Tuesday, June 19, 2018
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Mónica Melle Hernández

Responsibility, transparency and good governance in public-private collaboration?

Professor of Financial Economics at the UCM and member of Economists Against the Crisis


Public-private collaboration has grown in Spain mainly during the last decade as an instrument of support to the public sector for the supply of public infrastructure and services. It seeks a greater involvement of the private sector in the construction and management of public goods and equipment, offering a mixed financing system in which the private sector makes investments with a return period of up to twenty years, charged to public budgets (or, In the case of concessions, user fees).


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Similar to other financing systems, it provides the advantage of advancing the availability of new infrastructures to the general public, but at the expense, on one hand, of committing to future expenditure for its use, which limit the financing of new projects within a framework of budgetary stability. On the other hand, it produces a relative increase in private financing compared to traditional public debt financing. The economic and financial crisis has sharply increased the difference between the cost of direct public funding and that of this mixed financing represented by public-private collaboration. In addition, public-private partnerships are embodied in "turnkey contracts", which make the infrastructure cost contingent upon its timely completion.


The economic crisis is being used as an excuse to question the sustainability of the traditional model of public administration that provides public services; and in a way, to promote public-private partnerships. Public administrations, in the face of budgetary restrictions to comply with the Budget Stability Law, use this type of operations to carry out infrastructural projects, mainly in the transport, public health and education sectors, as they are often large and complex investments. However, there is no evidence that countries employing public-private partnerships have fewer fiscal deficits.


Private management of public services is not always better than public management


Conversely, there is a high degree of legal and conceptual vagueness in public-private partnership contracts, which has led to uncertainty and opacity regarding the nature of this phenomenon and its mechanisms of implementation. This makes it difficult for any responsible reflection both on its limitations and on the accounting and budgetary risks involved (Puerto, 2006).



The economic and financial crisis has sharply increased the difference between the cost of direct public funding and that of this mixed financing represented by public-private collaboration



Private management of public services is not always better than direct public management, depending on the scope of outsourcing and the organizational capacities of administrations and private institutions in each of the sectors. Greater or lesser efficiency of public-private collaboration is directly related to the rules of good governance. These norms are transparency and accountability to the general public, the responsibility and participation of the agents involved and the promotion and defence of explicit criteria of efficiency and quality in the decisions that are adopted.


The public sector does not have sufficient information on the return of private investment in public-private partnerships, nor does it have mechanisms to participate in the profits derived from the sale of shares by investors. In the UK, on grounds of commercial confidentiality, responsible departments and investors have been making access to the full cost-benefit information of public-private partnership projects difficult.


There needs to be more transparency in the information available on public-private partnership projects in the financing of public infrastructures in general. Taxpayers are not aware of the detail of the quantification of the investment made, the annual payments that are derived from the investments and services, the contractors or the duration of the contracts.


Meeting social and economic profitability criteria


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Planning, design, control and evaluation of the management of the public-private partnership are indispensable to achieve efficiency and effectiveness in the outsourcing of a service in a sustained manner over time. Planning and design are prior to the conclusion of the contract. Before initiating any public-private partnership project to finance new infrastructures, it is necessary that the public sector that promotes it concludes that it must be implemented through this mixed system of financing, taking into account criteria of social and economic profitability.


Subsequently, it is necessary that the public sector define exhaustively, before carrying out the relevant public tenders, if there is an adequate transfer of the project risk that was traditionally taken up by the public sector in its entirety. Public-private collaboration operations do not imply that the private member takes up all risks arising from the operation, nor even most of them, but that there is a precise allocation of risks according to the capabilities of the parties concerned that is evaluated, controlled and managed as accurately as possible.


By outsourcing the management, the Administration delegates its own competencies of planning, evaluation and control, and according to the economic theory of the contracts, the main-agent relationship that governs outsourcing contracts is enshrined in a problem of moral hazard (Salanié 1997, 108) in which agent and principal do not share the same payment structure and where the information asymmetry favours the agent, since the principal lacks information about their performance, so the principal tends to obtain a suboptimal outcome.


Measures, through the relevant control bodies, should be implemented to ensure subsequent implementation as set out in the technical and administrative requirements to avoid a change in the situation regarding the transfer of risks between the public and private sectors. private sector. 


Becoming true strategic alliances


It is also necessary that the technical and administrative specifications are sufficiently comprehensive so that the tenderer can properly assess investment, financing and service supply projects. Public-private partnerships for public infrastructure must become true strategic alliances between the public and private sectors, so the rules have to be quite clear, not only at the start (construction period), but also at throughout the life of the contract operating period. The specifications not only have to limit the risks for all parties and make the projects viable, but also regulate all contingencies, on one hand or another, which will be surely occur throughout the life of the contract.



There needs to be more transparency in the information available on public-private partnership projects in the financing of public infrastructures in general



With respect to control, and especially evaluation, they must operate without any continuity, throughout the process, to avoid and redress dysfunctional and negative situations for the interests of public administrations. The control is thus instigated in an integral way with the execution of the outsourcing, since it affects both the moment of conclusion of the contract, when setting in the specification variables and control indicators, and during the supply of the service, with variables of control directed at the process and at the result. The evaluation is orientated to the investigation and obtaining of information for the improvement of the satisfaction of the citizen -and also of the public organization-, while the control is directed to the establishment of mechanisms and guidelines for meeting the objectives and the needs of the public administration itself.


Responsibility and active participation


The Spanish administrations have a spectacular deficit of mechanisms of control of the private organisations that provide public services. They have good mechanisms of formal legal and economic control -for example, in the specifications- but they fail to implement them in practice, since they lack the human resources and experience to do so. However, evaluation and control are critical elements for the performance of the indirect management of a public service not only to be maximized, but also to be sustained over time. Specialized agencies (or other specific administrative bodies or areas) should be created in the management of outsourcing, so that, on one hand, knowledge is accumulated in databases and protocols for developing specifications and, on the other hand, some control and evaluation activities are centralized.


Finally, good governance of public-private collaboration requires the responsibility and active participation of stakeholders, especially professionals; particularly in the models of concession that in addition to infrastructures incorporate service supply.



The Spanish administrations have a spectacular deficit of mechanisms of control of the private organisations that provide public services



In short, for public-private collaboration to be efficient it is imperative that the public administration assume the role of organizer, regulator and controller. Only in this way will the establishment of generally lasting partnerships between public and private members allow the sharing of the costs, benefits, and risks associated with the investment and management of assets of general interest. Under such premises, the competence and experience of private companies will generate efficiency for the Administration, taking advantage of the knowledge and methods of operation of the private sector in the public domain.


Published previously in the Magazine Temas (Themes) Nº 235


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THE ECONOMY JOURNAL

Ronda Universitat 12, 7ª Planta -08007 Barcelona
Tlf (34) 93 301 05 12
Inscrita en el Registro Mercantil de Barcelona al tomo 39.480,
folio 12, hoja B347324, Inscripcion 1

THE ECONOMY JOURNAL ALL RIGHTS RESERVED