large-scale ones. Their popularity makes them become one of governing models for delivery of public goods and services. In many countries, especially developing ones, governments have PPPs to develop variety range of public goods and services such as utility networks, transportation, tourism, low cost housing, health, education, emergency response, etc. It is said that PPPs, unlike conventional contractual relationship, require integrated responsibilities, in which both government and private partner have their own resources to the share and own objectives to follow. In other words, the success of PPPs depends on the corporation of both sides, instead of having one partner play a role of a "smart buyer" [2] . There are many reasons for the creation of PPPs, which stem from gaining benefits for both sides, in terms of ideology and pragmatism. Ideologically, private sector is supposed to be better than public sectors in manufacturing and delivering goods and services. Pragmatically, public sector could get access to resources of private sector such as expertise, capital, technique, management, etc. (Savas, 2000) [3] while private bodies have chances to get stable long-term with governments. PPPs exist in many forms such as contracts, joint ventures, delegation, voluntary, etc. It is necessary for public managers to understand what their organization can offer, as well as what they could gain in return, and the same for private partners, from proposed PPPs, in order to remain a success for PPPs.

1. Definition

In some countries, governments have PPPs to encourage private organizations compete with public agencies, hoping that the competition can boost both sectors. PPPs are considered as an effective tool in state-owned enterprise privatization process. Savas brings a broad definition about PPPs as "any arrangement between government and the private
 sector in which partially or traditionally 
public activities are performed by the private
 sector" (2000) [4] . Whist, John Forrer and his co-authors define PPPs as ongoing agreements between private sector and government managers in which "the private organization participates in the decision-making and production of a public good or service that has traditionally been provided by the public sector and in which the private sector shares the risk of that production" [5] . According to the definition, Forrer implicitly distinguish PPPs with conventional contractual relationship. While in the traditional contracting, government agency plays the role of purchaser who issues RFP that dictates its desired services and products and specific requirements to allow private vendors bid, PPPs require interaction between government and private sectors, in which both sides have to define the problems, negotiate contractual terms, determine how to produce and deliver goods/ services. In other words, in PPPs, private vendor becomes a full partner, sharing benefits and risks with government agencies. Both public and private sectors are supposed to trust each other, increase accountability in order to obtain successful and effective corporation.

2. Why are Governments and the Private Sector Cooperating?

It seems that reasons for the creations of PPPs almost stem from the drawbacks of governments, especially in developing countries, and from the willing of private firms to get long-term contractual relationship with governments. Firstly, it is believed that the slow response and low quality of government-provided products and services that lead to public dissatisfaction. The demand of higher quality and quantity public products and services put pressure on governments and force them to allow private sector to compete with government agencies. Take Thailand in 1990s for example, the fact that the state-owned Thailand Telephone Organization makes monopoly of telecommunications lead to one million customer waitlist that requires at least 10 years waiting time for each customer to receive response [6] . Recognizing the telecommunication is necessary services, Thailand government allows the competition from private vendors, nowadays, telecoms plays an important role in Thailand economic with ratio of telecoms expenditure to total annual private consumption expenditure increases from 1.89 to 4.16 in 1993 and 2011 respectively [7] . Secondly, due to competition reduces cost while monopoly increase costs, private sector is believed to be more effective than government sector in providing variety of services and goods such as utility networks, transportation, tourism, low cost housing, health, education, emergency response, etc. Governments have increasingly relied on consulting companies to help them manage their contracts instead of improving their research capacity. Besides, smaller scale, less complicated hierarchy system, and simplified paper procedure make private firms more flexible and effective than many government agencies. Thirdly, due to the insufficient budgetary resources issues in both national and local governments, governments need to engage private sectors in order to gain access to their budgetary resources as well as their cost effectiveness of private delivery. In developing countries, "the current and projected revenue base of most municipalities is inadequate to finance capital improvements and associated operating costs" (The United Nations Development Program) [8] . Forth, in the globalization trend, governments are supposed to be quickly response to demands for high technological system and simplified and convenient infrastructure. When this is the case, in order to reach the goal of responding to development trend, governments allow the involvement of private sectors with expertise, capital, know-how, cost effectiveness, etc. Last but not least, private firms are willing to corporate with government agencies for long-term contractual relationship. It could be said that, the two parties are tied together as they both share benefits and risks.

3. What are the Potential Advantages of Public-Private Cooperation?

Public – private cooperation brings advantages for both two parties, and the whole population. Firstly, PPPs, which is considered as effective tool in state-owned enterprise privatization process, helps reduce monopoly, therefore, increase efficiency in service provision, reduce cost, and improve quality of products and services. By working in partnership with private firms, government managers can benefit from down costs because private managers know who to make their employees work more productively than civil system managers. Besides, by issuing RFP that allow vendors to bid, government managers can determine the true cost of products and services delivery, and they can eliminate waste. Secondly, by outsourcing with private vendors, government agencies can save money for employing more public employees or saving investment in facilities if they want to extend services. Thirdly, it is the involvement of private sector that makes public projects more commercial and improves financial insurance for public programs. Last but not least, due to the risk distribution between two sides, government and private sectors are supposed to be more responsible in their decisions as well as improve attached cooperation. In sum, PPPs "contribute to increasing national productivity and economic output, assuring a more efficient allocation of scarce capital resources, accelerating the transition to a market economy, and developing the private sector" [9] .

4. How Do Governments and the Private Sector Cooperate?

PPPs exist in many forms includes contracting with private companies, public-private joint ventures, build-operate-transfer agreements, passive government financing, delegation to private sector, and voluntary public-private cooperation [10] .

4.1. Contracting with Private Companies

Contracting is a ubiquitous method that often used by governments to arrange with private companies so that private companies can provide products and services that meet governments’ specific requirements. There are three main mechanisms of contracting, namely: service contracts, management contracts and lease contracts.

Service contracts: in the mechanism, government agency contracts with a private firm(s) so that the selected private firm(s) will provide specific service(s) in a specific period of time. The selected services are those that public agencies cannot offer as effectively and efficiently as private organizations do. These services often fall in the range of emergency response, waste collection, health care, transportation, drug treatment programs, etc. In the United States, municipal agencies contract out nearly 30 per cent of their services to the private organization [11] that help government saves lots of costs and improve service quality as well.

Management contracts: in the mechanism, governments have private organization take care of a specific public service in specific period of time, even in terms of operation and maintenance. This PPPs form is effective tool for government to transfer operational risks to private firms, in order to improve service efficiency and service quality. In the form, private firms are free to make management decisions, from hiring employees, managing facilities to running the operation. For example, in Brazil, the government has contracted with private organization so the private organization is responsible to manage the public hospital that was constructed by state government.

Lease contracts: in the mechanism, private companies lease facilities are assumed to be responsible for operation, maintenance, upgrade and even replacement of capital assets. The PPPs form is used extensively in both public and commercial areas. For example, state government leases development rights for land to private sector so that private firms could build station [12] .

4.2. Public-Private Joint Ventures:

Public-private joint venture is another PPPs form that often used in countries where privatization policies require government agencies to share stock with private firms. It is also an effective tool government use to privatize state-owned operations. Besides, there are some cases, government firms want to have public-private joint venture because they need private firms help them with problems/ issues that them cannot deal by themselves.

4.3. Build-Operate-Transfer Agreements:

Government use build-operate-transfer agreements when they want to buy or lease completed facilities financed and constructed by private companies after the private companies get their investment back as well as make benefit from their investment. For example, a United State private company provides building, operation, maintenance for a waste-water treatment to a local area. After a period of time, the private company gets their investment recovered and they also get profit. Then, the private company might want to transfer its ownership to local/ municipal government [13] .

4.4. Passive Public Investment:

In the mechanism, government invest in public sector (loans, grants, below market interest rate, etc.) in order to encourage public firms participate in public programs/ projects that are constructed for public benefit such as economics development, subsidy for purchase services, housing for low income people. The advantage of the PPPs for is that, thanks to the state incentives, private companies can reduce cost and risks as well. Besides, government agencies also get benefit because the private sector have comparative advantage in producing and providing products or services. The disadvantage of the mechanism is that both government and private can misuse the incentives. So it is very necessary to have a careful monitor and transparent management system. For example, in India, there is ubiquitous cooperation between government and private sectors in which private housing companies provide low-cost housing to low-income people effectively with support from local regulatory authorities.

4.5. Delegating Responsibility for Services or Infrastructure to the Private Sector:

This mechanism is increasingly used when states want to enhance the participation of private sector into public benefit such as environment, health, security, etc. The PPPs is done through mandatory and regulatory that simply require private sector to involve and follow. For example, private firms are required to invest in facilities and equipment that help protect environment by reducing emission to air. The Clean Air Act, the Resource Conservation and Recovery Act, and many state and local environmental regulations are supposed to protect environment by asking and forcing private firms involve in [14] .

4.6. Voluntary or Informal Public-Private Cooperation:

There is a trend of increasing voluntary activities in which private sector volunteer in public programs, and projects in order to address social issues and find the ways to deal with the issues as well as improve products and services quality. Participants in PPPs include UNICEFF, Agriculture and Development, World Vision, etc.