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Article

The Key to Involving the Private Sector More in Public-Private Partnerships

Strategy

In a context of tightening of public purse strings, governments increasingly rely on public-private partnerships (PPP) to design, build, finance, maintain and operate infrastructures and services, were once purely state managed. This includes traditional infrastructures, such as bridges and roads, and services, such as schools and hospitals. Researchers have found that the key factor in attracting strong private partners to build efficient PPPs is the quality of national institutions.

Destination Home NGO
Cover Photo: Destination: Home, a public-private partnership serving as the backbone organization for collective impact strategies to end homelessness in Santa Clara County, California.
 

Public authorities - the world over - struggle to find funds to build, maintain and run public infrastructures and services. This often leads to the involvement of private companies and the formation of public-private partnerships (PPPs). These partnerships can be set up to make the most the private sector’s organizational resources, usually deemed more efficient. Long-term contracts are created to build bridges, tunnels, communication networks, water systems and airports. Increasingly, these partnerships are also behind the creation and running of education, health and social services. But such services, having public objectives, are subject to political influence.  This might make potential entrepreneurial partners wary of entering an agreement, lest a newly elected government rewrites the rules of the game halfway through the contract, or inefficient bureaucracies cause money to be wasted.

So, under which conditions can private companies be encouraged to get involved in PPPs? The question is all the more important as PPP contracts ask a lot more from their private partners. 

We found that high-quality institutions are key to allowing wide private scope in PPPs.

The key factor behind the involvement of private partners

In our study, we have revealed that in a PPP there is an interesting interplay between the effects of the public and private partners’ capabilities. Importantly, we also found that these depend on a key country-level factor: the quality of national institutions.

Defining capability

Our study focussed on two main types of capabilities that can be developed by both partners in PPPs: experience and governance-based. Experience-based capabilities relate to accumulated organizational learning of the inner workings of PPPs needed to ensure they achieve goals. Governance-based capabilities relate to cases where efforts have been made to create specialized organizational structures – such as laws and government offices – related to PPPs. These can oversee the partnerships, audit, monitor and mitigate contractual hazards.  

Defining quality

For an institutional environment to be of high-quality, it needs to guarantee the rule of law, be transparent and have clear, established and effective bureaucratic procedures. This reduces the propensity for corruption and bribery. In the context of our work, this means private partners see fewer political and contractual hazards. This type of high-quality institutional environment is seen to be less risky and is therefore more attractive to private investors. 

For an institutional environment to be of high-quality, it needs to guarantee the rule of law, be transparent and have clear, established and effective bureaucratic procedures.

The demand for an increasing private scope: the example of the Lesotho hospital

Traditionally, PPP contracts required private companies to: build an infrastructure, lease it and then transfer it back to the public. Today’s evolved PPPs want private companies to have wide scope – they must invest and participate in multiple (or all) activities related to the partnership. In many cases they design, build, finance, maintain and operate - both public infrastructures and public services. In some cases, PPPs now see private partners with such wide scope that the public side sits back, just monitoring and auditing.  

One such example we came across in our studies was Lesotho’s Queen ‘Mamohato Memorial hospital. The government could not afford to redevelop the existing hospital, nor provide its healthcare. It had to outsource all hospital activities - infrastructure and services. With the help of the International Finance Corporation (IFC), the hospital is now run by a private consortia, Netcare. This is responsible for building part of the hospital, operating administration and medical services, and delivering clinical and non-clinical services. Whilst the hospital is still owned by the public, it is run by a private business that needs to balance the books and make profit. As such, Netcare had to design rules to ensure people with few means can access healthcare services , whilst limiting deficit. The jury is still out on the success of this, and NGOs have been critical about the balance of free and paying services available. However, without this PPP, no developments would have been achievable and access to healthcare would be limited. 

High-quality institutions allow for increased private scope

With this in mind, our study revealed that, when a national institution with a high-quality environment wants to enter a partnership, it will attract more private companies and competitive bidding. It will be able to choose a private partner with more capabilities that is able and willing to be involved in a broad range of value-creating activities (have a wide scope) in the project.

An example of this occurred in the Philippines in 2003 when the National Kidney and Transplant Institute (NKTI) sought to enter a PPP. It worked with the country’s PPP unit, the Public Private Partnership Center of the Philippines, to establish its feasibility and the Terms of Reference (ToR) of a potential PPP. A public bidding process was then set up to select a partner that could lease medical equipment to the institute, including the provision of supplies and services. Two bids (out of three) were evaluated based on technical soundness, operational feasibility, and project financing. The winner was determined by a weighted scoring system. 

the National Kidney and Transplant Institute Quezon Philippines
The National Kidney and Transplant Institute, Quezon city, Philippines

Our study also found that, when a high-quality public institution has had prior PPP experience (experience-based capability) this leads to enhanced private scope. However, with low-quality institutions the opposite is seen. In countries where institutions are not high quality, which include many emerging industrialised nations, we saw that the creation of specialized public PPP units - to design and govern public-private collaborations - had a profound effect on private scope. In these cases, public capabilities are improved through governance and they can offset the perceived hazards of institutional weakness. As such, countries with specialized PPP units, but low-quality institutional environments, can attract private partners that participate in more aspects of the partnership and have wide scope.

Institutional environment is an enabler

We also saw greater private scope in partnerships where both partners have previously created jointly funded vehicles specifically designed to govern the PPP. In addition, private partners that had prior PPP involvement with high-quality institutional environments accumulated more capabilities. This suggests that high-quality environments can be enabling to private companies and help them improve their scope. 

Importantly, overall, our study revealed that where there are high-quality institutional environments, there is larger private scope in PPPs in both industrially developed and developing countries. In emerging industries, successful partnerships allow private entities to accumulate ever higher quality capabilities such as processes and procedures, which makes them more attractive to public bodies. This is likely to, in part, explain the high level of growth of PPPs in Asia, Africa and Latin America.

 

Examples on how public-private partnerships can help emerging market countries to reduce poverty and preserve sustainability:

“Public Private Partnerships at Work: Tuna Handline Fishing in Lagonoy Gulf, Philippines"

How can public-private partnerships utilize purposeful funding through CSR to make an impact on social issues? See this short interview with Chuck Robbins, Chairman and CEO of Cisco, and Jennifer Loving, CEO of Destination: Home, about housing for homeless people in Santa Clara (Silicon Valley, California). Read the article on Giving Compass

“Ending Homelessness Through Public-Private Partnerships”

Methodology

Focus - Methodologie
We used a unique database of public-private agreements in 96 countries (both developed and emerging) across nine different sectors that spanned two decades (1992-2012). This database was created by pooling observations from the Project Finance International (PFI) and Securities Data Company (SDC) Platinum Global Public Finance databases from Thomson Reuters. We created a measure of private scope based on the extent of private involvement in the PPP project. We then used the ordered probit model to test our hypotheses related to private scope, institutional environment quality and public and private capabilities.

Applications

Focus - Application pour les marques
We found that high-quality institutions are key to allowing wide private scope in PPPs. This result can be used by international institutions – like the World Bank and the IMF – to help provide developing countries with the relevant ingredients to increase their ability to proceed through PPP. These countries need to increase the quality of national institutions so that they can appropriately audit and monitor PPPs and this will enable private companies to have a wide scope in the partnerships. The development of high-quality institutions will also make these countries more attractive to private companies and their investment. As such, those companies that have many capabilities and the capacity to get involved in all aspects of a project (wide scope) will apply to be partners. This will bring many benefits in terms of the overall development of such nations.
Based on an interview with Bertrand V. Quélin of HEC Paris on his article, “The private scope in public-private collaborations: an institutional and capability based perspective”, co-written with Sandro Cabral and Sergio Lazzarini of Insper, Institute of Education and Research, and Ilze Kivleniece of Insead, in Organizational Science, 30 (4), 831-846, in 2019.

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