CAIRO: Booz & Company, a global management consulting firm, which provides strategic advice to businesses, governments and organizations, released a report on Sept. 14, outlining how joint ownership ventures between the government and the private sector can tackle inadequate and ailing public sector services.
As the report notes, to date, public-private partnerships (PPPs) have been instrumental in surmounting the obstacles emerging economies face in modernizing infrastructure in areas such as telecommunications and energy.
Yet, it equally underscores how they have fallen short in achieving similar success with regard to public service projects.
In a joint ownership arrangement, both the government and the private sector obtain a stake in a newly formed corporation, in which the public sector contributes concession rights as well as provides regulatory support, while the private sector supplies the technical know-how and a chunk of the financing required, the report explains.
With the two sides having joined forces, the benefits, the report says, are three fold.
One, combining efforts allows for the capacity “to leverage assets or resources that neither side” could bring to the table alone. Two, with risks being distributed between the two camps, initiatives’ chance of success increases. Last, such jointly owned companies allow for “straightforward exit strategies” that are inexistent in other PPPs, the report claims.
Indeed, if a newly formed venture is posting positive results as well as financial figures, then the public can seek an initial public offering, which gives it a way to “cash out” on the situation. A second option would be for the public partner to sell a segment or the totality of its stake, the report explains.
Though the benefits are seemingly manifest, the report’s authors indicate that risks are also inherent and must be heeded.
A major concern is a situation whereby a company, having won concession rights, becomes a monopoly within the market, which could lead to an abuse of its market position via providing low quality services all the while gouging prices.
To circumvent such an eventuality, “service-level agreements should be established to determine the services to be provided and performance targets to be met, and a contractual agreement outlining what is reasonable for consumers to pay and what investment returns the company should earn, should be signed,” the report underscores.
A further risk is a potential conflict of interest arising, in which as a government service, it should aim to provide quality, affordable service, but as a stakeholder within a profit driven company, the two objectives can easily become incompatible.
The report points out that this issue can be avoided by the implementation of a separate entity to monitor the performance of the organization as well as a contractual pricing mechanism, which has the goal of maintaining the company’s financial returns within a pre-established range.
The report fleshes out several other impasses that exist within the MENA region toward achieving successful PPP service projects.
For instance, many private sector companies lack experience in such public service ventures, while on the public sector side weaknesses are patent as well, such as political instability, weak judicial and legal frameworks, which are necessary to protect the private sector’s rights, as well as a dearth of program managers and human capital in general to run outsourcing programs, the report says.
The report contends, in a nutshell without delving into any concrete detail, that by bringing both the private sector and public sector together, these problems can be tackled.
In sum, the report states that such partnerships should remain short-term in focus, as “Governments … should not be owners of individual companies,” but rather, focus on creating and enforcing policies and regulations, while markets and competition will do the rest.
Otherwise, as the authors note, maintaining government ownership would erode confidence in free markets’ ability to ensure quality services and low prices through healthy competition.
The uptake of public-private partnerships allows for “a set of services that might otherwise require years to introduce can be brought out relatively quickly. However, joint ownership should always be regarded as a temporary solution, never as a permanent one,” noted George Atalla, a partner at Booz & Company.
The long-term focus for the government should be “legal, regulatory, and institu¬tional frameworks so that its private sector can launch public-services projects without such a high level of government involvement,” the report concludes.