Ethical concern and inspiration of the PPP Model

Since the 1990s, the PPP model has achieved great progress and has been widely used in the public management field all around the world. This thesis systematically reviews the international experience and development rules of PPP model and puts forward the relevant policy in combination of practice: Strengthen legal system building; set special management department; choose appropriate PPP model and cooperation partner; take the opportunity to cooperate; strengthen the public supervision; share risk reasonably and strengthen risk control, etc. in the hope of enlightening the healthy development of PPP model.

PPP (Public Private Partnership, also called public-private joint management) model has achieved great progress and has been extensively applied in public management area all around the world. In Europe, especially in Britain, the application field of PPP includes transportation, public services, fuel and energy, public order, environment and health, entertainment and culture, education and national defense. In most countries, PPP model is applied primarily in infrastructure construction field, including toll highways, railways, bridges, metro, light rail system, airport facilities, tunnels, power plants, telecommunication facilities, school buildings, hospitals, prisons, sewages and garbage treatment, etc. From the perspective of the region, Europe has the most developed PPP market. From the perspective of the country, developed countries such as Britain, Australia, America, Spain, Germany and France have a better management level and scale of PPP project.

Although different countries and departments have a different definition of PPP model and various statistic scope and statistic data, make it difficult to evaluate the total value of PPP program. Taking infrastructure as an example, PPP nominal value of infrastructure all around the world is 775.1billion dollars. Among which Europe accounts for around 45.6%, Asia and Australia account for 24.2%, Mexico, Latin America and the Caribbean area altogether account for 11.4%, America and Canada account respectively for 8.8% and 5.8%. Africa and the Middle East account for 4.1%.

Necessary conditions of the successful operation of PPP

From the practice situations of different countries, the successful operation of the PPP model requires the following conditions:

The importance of government support
In the PPP model, Government is one party of the concession agreement and also provides the political and legal environment of project operation. Thus, the government should transform the administrative management and adjust the function to meet the needs of PPP model management if the government take the PPP model.
First, Public sector should approve projects prudently and establish a procedure that suits the development of projects. The legal status of PPP should be set up and select partner carefully though market and evaluate the construction capacity and operation strength thoroughly. Above all, Public sectors need to clear the standards, expand the production and provide the methods. Private sectors should prepare the appropriate proposals to bid for public sectors to select the best. Public sectors should reserve the space for the private sector to innovate which would not only meet the needs of the public sector but also ensure the reasonable schedule which could win the bid by precisely calculating the cost.
Second, the public sector should be prudent when making any commitment. It should protect the fund security and reduce the financing costs to ensure the sustainability of projects by ensuring the private sector reasonable and acceptable profits. Public sectors should keep its promise. Otherwise, it would be difficult to maintain the sustainability of PPP projects. In this regard, the PPP program of Fazakerley Prison in Britain and Bridgend Prison is the negative case of it. The British government had made a commitment that the government would be the insurer if the private sector couldn’t apply for the business insurance. However, after the outbreak of riot and insurrection of prisoners during the operation of the projects, commercial insurance refused to renew the insurance, and the Britain government didn’t keep the words to be the insurer which made the private sector couldn’t afford the largely increased operation cost of projects. It led the termination of the PPP project.
Third, the public sector needs to establish clear boundaries (including assets boundary and supervision boundary), such as supervisions of market access, price, and universal service, etc. in the prerequisite and guarantee of efficiency supervision. To achieve the targets, public sectors need to have relative higher public management ability.
necessary excitation mechanism
In PPP model, if excitation mechanism could be confirmed in contract, it could effectively avoid the deficiency of traditional public construction projects, such as the overdue problem or the over-expenditure problem.
First, the payment mechanism should be set up to promote the private sector to finish in time. Especially in the project that the public sector purchases service directly, only the private sector provides the products and services that meet the requirements, would public-sector pay the money. Thus, the private sector needs to finish the work on time and get the payment earlier. On the other hand, the payment of public sector would only pay the services that the private sector already provided and do not pay the expenditure of the project. Therefore, the private sectors need to plan carefully when they bid and control the expenses during the contract period in a reasonable scope.
Second, the rewards and punishments mechanism should be set up to promote the private sectors to the products and services that meet the standards. If the products and services provided by private sectors are not in compliance with the requirements of the contract, the public sectors will punish the private sector by methods such as reducing payment. For example, in the PPP project of telecommunications, if the number of times that the information technology operation system interrupt occurs more than the number of times in the contract, the public sector could reduce the payment as punishment. If the products and services provided by private sector constantly could not meet the standards of contract, then the public sector could terminate the PPP contractor take over the project directly or call for tenders again. If the products and services provided by private sectors meet or even beyond the standard of the contract, the public sectors could give additional payment with a certain ratio of rewards. Necessary rewards and punishments mechanism could stimulate the private sectors to provide more qualified products and services. HK treasury has conducted a survey on over 500 operating PPP projects, and statistics showed that when the reducing cost punishment implemented because of the services provided could not meet the contract requirements, nearly all the punished projects later provided the qualified products and services. 72% of them even provide better services than in the contract after punishment.
Third, arrange the reasonable capital structure and try to align the interests of all the involved parties. One problem that puzzles the traditional public projects construction for a long time is the construction period and quality control of contractor and the product quality control of equipment supplier. In PPP model, this problem could be solved by arranging capital structure reasonably. For example, in the PPP model, involved parties could consist a Special Purpose Vehicle (SPV), the contractors, equipment suppliers and operators respectively hold a certain share. In this way, the income of the public project would become a community of interest during the contract period. The construction quality and equipment quality would affect directly the operation income of the project. This would promote the coincidence of interest of contractors, equipment suppliers and the operators who would pay attention to the performance of the project in the contract from the beginning to the end and try to save the cost and correct the deficiencies in time.
The importance of reasonable risk sharing
Long investment period, a large amount of money and uncertain factors of PPP project all make it have to face a huge risk no matter which party bears the risk alone, the public sector or the private sector would be a harm to the implement of the project. To ensure the successful implement of PPP project, reasonable risk sharing should be allocated between the public sector and the private sector. To best utilize the PPP model, the following of the general rules of large project construction and reasonable and fair risk sharing of involved parties are the foundations of PPP project operation.
First, it should give play to unique advantages. Due to the different resources of participants of PPP projects, the ability to face the risk is varied significantly. Whoever has the best ability to control a certain risk should exploit its advantages in that area. For example, internet network involves the cooperation of several countries and the risk of political, policy and law that the private sector is not willing to take or can’t take. However, the government has the ability to take the risk. In this case, the relative government should take the risk. The construction risk occurs in the progress of project construction. The contractor has the best ability to control the risk; then the risk should be taken by the contractor. Accordingly, operational risk management should be allocated to operation companies.
Second, the risk and the profits should match. High risk shall come with high profits. Low risk shall come with low income. Fair is needed. Only fair could connect all the involved parties together and stay a rational and prudent behavior in the period of the project. This is the prerequisite of being an interesting community.
Third, act according to one’s capability. The risk should match the capability of participatory. It should have a ceiling. If an investor bears the risk that he can’t take, then it would easily lose control. Especially in the implementation of a PPP project, if the risk is much bigger than it estimated, it should not let one party take the risk alone. Otherwise, it will harm the enthusiasm of the risk takers.
Overall, PPP is the inevitable trend of social development and the balance of power and money. As long as the moral hazard is controlled reasonably, it is believed that the PPP could benefit the whole mankind finally.