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Structuring Effective PPP Units

Structuring Effective PPP Units. Stephan Schmitt-Degenhardt Bratislava Regional Center Budapest, 7 th June 2010. Entry point: “Successful PPP units address areas where the government has identified weaknesses or low/no capacities”. Ultimatum Game. Link PPP – Ultimatum Game

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Structuring Effective PPP Units

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  1. Structuring Effective PPP Units • Stephan Schmitt-Degenhardt • Bratislava Regional Center • Budapest, 7th June 2010

  2. Entry point:“Successful PPP units address areas where the government has identified weaknesses or low/no capacities”

  3. Ultimatum Game • Link PPP – Ultimatum Game • The splitting of some potential gains between Government (offerer) and private consortium (receiver). • In a repeated game the optimal strategy is fairness/cooperation • General experience: • The average offer is between 40% and 50%! • Approximately half of the receivers turn down offers under 30%! • Conclusion: PPP tenders and contracts need to be designed with perceived fair splits in mind.

  4. Prerequisites for successful partnerships Expected answers according to intuition: • “Trust” and potentially derivatives such as transparency, credibility, honesty, etc. • “Flexibility” • Rules of the game

  5. “Most people can be trusted” Source: World Values Survey, *1999/2000 wave , **2005/08 wave, (i)/(d) significant increase/decrease between last two waves

  6. “Do you think most people try to take advantage of you?” Source: World Values Survey 2005/8 (comparison with 1999 survey not possible) 1 = Would take advantage, 10 = Try to be fair

  7. Prerequisites for successful partnerships Conclusions: • Trust is highly culture specific (extent and specificity) • Accordingly, PPP Units should contribute to trust building “Widespread distrust in a society … imposes a kind of tax on all forms of economic activity; a tax that high trust societies do not have to pay.” Francis Fukuyama, US Political Economist

  8. Flexibility of agreements PPPs in transition economies face many uncertainties: • Developing legal and regulative frameworks • Developing formal and informal institutions • Unpredictable development patterns • Developing social/environmental concerns (e.g. MDG) • Changeable tariff structures • Fluctuating exchange rate (rather: risk) and thus require exceptional flexibility. Flexibility requires: • Flexible contracts • Trust • Low uncertainty avoidance

  9. Uncertainty avoidance index Source: Hofsteede

  10. Consequence in terms of principle – agent problem Principle-agent problem: Information asymmetry (obtaining information costly for principle) • Behavior based contracts (e.g. Management contracts) • Outcome based contracts (e.g. Concessions) But in SEE/CEE basic assumption of risk averse agent and risk neutral principal (often) wrong Conclusion: Based on differences in risk aversion, outcome based contracts should be preferable

  11. Corruption Perception • Therefore: Good arbitration agreements

  12. Governance Indicators Source: World Bank

  13. Governance and PPP units Conclusions: • PPP units in SEE/CEE need to specifically address weak governance issues (regulatory environment, corruption, quality of public service, civil society involvement, potentially Human Development) • “Best Practices” are mainly derived from countries with significantly higher governance indicators. A 1:1 transfer might not be advisable.

  14. Efficiencies of PPPs Allocative efficiency Decision on the project/service; Cost-benefit calculation Technical efficiency Decision on the means to obtain project/service; Private sector involvement/PPP; Public Sector Comparator X-efficiency Dominant objective of PPP!

  15. Government’s reasons for pursuing PPPs • Limited municipal revenues with tendentially discretionary allocation of additional central/regional resources • Most countries’ municipalities can only get indebted up to 20-30% above budget • Limited experience with cost-benefit analysis • PPP as financing and not efficiency instrument But: No resources to finance PPP project preparation Conclusion: Focus on finance and Public Sector Comparator

  16. Implemen- tation Derivative functions Transparency Accountability Trust building • Stakeholder • involvement • Regulatory advice • Project efficiency • and • Capacity building / technical assistance with goal that gov’t can increasingly take over functions Advise on regulatory env. Award & contracting Facilitate civil society involv. Tendering process Facilitate anti-corruption PPPproject design Ensure application of PSC Calculation of PSC Advise on financing Decision on PPP Ensure fairness Ensure right risk distribution Feasibility Study Sector Diagnostic Engage in trust building

  17. Critical issues • Decision power of unit / power of control • Independence of unit / institutional set-up • Scope of unit’s responsibility • Evaluation / success factors of unit

  18. Decision power The more decision power the • higher the potential impact • higher the responsibility • more opposed by procuring government organizations • more dangerous position in environments of weak law enforcement decides, “green-lights” may advise • The effective decision power • depends on the independence of the unit (low decision power unit attached to high decision power institution can yield similar results as high decision power independent unit) • can be limited to certain steps of the procurement process • might be substituted by right to “blow the whistle”/to publish

  19. Independence The more independent the • lower the potential interference • lower the potential conflicting interests (if autom. finance) • less protected and connected integrated department fully independent with automatic finance • The impact/importance of independence • depends on the decision power (independence with low decision power is rather meaningless) • is questionable if unit is dependent upon financing through voluntary clients

  20. Scope The higher the scope the • more can effectiveness and efficiency be ensured • more conflicting interests can occur • more the unit is exposed to outside pressure few selected steps complete procurement process • The impact/importance of scope co-determines • the ownership feeling and capacity building chances at the level of the procuring government organization • the unit’s clients and the opportunity to address other stakeholders (esp. civil society, businesses) beyond the procuring government

  21. Success factors The success factors influence the overall PPP programme regarding • its orientation • its efficiency • its scope • The impact/importance of the success factors • depend upon the actual influence of the unit on the overall PPP programme and thus the unit’s power, independence and scope • might be very difficult to measure (attribution gap, lags, etc.)

  22. Comparison of PPP units globally • None of the established PPP units actively deals with transparency, accountability, trust building, stakeholder involvement • Their scope and power is usually rather limited • Most are established as dependent governmental units

  23. Food for thought PPP units in SEE/CEE • should actively engage in issues of transparency, accountability, trust building and stakeholder involvement • might have limited decision power but should be obliged and protected to “blow the whistle” • should nevertheless be institutionally linked to powerful ministries • might be engaged in all public procurement processes (cf. Korea) but at least in most core processes (except negotiation) & mediation during implementation • Might be evaluated according to efficiency cum sustainability criteria

  24. Sources and further information • CRGP: “Public-Private Partnership Agencies: A Global Perspective”, 2008 • OECD: “Dedicated Public-Private Partnership Units - A Survey of Institutional and Governance Structures”, 2010 • PPIAF: “GridLines: Designing and using public-private partnership units in infrastructure - Lessons from case studies around the world”, 2007 • UNECE: “Guidebook on Promoting Good Governance in Public-Private Partnerships”, 2008 • UNDP: “Toolkit on Pro-Poor Municipal PPP”, 2006 • UNDP: “Review of the national policy, legislative and institutional environment necessary for the establishment of municipal public private partnerships (PPPs) for public service delivery and local development in the Europe and CIS region”, 2006 • World Bank: “Public-Private Partnership Units: What Are They, and What Do They Do?”, 2006 • World Bank: “International Experience in Establishing and Operating PPP Units”, 2007 • World Bank/PPIAF: “Public-Private Partnership Units: Lessons for their Design and Use in Infrastructure”, 2007

  25. Thank you!

  26. Definition of PPP units World Bank: “Any organisation designed to promote and/or improve public-private partnerships that has a lasting mandate to manage multiple public-private partnerships transactions in response to government failures (poor procurement incentives, lack of co-ordination, lack of skills, high transaction costs, lack of information, etc.).“ It may control the total number of public-private partnership projects and ensure that proposed projects fulfil specific quality criteria (e.g. affordability, value for money and appropriate risk transfer). A dedicated unit’s possible functions are policy and strategy, project identification, project analysis, transaction management, contract management, monitoring and enforcement. Asian Development Bank: “A point of co-ordination, quality control, accountability and information on public-private partnerships for one or more sectors.” These units are created as a new agency or within a ministry such as the finance ministry, which is seen to be at arm’s length from the sector utilising public-private partnerships as a service delivery mechanism.

  27. Pros and cons of PPP units

  28. Approach to PPP Unit development

  29. Government failures

  30. Presidential, semi-presidential and parliamentary systems

  31. Evolution of PPP unit development

  32. PPP units globally Asia/Pacific: Australia, Bangladesh, China, Fiji, Japan, India, Indonesia, Israel, Japan, Pakistan, Papua New Guinea, Philippines, Kazakhstan, Rep. of Korea, Singapore, Sri Lanka Africa: Egypt, Malawi, Mauritius, Nigeria, South Africa, Turkey Europe: Austria, Belgium, Croatia, Czech Rep., Denmark, Estonia, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Moldova, Netherlands, Poland, Portugal, Russia, Slovakia, Slovenia, Spain, Switzerland, UK Americas: Brazil, Canada, Chile, Costa Rica, Jamaica, Peru, Puerto Rico, USA

  33. Functions of benchmark PPP units

  34. Functions of EE/CIS PPP units

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