A PPP unit is the response to an identified institutional problem encountered by a government in managing its PPP program.25 The government failures (or nonmarket failures) may include poor procurement incentives, lack of coordination among government agencies, lack of expertise or sufficient information, and high transaction costs in proceeding with PPP deals.26 Given that governments face a diverse range of these failures in dealing with their PPPs, the PPP units fulfill different functions such as these identified by the World Bank:
Policy Formulation and Coordination. A PPP unit may act as a consolidator of information and policy regarding PPPs, overcoming the traditional siloed structure of government agencies. While this function has a wider applicability at a central level, it is still feasible in a specific department sector or ministry with numerous offices involved in the PPP process. For example, the UK Treasury's PPP Policy Team-part of Infrastructure UK-is responsible for formulating the national PPP policy guidelines. In Canada, Partnerships British Columbia, the PPP unit for that province establishes policies and best practices for PPP management.
A PPP unit may coordinate the stakeholders involved in the PPP program at different levels. In case there are multiple departments or ministry-led PPP units, the central PPP unit may serve primarily to coordinate an overall national policy framework. For example, Ireland's Central PPP unit chairs the Inter-departmental Group on PPPs, which brings together the PPP units from various ministries and representatives of other interested agencies. The coordination may also happen across levels of government, especially in a federal structure. The National Australian PPP forum, created in 2004, is a national coordination and cooperation mechanism among the federal, state and local governments on PPPs.
In addition, the PPP unit may coordinate not only with government agencies but also with other stakeholders. For example, Ireland's Central PPP unit coordinates the Public/Private Informational Advisory Group, formed by representatives of employers' organizations, unions, engineers' organizations and public sector.
Quality Control. PPP units may respond to poor PPP procurement incentives by acting as the first reviewer of the potential PPP project proposals. This may occur when agencies or ministries promote PPP projects without fully taking into consideration the long term fiscal impact on the government's budget. For example, South Africa's PPP Unit was created to prevent ministries from pursuing PPP projects that allowed them to avoid the national budgetary limits.27 In addition, a PPP unit may verify whether the proposed project fulfills all the desired criteria set beforehand. Portugal's central PPP unit, Parpública SA, conducts a technical assessment of proposed PPP projects before the procurement phase and provides its recommendation to the Ministry of Finance.28
Technical Assistance. One of the recurring problems in PPPs is the lack of adequate and necessary skill in the public sector to deal with PPP deals. This proficiency is not limited to financing issues such as the assessment of the Value for Money and the discount rate of the project, which may be contracted out to private consultants. More important is to understand the place of the PPP project in the government's long term plan, its fiscal consequences, the allocation of risk between the public and the private sector and what government reforms would be required for a successful implementation. While there is a role for private advisors in pursuing PPPs due to the complexity of the contracts, the public sector should be able at least to adequately provide oversight of the consultants to secure the public interest.
The creation of a PPP unit with the necessary technical skills to help procuring agencies would simplify the PPP process and allow for a more effective negotiation process. Further, it provides a consolidated authority in negotiations. This is especially important when the PPP project involves several departments of the procuring public client.29
Most PPP units currently in existence provide technical assistance to public entities procuring projects through PPPs. This is one of the major reasons, Parpública SA was created in 2003. Portugal had a poor experience with PPPs in the 1990s, due to inadequate consideration of long term fiscal consequences, insufficient risk transfer to the private sector and rigidities in the procurement process.30 The lack of public sector capacity in evaluating and managing PPP deals added to these problems.31 As part of the reform of the PPP process, the Portuguese government created Parpública SA not only to conduct quality control upstream but also to provide technical assistance in project procurement and management.
There is some concern about the potential conflict of interest in PPP units that provide both quality control and technical assistance. This would be similar with an accounting firm that provides both auditing and consulting services to the same client. The mix of incentives may lead to disastrous results as was the case with Enron's auditor, Arthur Andersen in 2001.32 While most PPP units do not have a direct profit motive, these two functions should be clearly delimited in the structure of a PPP unit.
| The U.K. Experience with Supporting the Public Sector in the PPP process A PPP unit may provide technical assistance to different members of the public sector, such as ministries, state and local governments, state agencies, and other public agencies involved in PPPs. The UK's relatively long history with PPP units provides a good example. In the summer of 2010, the U.K. government created Infrastructure UK (IUK), a Treasury unit responsible for implementing that nation's long-term infrastructure strategy and facilitating private investment across a variety of infrastructure sectors. This is the latest reorganization of PPP units since the UK started experimenting with this governance structure in the late 1990s. IUK consolidates two previous PPP units (Partnerships UK and the U.K. Treasury's PPP Policy Team) together with a newly created U.K. Treasury's Infrastructure Finance Unit.33 IUK takes over the role of Partnerships UK (PUK), responsible for the technical assistance in procurement and management of PPP deals. Like PUK, IUK engages with central government ministries, departments, and other public bodies in a varied number of sectors including transportation, housing, defense, education, and information technology. It provides technical assistance to these entities at the procurement policy phase and downstream in individual projects. Its technical assistance in individual projects is comprehensive, from assessing Value for Money, structuring competitive bids, supporting negotiations with the private sector to designing quality monitoring systems. IUK has a team of 60 professionals from various infrastructure-related fields, including commercial and financial experts, lawyers, economists, and policy advisors. At the municipal level, another PPP unit-Local Partnerships-also provides technical assistance on PPPs. It is a joint venture between the Local Government Association and the U.K. Treasury. Launched in 2009, Local Partnerships provides project support as well as other functions such as gateway reviews on projects considered for PPP, asset management reviews, and training to build local capacity. Its technical assistance to local governments on PPPs covers all the stages of a PPP project from development, structuring, and procurement, to execution and delivery. Local Partnerships' project support focuses on nine sectors, chosen based on funding availability for PPPs, priorities established by the Local Government Association and the latest national Efficiency Review report.34 These nine sectors are: corporate property and regeneration, housing and sustainable communities, culture and sports, fire and police services, corporate and transactional services, social care, transportation and regeneration, schools, and waste management. |
Standardization and Dissemination. In a PPP arrangement, the teams of bidders have to deal with myriad statutes and government regulations. Moreover, these regulations differ from state to state, in the case of a federal government structure. This contributes to substantial transaction costs related to the procurement of PPPs, for both the private sector and the government, estimated to be 10 percent of a project's capital costs.35
A PPP unit may deal with these transaction costs by standardizing the procedures and requirements at different levels of the procurement process. This standardization process may take the form of documentation or recommended guidelines and best practices. The companies interested in PPP opportunities can see beforehand a standard of the contracts employed and the required PPP characteristics, reducing the uncertainty in the market. In addition, it reduces the costs incurred in filling the paperwork for the bid. The public agencies benefit from the cutback in costs and time. Standardized documentation requires less time to grant approvals, create the tender documents or negotiate the contract with the bidders.
Standardization complements the other functions of a PPP unit. By providing standardized documentation, the PPP unit helps public entities to avoid pitfalls in structuring and managing the PPP contract. Further, it provides another level of assurance that the contracts pursued fulfill the standard requirements and protect the public interest. In addition, it helps the promotion of PPPs, because it creates certainty and legitimizes the PPP market.
Québec's PPP unit, L'Agence des partenariats public-privé du Québec (PPP Québec), established in 2005, created a series of guidelines to be followed by the public sector in dealing with PPPs. For example, public bodies are required to use the criteria set up by the unit in evaluating the potential of a PPP proposal. PPP Québec recommends that public agencies use their standard assessment methodology in selecting a PPP project.36 Upon request, the unit may provide technical assistance to the public sector along the procurement process.
Promotion. The creation of a PPP unit increases the credibility of the government's commitment to PPPs. Further, a PPP unit may act as a consolidator of information on PPP opportunities, given that investors are not always aware of the projects that the government would consider ripe for PPPs. Both developed and developing countries have used PPP units as means to increase private interest in PPPs. The Flemish PPP Knowledge Centre provides the private sector with information on PPP policy and possibilities. Partnership, BC also serves as a resource for the private sector interested in PPPs in British Columbia. The Philippines' PPP Unit-the Philippines Build Operate Transfer Centre-has among its functions the promotion of the PPP Program to potential investors.37
Incorporating both promotion and advisory functions in a PPP may lead to a conflict of interest problem. If the PPP unit is considered successful by the number of PPP deals completed, the PPP unit may have an incentive to accelerate the process and not do full diligence on the projects. The optimal arrangement is to split the functions in different entities or have the promotion department of the PPP unit reporting to different government bodies.
Based on their functions, PPP units may be categorized as review bodies, full service agencies and centers of excellence.38 The review bodies limit their activity to a gateway quality control function and provide recommendations on the feasibility of PPP proposals to decision makers. The full service agencies fulfill additional functions to the quality control responsibility of the review agencies. The Centers of Excellence consolidate information and disseminate research and best practices regarding PPPs.