The early involvement of all stakeholders in the PPP process helps develop an enabling environment. The stakeholders provide valuable information on the points of concern, the performance expectations, and potential risks. This input is also critical to assess whether key business assumptions of the proposed PPP (in particular tariffs/fees) are realistic and enforceable. Avoiding consultation invites the risk of later opposition, which slows or derails the process. Ongoing consultation with stakeholders is important at every stage. Consultation with potential bidders and partners is also critical to ensure that the proposed PPP design meets their requirements. Otherwise, there is a risk that the PPP design includes an unrealistic combination of (politically) desirable features (high-level service, low prices, no redundancies, no subsidies, and short concession periods) that will make the project unattractive to bidders or unsustainable. Collecting informal feedback from the market during the preparation stage is therefore critical.
A natural way to create an institutional mechanism to manage relationships among stakeholders involved in a PPP is to define the main characteristics and institutional qualities of the regulatory agencies. Guasch (2005) provides the main institutional requirements for establishing a robust regulatory body that enables efficiency in operation and enforcement to manage PPPs. Such requirements include the an adequate regulatory structure, organization, legal and economic instruments to enforce contracts and appropriate financing.
Capacity and Institutional Frameworks for PPPs at the Local Level In recent years more attention has been placed on understanding the nature of the relationship that needs to be established and maintained among the parties. National and local governments will need to ensure a political, legal and administrative framework that permits and facilitates private sector development and public private partnerships, the availability of necessary economic, financial, technical, institutional and negotiation expertise, and mechanisms for interdisciplinary/interagency cooperation and dispute resolution. Organizations may need to evolve for effective management of the different aspects and phases of PPP development. Municipal governments need clarity on their role and authority level, not just to sign contracts, but also to undertake all the other tasks related to maintaining the partnership. These would include financial, legal, administrative, and other areas of public administration. At various levels of government, a major concern is how to ensure that there is real and perceived continuity and consistency in national policies, laws and regulations over the long term and despite changes that may occur in political regime. The private sector must be given clear and consistent signals that will guide their own decision making. Case studies of PPP's in some developing countries indicate how important citizen acceptance and participation is. In divided societies especially, fundamental questions arise over the exploitation of natural resources such as water by private and especially foreign companies, or the extent to which some services should be freely available or sold at socialized prices. In these cases and more so when there are perceptions of corruption or collusion, and if there are negative impacts to local people or the environment, it is not unusual to find local citizenry groups rising in protest against the PPP. From the perspective of national and international private investors, countries perceived to have political and social instability, as well as inconsistent and unfavorable legal and investment frameworks are considered either unattractive to capital investment; or attractive if the profit margin is relatively high (with high risk premium). Municipal officials in general do not have the power to change but can try to influence positive changes in the investment climate. More manageable are local level strategies to improve credibility and the business environment in the municipality. Some national and municipal governments have done this and have even created associations and institutions in and outside of the state to discuss, evaluate and in some cases promote a more active participation of private sector companies. Source: Adapted from Public Private Partnerships for Municipal Governments Municipal Finance Task Force RTI International, 2007. |
The essential functions of regulatory institutions have the objective of creating an institutional framework that manages and distributes responsibilities and obligations to the stakeholders and partners involved under the contract. This framework considers the administration of tariff adjustments, the determination of quality and technical standards, the provision of monitoring compliance with contractual requirements, and the facilitation of resolution disputes. These institutional mechanisms facilitate efficiency in the organizational structure by aligning the professional capacities to ensure that prices and other features in services, costs and benefits are distributed according to predetermined explicit criteria.
Economically speaking, the institutional framework should also induce the partnership to operate at lowest (efficient) possible costs and align tariffs and prices accordingly. But also, the institutional setting allows the provision of the basic conditions to ensure adequate incentives for private parties to participate in a PPP. Particularly present in developing countries, weak institutional mechanisms make stakeholders vulnerable to corruption or undesirable behavior. Many times the institutional setting acts as a way to provide barriers or open conditions to enter an infrastructure partnership. It also provides stability to the bureaucratic scheme of the partnership and credibility to the enforcement of contract clauses.
Some studies have explored the impact of regulatory and institutional design for infrastructure sector performance. For instance Guasch, Andres and Straub (2007) investigated two dimensions of regulation that matter when it comes to avoiding disruptive renegotiations. One has to do with the regulatory environment since independence can be crucial to isolate the institutional setting of long-term infrastructure concessions and contracts from political pressures. The second has to do with the type of pricing regulation. But these two aspects can hardly be separated. Governments should then consider a sequence including the development of the institutional mechanisms to create a reasonably independent regulatory agency as defined in a contract. This brings clear rules for management in order to achieve a solid mechanism of information flow and responsibilities between parties and stakeholders.