Under a service contract, the government organization (e.g., local government) hires a private company to deliver specific tasks or services for a specified time period. The private partner must perform the service(s) at the agreed price and must meet performance or deliverable standards set by the government partner. Generally, competitive bidding procedures are the best way to award service contracts, as competitive bidding mimics the open market in a time limited and controlled manner.
Under a service contract, the compensation for the private partner is fixed; therefore, the private partner can increase its profit only if it can reduce its operating costs. Often, this incentivizes the private partner to save costs instead of introducing efficiency innovations, as service contracts are usually of short duration, typically 1 year. To prevent providers from cutting corners, the organization needs to invest in a comprehensive monitoring and evaluation (M&E) system. With proper M&E, this profit incentive based behavior of the private partner can be controlled and eventually channeled into greater efficiencies and innovations through a longer-term contract or preference for continuance of existing contracts.
| Table A2.1: Public-Private Partnership Modalities | |||||||||
| PPP Type | Capital Investment | Recommended Years of Partnership | Operations and Management | Outcomes Monitoring and Evaluation | Risk Assumed by LGU | Competitive Pressure | Problems and Challenges | ||
| Service contract | Government organization/Local government | Annual | Government organization/Local government | Government organization/Local government | Low | High | Local government unit (LGU) must be able to administer multiple contracts simultaneously. LGU must have strong contract policing powers and political will. | ||
| Management contract | Government organization/Local government | 3 to 5 years | Private | Government organization/Local government | Low to moderate | High during bidding | Private sector partners usually encounter problems with LGU budgetary process, staff hiring and firing. | ||
| Lease contract | Government organization/Local government | 3 to 5 years | Private | Government organization/Local government | Moderate | High during bidding | Issues of low maintenance of infrastructures and equipments | ||
| Concessions | Private | 10 to 25 years | Private | Government organization/Local government | High | Moderate during bidding | LGU must be powerful enough in ensuring reasonable fees and quality outcomes | ||
| Private | 10 to 25 years | Private | Government organization/Local government | High | Low | Issues of inefficiencies and low innovations | |||
Service contracts are usually most suitable where the service can be clearly defined in the contract, the level of demand is reasonably certain, and performance can be monitored easily. Service contracts provide a relatively low-risk option for expanding the role of the private partner. Service contracts can lead to a quick and clear impact on system operation and efficiency. Service contracts are often short-term, allowing for repeated competition in the sector.