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RealityCheck contents JULY 2011 Public-Private Partnerships: Trying to Balance the Equation 3 Understanding Public-Private Partnership 11 PPP under the Aquino Administration 19 Nepal’s KUKL: An Example of PPP Disaster 31 about this issue Governments across the globe are now being encouraged to partner with private for-profit entities in various fields that were formerly the exclusive or The Reality of Aid dominant turf of public agencies, in what has come to be known as Public-Private Partnerships (PPPs). Private sector participation in building and operating infrastructure and other public service facilities, under some contractual arrangement with the government, is ACKNOWLEDGEMENT increasingly packaged as a win-win solution, which on one hand taps private investment, management, and This Reality Check was made possible with valuable technical capacity, while on the other hand supposedly contributions from Pio Verzola, Jr. of IBON benefits the government and the public through International, Gopal Siw akoti ‘Chintan’ of Nepal increased revenue and improved service. Policy Institute and IBON Foundation, Inc. However, a growing body of evidence shows that Cover Photos by: users.owt.com, Wafed PPP schemes on paper may not show imbalances in Inside Photos by: ppp.gov.ph clickthecity.com how costs and benefits, risks and opportunities, are afscme.org shared between the government and private partners, Lyn Rillon resulting in eventual failures and unmet public needs. kvitters.com In short, governments especially in developing urbanrail.net countries must reassert the primacy of public service, psalm.gov.ph democratic regulation and social accountability news.ph.msn.com over private profit, and continue to develop better pinoyexchange.com alternatives to untrammeled privatization. Wafed Cover Design and Layout by: Jennifer T. Padilla Secretariat This issue is prepared by: 3rd Floor IBON Center 114 Timog Avenue, Quezon City 1103 Philippines IBON International Tel: (632) 927 7060 to 62 local 201 Fax: (632) 927 6981 E-mail: [email protected] Website: http://www.realityofaid.org Reality of Aid - Asia Pacific pp.gov.ph Public-Private Partnerships: Trying to Balance the Equation Pio Verzola Jr with contributions from Galileo Burgos, Jr. Governments of developing countries across urged to enter into any of a wide range of the globe are now being encouraged to partner arrangements with the private sector, to utilize with private entities in various fields of socio- its capacities and resources in building and economic development that were formerly the operating facilities for public services and exclusive or dominant turf of public agencies. other projects deemed crucial to the country’s overall development effort. In what has come to be known as Public- Private Partnerships (PPPs), often also Usually amidst the backdrop of governments referred to as Private Sector Participation hobbled by fiscal constraints and low technical (PSP), developing country governments are capacity, private entities are encouraged to Pio Verzola Jr is the Head of the Policy and Communications Unit while Galileo Burgos, Jr. is a Research and Editorial Assistant of IBON International. 3 The Reality of Aid invest capital, infuse technology, and exercise in contrast with an earlier generation of managerial functions in various sectors privatization schemes in which the government formerly reserved for public agencies and dropped out of specific public services government corporations, such as power altogether while private companies took over. generation and distribution; water, sanitation and waste management; pipelines; hospitals, As the Asian Development Bank (ADB) school buildings and stadiums; prisons; said: “PPPs present a framework that – while railways, roads, and air traffic facilities; mass engaging the private sector – acknowledges housing; and information systems. and structures the role for government in ensuring that social obligations are met PPP defined and successful sector reforms and public investments achieved.” 2 As defined by the World Bank Institute (WBI), “Public-Private Partnerships (PPPs) At the same time, ADB explains, private-sector mobilize private sector resources – technical, entities engaged in PPPs aim to profit from managerial, and financial – to deliver essential their capacity and experience in the business public services such as infrastructure, health and will seek appropriate returns for their and education.”1 investment. Its global proponents are careful to emphasize The International Monetary Fund (IMF) has that the concept of PPP recognizes the listed down examples of schemes and their continuing functions exercised by government respective modalities on which public-private in providing such public services. This is partnerships can be based.3 (See Table 1) Table 1. PPP Schemes and Modalities Schemes Modalities The private sector designs, builds, owns, develops, Build-own-operate (BOO) operates and manages an asset with no obligation to Build-develop-operate (BDO) transfer ownership to the government. These are variants Design-construct-manage-finance (DCMF) of design-build-finance-operate (DBFO) schemes. Buy-build-operate (BBO) The private sector buys or leases an existing asset from Lease-develop-operate (LDO) the government; renovates, modernizes, and/or expands Wrap-around addition (WAA) it; and then operates the asset, again with no obligation to transfer ownership back to the government. Build-operate-transfer (BOT) The private sector designs and builds an asset, operates Build-own-operate-transfer (BOOT) it, and then transfers it to the government when Build-rent-own-transfer (BROT) the operating contract ends, or at some other pre- Build-lease-operate-transfer (BLOT) specified time. The private partner may subsequently Build-transfer-operate (BTO) rent or lease the asset from the government. Source: International Monetary Fund. Public-Private Partnerships. March 12, 2004. 4 RealityCheck JULY 2011 Some authors associated with the World Bank prefer the term Private Sector Participation (PSP). Christophe Schramm, for example, explains that “PSP” better captures the sense of a “contractual risk-sharing relationship between the public and the private sector that seeks to bring about a desired policy outcome with mutual benefit.”4 Based on a study focused on urban public services in the Middle East and North Africa region, Schramm proceeded to offer a typology of private-public arrangements, presenting a spectrum of PSPs and describing the specific features of each kind of PSP. At the left end of his table, the public sector takes over most of the risk, while the private sector clickthecity.com gradually becomes the risk-taker when moving 5 to the right end of the table. (See Table 2.) services, and loss of public accountability. Such dislocations in turn led to mass protests and PPP evolved from earlier privatization schemes even uprisings in various parts of the world. The policy of privatization has been For instance, some 200 workers of the implemented across the globe since the 1980s, old publicly Metropolitan Waterworks and together with other neoliberal structural Sewerage System in the Philippines, dubbed reforms, as part of Structural Adjustment as one of the country’s biggest privatization Programs (SAPs) imposed by international act at that time, were promptly fired by the financial institutions (IFIs) especially on new private corporate owners only a few developing countries. days after buying the public water system in August 1997.6 In Argentina, water privatization Through policies and programs that resulted in the retrenchment of half of its implemented privatization, developing country workers and higher costs, while supply and governments allowed the transfer of their distribution has not yet improved.7 assets, contracts and functions into the hands of the private sector – supposedly so that Due to these early failures as well as remaining governments can shift public spending to legal and institutional hindrances to full-blown other priorities and thus avoid the perennial privatization, modified versions have emerged, problem of budget deficits. which have been collectively called PSP or PPP. However, privatization programs and policies Are PPPs for public service or for private profit? have been found to be too bitter a pill to swallow for many developed and developing According to the Organization for Economic countries, often resulting in massive layoffs of Cooperation and Development (OECD), public workers, higher costs of basic public “PPPs can combine and reinforce each other’s 5 The Reality of Aid Table 2. Service (or management) Lease contract BTO/DBO/DBFO, Concession Privatization contract or affermage BOT/BOOT Asset ownership Public Public Public Public/private Private Capital investment Public Public Public (BOT: Private) Private Private Operational Limited Yes Yes Yes Yes efficiency New services No Yes Yes Yes Yes User fee No Yes Yes Yes Yes Undetermined Typical length 1-15 years 5-25 years 15-30 years 10-50 years (unless determined by license) Source: Christopher Schramm. “Private Sector Participation in Urban Public Services: Comparison of Laws and Institutions in MENA Countries.” World Bank. April 2006. [private-sector and public-sector partners’] On the other hand, a major 2007 study by knowledge and capacities – and bring Gassner et al., which analyzed 302 utilities with complementary skills in complex processes private-sector participation and 928 utilities – for example access to health

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