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«The Transition Towards a Sustainable PPP Regime Authored by Geert Dewulf, Ashwin Mahalingam, and Stephan Jooste Copyright belongs to the authors. All ...»

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Working Paper Proceedings

Engineering Project Organizations Conference

Estes Park, Colorado

August 9-11, 2011

Proceedings Editor

T. Michael Toole, Bucknell University

The Transition Towards a Sustainable PPP Regime

Authored by

Geert Dewulf, Ashwin Mahalingam, and Stephan Jooste

Copyright belongs to the authors. All rights reserved. Please contact authors for citation details.

The transition towards a sustainable PPP regime

Geert Dewulf, Ashwin Mahalingam and Stephan Jooste

Introduction Several governments across the world are increasingly embracing the use of Public Private Partnerships (PPPs) to deliver infrastructure services. In part the rationale for the use of PPPs is the need to buffer public finances with investment from the private sector in order to create or refurbish infrastructure assets. In addition, the private sector is expected to bring in efficiencies in service provision, due to the ability of market forces to optimize the cost of these services, as well as the potential for performance based incentives to improve operational efficiencies. These outcomes are based on the assumption that the private sector, whenever possible, is likely to attempt to maximize its profits.

This shift in the procurement philosophies of many governments has been influenced by intellectual movements such as the New Public Management (NPM) philosophy which advocates the use of competition and market-based incentives in public sector governance, and indeed the inclusion of the private sector in the delivery of the government’s responsibilities. In other words, NPM advocates a shift away from direct provision and towards a contracting-out strategy on the part of the government.

NPM made an appearance in the 1980s, influencing a series of contracting-out and privatization approaches in the 1990s. The UK was one of the early adopters of this approach with its Private Finance Initiative (PFI), while several other countries soon followed suit.

Given its status as one of the early proponents of PPP, several countries have often looked towards the UK for formal and informal guidance on setting up their own PPP programs. Jooste, Levitt and Scott (2011), in their study of the PPP enabling fields in British Columbia, South Africa and Victoria, argue that some amount of institutional convergence can be witnessed in these PPP environments due to the influence of the PPP program in the UK. Policy makers interested in setting up PPP enabling environments often look for templates or best practices that work elsewhere and attempt to ‘cut and paste’ them in their home environments. For instance, delegations from several countries such as the Netherlands have visited the UK to observe the PPP implementation first-hand. Partnerships UK (PUK) the coordination agency in charge of PPPs in the UK played a proactive role in advising India on its PPP policy.

Initial PPP policy drafts, particularly in India have often drawn directly on sections of the policy in the UK and elsewhere.

It is however unlikely that identical PPP fields will be found across countries.

Contextual factors and the persistence of existing institutions (Zucker, 1977) can be predicted to interact with new PPP regimes to create a field that is unique to a particular country/state. Indeed, Jooste et al. (2011) study shows how the PPP enabling fields in British Columbia, South Africa and Victoria have evolved and function in a variety of different ways, despite some amount of similarity with regards to form. Giddens’ (1979) work on structuration and the interplay between actors and institutions is instructive here. According to this theory, actors, structures and interaction processes mutually enforce each other. The theory describes the dual function of social structure as both the medium and the outcome of social action.

Actors’ knowledge of the structures in which they operate inform their action, which reproduces social structures, which in turn enforces and maintains the dynamics of action. Giddens’ theory has had a wide impact on today’s understanding of society.

New institutional forms – the elements of a PPP enabling environment in this case – will compete with existing ones – institutions corresponding to traditional public procurement, and will attempt to modify the behavior of actors who procure infrastructure services. These actors will in turn influence the procurement processes and institutions so as to ensure that these new logics are now consistent with the cognitive frames of the actors involved. Over a period of time, actors and institutions evolve in a context-influenced manner towards a state that is unique, path-dependant, and different from the origin. Barley and Tolbert (1997) in their work on institutional change, also argue that institutional arrangements go through a process of encoding, enactment, re-enactment or revision and objectification, followed by further encoding and so on. This revision of institutions can be influenced by exogenous forces, which are situated in a particular context.

Still, the major stream of literature is still dominated by a microeconomic perspective on the PPP problem. Microeconomists consider procurement and tender procedures as formal bargaining. The outcome of this bargaining is influenced by several aspects (Hoezen, 2011; Williamson, 1975): bounded rationality (people intend to act rationally, yet do so only to a limited extent); informational asymmetry (related to the fact that transacting parties have potentially unequal access to information);

transaction costs; and enforceability problems (difficulties due to monitoring problems, costs or other causes to enforce the terms agreed in the contract). However, in practice, governments are looking for implementable solutions such as establishing PPP units to develop required competences and access to information, implementing standard solutions to lower transaction costs and developing new monitoring systems to decrease incentives for opportunism. Both in practice as well as in the academic literature on PPPs, little attention is paid to the importance of interaction processes to develop such systems or the more social-psychological perspective. Relationship development is an iterative and evolutionary learning process. It emerges, grows and dissolves over time (Boddy et al. 2000). This interaction-based perspective is what we propose to adopt in this paper.

When one looks at the landscape of PPP projects that have been implemented across the world, some have succeeded, while a large majority has resulted in failures. These failures are often not due to any inherent instability within PPPs, but more often due to the lack of an enabling environment that can foster sustained success with regards to PPPs (e.g. Mahalingam, 2010). Projects often fail due to poor capacity to structure and govern PPPs on the part of the public sector, award procedures that are not transparent, weak or non-existent dispute resolution mechanisms and so on. From a policy makers perspective, the following are then clear – first, it is important to have a strong, mature and stable enabling field/environment for PPP programs to flourish.

Second, although best-practices from around the world can be used as guidelines, they should be adapted and internalized to local conditions.

Our objective in this paper is to provide policy makers with insights on how to blend the generic needs of PPP programs with the constraints of their local context. To do so, we use Strategic Niche Management (SNM) as a framework to help guide decisions made by policy makers. Our approach will be as follows. We first describe the evolution and current state of PPP enabling fields in 9 different countries and states. Our objective is to demonstrate that that there is a reasonable level of isomorphism between institutions that form PPP fields in these arenas. Yet, significant differences exist both in configurations and outcomes. In some countries we observe an exponential growth of PPP projects after the initial launch of a PPP policy program, while in others the development stopped shortly after the introduction. Moreover, we depict similar procurement schemes, assessment tools and (legal) procedures, but outcomes differ. We argue that the ‘structures’ or formal contracting are similar but the ‘interaction processes’ or informal relations between the key stakeholders differ across countries. Normative and cognitive institutions that relate to the process of contracting are likely to be quite resilient and therefore, while formal programs can be easily enacted, getting PPPs to ‘flow’ through these programs is more difficult. We then introduce the notion of Strategic Niche Management and demonstrate how this framework can be used by governments to set up formal and informal PPP enabling structures and processes that are legitimate, consistent, and in line with local institutions. Our approach in this paper is exploratory as opposed to normative. SNM is one potential approach that can help policy makers piece together strategies that can help PPPs prosper in their home environments.

Methodology We conducted a cross-case comparison of the PPP environments in 9 different locations, to ascertain how the enabling fields in these environments compared with each other. To do so, we created case histories of each of these PPP enabling fields.

We worked in large part with secondary data that we obtained from archival records.

However, we also conducted several interviews in each location with senior players from the public and private sector in order to ascertain their views on the composition of these fields. The number of interviews conducted per location varied, but in total we spoke to over 50 respondents. While collecting data we attempted to understand the current configuration of the PPP enabling field, as well as the path that was taken to arrive at this configuration. Needless to say, the former was comparatively easier to map as compared to the latter.

We coded our case histories (Strauss and Corbin, 1998) and attempted to generate a list of codes that are based in the literature and could serve as a useful set of constructs to compare the various cases. Through this process, we selected the following parameters for comparison: (i) The stated rationale for PPPs; (ii) Regulative supports for PPP programs; (iii) Key actors; (iv) Formal schemes and practices; (v) Capacity Building Initiatives; (vi) Political Willingness to implement PPPs; (vii) Capacity to implement PPPs; (viii) Acceptance of PPPs by stakeholders; and (ix) Trust between Public and Private actors. The first five of these parameters are formal characteristics that are objective and easily observable. The last four are more subjective and represent normative and cognitive orientations towards PPPs in an environment.

Through this analysis, we compared the selected PPP programs on their formal and informal characteristics. A brief description of each case, followed by our results, are presented below.

Case Studies Gujarat, India Gujarat is one of the most developed states in India. Gujarat has many PPP projects underway in various sectors and has a significant thrust towards private sector investment in infrastructure. The state thus looks at PPP’s to augment public resources for investments in infrastructure as well as to provide operational efficiencies. All infrastructure projects are to be first investigated for PPP feasibility.

Gujarat was the first state in India to create a legal GID Act that provided a framework for private financing, development, construction and operation of infrastructure projects. However, the government enacted PPPs even before the act came into existence. After the creation of the Act, a new organization was created, viz., the Gujarat Infrastructure Development Board (GIDB) to facilitate the setting up of projects. The Act has helped to bring in transparency and facilitate a level playing field for various participants. GIDB has adapted and created Model Concession Agreements (MCA), RFP and RFQ models for projects that are freely available to all bidders. The political and bureaucratic will seems to be a persistent feature in the state of Gujarat from the top political leadership to the line agencies implementing projects.

Bureaucrats and elected representatives are willing to take up projects on a PPP basis.

The historical perception of Gujarat being an investor friendly state has helped the cause here. The private sector seems to be more comfortable in doing business in Gujarat. The state also has implemented projects for some time now and the willingness has slowly built up with successes in major sectors such as ports and roads. Regulation of the sector is done at two levels. GIDB acts as a regulatory body during the project conception and award phase. Once the project is completed and operations begin, then sector specific regulatory agencies take over the responsibility of regulating the project. The GID Act lays down the framework for dispute resolution. The state is known for quick turnarounds in terms of clarifications. The state has initiated major training programs to strengthen public sector capacity, and more than 1000 personnel have been trained. However, it is felt that further scope for strengthening capacity exists. Some sectors have built a lot of in-house capacity while others are still in nascent stages of developing such capacities. There is a general acceptance of the public towards private sector participation in many areas of economic activity. Government representatives opine that the people understand the role of the private sector in infrastructure. A number of discussions revealed that that the government agencies are of the opinion that people are indifferent on who provides the service so long as they think the service is being provided at good quality and reasonable price.

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