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Effectiveness of Public Private Partnership in Infrastructural Development


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Effectiveness of Public Private Partnership in Infrastructural Development

  2. 2. 1.0 INTRODUCTION1.1.1 NEED FOR INFRASTRUCTURE DEVELOPMENTOver the last ten years, private sector financing through Public PrivatePartnerships (PPP) has become popular as a way of procuring andmaintaining public sector infrastructure in Nigeria, in sectors such astransportation (roads, bridges, tunnels, railways, airports), socialinfrastructure (hospitals, schools, prisons, social housing) and other publicinfrastructure utilities. Structuring PPP is complex because of the need toreconcile the aims of the large number of parties involved. On the privatesector side there are investors, lenders and companies with construction andoperational services. On the public sector side there are public authoritiescreating and implementing PPP policies and the general public who use thefacilities that a PPP provides. The involved parties need to have a basicunderstanding of policy and finance issues, and how their part of the projectis linked to and affected by them.Investments in infrastructure can directly contribute to improving humanwelfare, economic growth and can therefore be used as a lever to reducepoverty. Inequality not only declines with larger infrastructure stock, butalso with the improved quality of infrastructure services (Calderon and
  3. 3. Serven 2004). In a way, whether a nation is undeveloped, developing, ormature, they all hold a common characteristic in today’s economy: the needto construct, repair, refurbish, and modernize their infrastructure (Levy1996). In developing nations like Nigeria there usually exists a legitimateurge for development, due to its inhabitants lacking basic services withregards to heavy infrastructure provision plans. If, on one hand, thedevelopment of infrastructure comes to help; on the other hand, muchplanning is required to enhance its goal and also to mitigate the possiblenegative impacts. A massive infrastructure investment, if carried-out thewrong way, can threaten the economic, social and environmental cohesionof a particular area or region.1.1.2 PUBLIC-PRIVATE PARTNERSHIPA Public-Private Partnership (PPP) is a contractual agreement between apublic agency and a private sector entity. Through this agreement, the skillsand assets of each sector are shared in delivering a service or facility for theuse of the general public. Public-Private Partnerships are means of utilizingprivate sector resources in a way that is a combination of outsourcing andprivatization with government partnership. Nations are increasingly relyingon creative financing and asset management to maintain and improveinfrastructure because PPP provides a more efficient and cost effective
  4. 4. means of providing the same or better level of service, at a savings to thegeneral public.The successes of Public Private Partnership (PPP) in infrastructure projectshave made it a good alternative against bonding and other traditionalfinancial methods. PPP has the benefits of increasing innovation andefficiency, as well as risk transfer, and as such making it a preference forsome government agencies in infrastructure projects. The initial motive forimplementing PPP was typically about financial breakthrough. There is aneed to combine both public and private expertise as neither sector is able todeliver projects effectively and efficiently alone. The private sector has theability to incorporate skill, innovation, motivation, well assessed risks andtechnology into infrastructure projects.To eliminate doubts in the use of PPP as a procurement alternative, thisstudy points out the effectiveness of PPP as a procurement methodology.The derived benefits, success and efficiency of the PPP method can fit inwith culture and practices of infrastructure projects. This research can serveas a reference on determining the PPP needs in infrastructure projects.1.1.3 HISTORY OF PUBLIC-PRIVATE PARTNERSHIPPrivate sector involvement in the delivery of public services is not a newconcept; PPPs have been used for over two decades, starting in 1980s.
  5. 5. Initially focusing on economic infrastructure, PPPs have evolved to includethe procurement of social infrastructure assets and associated non-coreservices. PPPs are used in housing, health, corrective facilities, energy,water, and waste treatment projects. PPP policy has also evolved globally aspublic sectors budgetary challenges limit potential options. One method oftapping into alternative sources of capital is the public-private partnership.Public-Private Partnership could also be defined as:“Any medium to long-term relationship between the public and privatesectors, involving the sharing of risks and rewards of multi sector skills,expertise and finance to deliver desired policy outcomes.” (Standard, Poor,2005).Some definitions make it seem as though most of the risks are transferred tothe private sector. In reality, there is a relatively equal amount of risktransfer in a properly modeled PPP. Private participation in Nigeriainfrastructure is not a new phenomenon. The private sector was alsoinvolved in the nineteenth century in the development of canals andrailroads. In the twentieth century, with the growing economy and the needfor new infrastructure, the state governments and the federal governmentassumed the responsibility for providing infrastructure (Nirupuma, 2009).
  6. 6. In the early 1990s private participation in public sector projects emerged,specifically in the increasingly developing southern and Northern States.The private sector over the years has become progressively innovative inseveral developed countries, which has added substantial value to publicprocurement. The Nigeria Government has been a recent initiator of thecurrent private sector involvement with infrastructure projects.1.1 BACKGROUND OF THE STUDYOver the past years, there has been an increased focus on the provision ofinfrastructure in Nigeria. The emergence of infrastructure as a separate assetclass with stable returns over a number of years has resulted in a largenumber of investment funds being set up. This increased interest on the partof the financial investor and other private entities, is almost evenly matchedby the demand for new infrastructure by developed countries as well asdeveloping countries (Griffith-Jones, 2009).Developing countries like Nigeria are in increasing need for new andimproved infrastructure to support their increasingly growing rates(Universities UK, 2010). The private sector has however been workingalongside to fill these gaps in funding. In spite of these recent economicdownturns, there are significant interests for infrastructure projects. With the
  7. 7. current global economy crisis, government agencies are increasinglyfocusing on policies that will provide adequate infrastructure with long termbenefits to the general public.1.2 STATEMENT OF THE PROBLEMThere is a growing demand in Nigeria for the acceleration of infrastructuredevelopment and the improvement of service delivery in order to meet theever-growing needs of its populace.A large part of the national infrastructure in informal settlements remainsundeveloped and inaccessible. The dwindling national resources, increasingdemand for infrastructure development, capacity constraints and highmaintenance costs further aggravate the problem.The most highly developed infrastructure and services are mainly found inmajor urban areas and intercity links.1.3 AIM AND OBJECTIVES OF THE STUDYThe statement of problem above necessitates the need to examine public-private partnership and efficient public services delivery with a view to:i. To determine the extent to which public-private partnership enhancesefficient public services delivery and economic activities in Nigeriaii. To identify the type of public-private partnership suitable for servicedelivery in Nigeria
  8. 8. iii. To examine the difficulties of the PPP in infrastructural developmentiv. Measure the effectiveness of PPP in Nigeriav. To recommend ways of improving on the gains of PPP ininfrastructural development in To highlight the problems influencing effective implementation ofpublic-private partnership in Nigeria1.4 RESEARCH HYPOTHESISIn order to guide the investigation and to gather evidence about theeffectiveness of Public private partnership in Infrastructure development inNigeria, the research was conducted using the following hypotheses.I. Effective public service delivery does not significantly enhanceeconomic activities in NigeriaII. Public-private partnership does not significantly enhance the efficientdelivery of public services in Nigeria
  9. 9. 1.5 SIGNIFICANT OF THE STUDYThe findings of the study are likely to result in an enhanced understanding ofthe issues associated with PPP projects in Nigeria, which in turn could resultin the following:• Increased implementation of PPP projects;• Enhanced capacity for service delivery;• Increased efficiency in the management of PPP projects;• Provision of improved social services;• Improvement in the quality of infrastructure services;• Development of clear guidelines for PPPs;• Increased funding / finance from the private sector1.6 Scope and Limitation of the StudyThe scope of this study is limited to how PPP method is effective ininfrastructure projects in Nigeria. This research focuses on factors necessary toensure a successful and effective project, as well as the benefits, disadvantagesand challenges of PPP projects.
  10. 10. 1.7 DEFINITION OF TERMSAccountability: This is the ability of the public to hold to account thoseresponsible for managing the use of public funds in the delivery of services.Bidder: A bidder is one who submits a bid in response to a project brief or to arequest for an expression of interest.Build Own and Operate (BOO): This is when a developer is responsible forthe design, funding, construction, operation and maintenance of the facility,during the concession period, with no provision for transfer of ownership to thegovernment.Build Own Operate Transfer (BOOT): This is an arrangement whereby afacility is designed, financed, operated and maintained by a concessioncompany. The concessionaire retains ownership until the end of the concessionperiod, after which ownership and operating rights are transferred back to thegovernment.Built Operate Transfer (BOT): This is an agreement where a facility isdesigned, operated and maintained by the concessionaire, for the period of theconcession. Thereafter, legal ownership of the facility may or may not rest withthe concession company.Bundling: This refers to the integration in a PPP of functions such as design,construction, financing, operations and maintenance of the facility.
  11. 11. Business case: The business case provides an overview of a partnershipapproach. This is where the project is fully scoped, risks and costs areidentified to develop a cost-benefit analysis and test the net benefit of theproposal.Concession: Concession-based approaches are the oldest form of PublicPrivate Partnership, and a variety of arrangements are based on the concept of afixed-term concession, using various combinations of private sector resourcesto design, construct, finance, renovate, operate and maintain facilities.Ownership of the facility may remain with the government, or may betransferred to the government on completion, or at the end of the concessionperiod.Contracting out: This is an outsourcing arrangement in which a public agencycontracts with an external supplier for the provision of goods and / or services.Conventional procurement: This is a public procurement approach in which apublic agency secures the finance directly and pays the contractor as workprogresses.Core activities: These consist of operational elements involving the making ofkey decisions and / or the delivery of services, which may remain withgovernment.
  12. 12. Default: The failure of a party to perform a contractual requirement orobligation, including failures to meet deadlines, to perform to a specifiedstandard, to meet a loan repayment or to meet its obligations in relation to anestablished agreement.Design Build Finance (DBF): A form of PPP that involves the procurement ofasset using private finance, without private sector operations and provision ofthe associated services.