Theme1: The role of PPP unit

The first theme of this discussion is regarding the role of PPP unit.

Our main questions are following three:

• Considering the type of PPP unit, which is more ideal, central PPP unit which has control over quality and transaction cost of all the projects, or the one which has more coordinating and frame-building functions?
• Does PPP unit have to be inside the bureaucrat system? Or can it efficiently function as the expert advisory unit away from the bureaucrat system?
• Do the roles of PPP unit differ according to the country’s own policy on PPP projects? Or is there any common role which PPP unit necessarily fills in any countries?

[1] Author: Paul Noumba UM, Moderator

Organization:

Public Private Partnership in Infrastructure (PPPI)
Program, Finance & Private Sector
Development,World Bank Institute

Role of PFI/PPP Unit?

In October 2006, the World Bank Group (see http://rru.worldbank.org) hosted an e-discussion on "Public Private Partnership Units - Are they needed and what should they do?". The e-discussion attracted contributions from professionals worldwide and beyond PPP units hence demonstrating the relevance to revisit the rationale behind the establishment and the operation of PPP/PFI units.

More and more governments are turning to private sector to provide a broad range of infrastructure services previously provided by the public sector. As they do so, they must acquire and develop new skills, introduce new procedures and processes, and establish new institutions to manage the PPP program. Although these institutional arrangements vary from country to country, governments increasingly set up PPP/PFI units. PPP units worldwide differ in structure, role, mandate, authority, financing and operations. There is no single model that fits all situations and circumstances. But, PPP units as any other newly established institution do not always work as planned. Making the right decisions on their roles, location, and interactions with other government agencies is critical to their success.

To broaden the scope of our exchanges, I have added three new question to the list circulated earlier by the organizers. I look forward hearing from you soon.

Discusssion Questions

• Which type of PPP unit is best for PPI development: i) central PPP unit with control over quality and transaction cost of all PPP projects, ii) central PPP unit with only coordinating and frame-building functions?
• Should PPP unit be established inside government ? Or can it efficiently function as an expert advisory unit away from the bureaucrat system?
• Do the roles of PPP unit differ according to the country’s own policy on PPP projects? Or is there any common role which PPP unit necessarily fills in any countries?
• In some countries sub national governments also rely on PPP to address their infrastructure development needs. What coordination mechanisms should be designed and implemented between central and state-based PPP units?
• Based on your own experience what is the ideal governance structure for a PPP unit?
• How should we appraise the performance of a PPP unit?

[2] Author: Hirohiko Machida

Organization:

Private Finance Initiative Promotion Office,
Cabinet Office, Government of Japan.

Role of PFI/PPP unit :From our viewpoint (Japan)

Thank you for Mr. Um’s showing us clear picture and what we had come through in the PFI/PPP field. As Mr. Um had mentioned, PPP units haven’t had any single ideal model yet, and is seeking to the most effective way. Through the difficulties we are facing every day, I agree with the contexts Mr.Um described for us.

Now I will be the first to provide my own experience and the situation in Japan to share with all of you.

As Mr.Um has wrote to us, there are roughly two categories for PPP units ( 1: central PPP unit with control over quality and transaction cost of all PPP projects, 2: central PPP unit with only coordinating and frame-building functions) and I suppose Japan is the latter case while UK is the former case which seems to be successful since the ratio of the PPP projects in the public sector has come to be stable.

From the perspective that we should improve the budget deficit to achieve healthy finance of the country, in my own opinion, PPP unit must have authority to control the total budget of all the projects eventually. But I don’t have much confidence to say that it is the only way to realize our policy goal. This may be controversial among many countries and I would like to ask your opinions. Especially in the successful countries, how do you decide to arrange PPP unit in your own structure?

[3] Author: Richard Foster

Organization:

Acting Head, Partnerships Victoria Unit
Commercial & Infrastructure Risk Management Group
Department of Treasury and Finance

Role of the PPP Unit

Thank you to Paul Noumba Um and Hirohiko Machida for their comments on this issue. Here are some reflections from our perspective in Victoria.

The role of the PPP Unit depends upon a number of factors. Some of these relate to the bureaucratic structure or "machinery of government". Key factors include the size of government, the size of the PPP program, and the question of where within government infrastructure delivery "sits". In the UK for example, government is large and the number of projects is large, but infrastructure delivery is more "devolved" than here in Victoria. For example, in the UK schools projects are undertaken by local authorities and hospital projects are undertaken by NHS trusts. Here in Victoria, government departments play a more direct role - for example, our hospital projects are delivered by our Department of Human Services. With our smaller number of projects combined with the fact that most projects are delivered by departments or agencies relatively close to central government, it has been practical for the Partnerships Victoria Unit to be directly involved in all projects, providing advice, ensuring compliance with policy and disseminating lessons from previous projects. In contrast, in the UK it would be difficult to envisage a single PPP Unit being across all projects, but in sectors such as health and education the individual departments have established their own units.

There are a number of important roles for a central PPP Unit. These include being a guardian and developer of policy, ensuring a consistent approach is applied, being an evaluator and adviser in relation to risk issues, being a centre of best practice and expertise, and being a focal point for engagement with the PPP industry. All of these roles are important. All of them can be individually undertaken elsewhere within government. However, I’d suggest that if all these roles are undertaken by the central PPP Unit, this will help promote consistency and deliver confidence to all stakeholders - government, the community and the PPP industry. As such, having a central unit perform these roles is a key enabler for a successful PPP program.

In a federal system, the relationship between Federal and State Units depends to a large extent on the nature of the particular system, and the respective responsibilities of the different levels of government. Here in Australia, delivery of much of the major infrastructure in the health, justice, education, water and transport sectors is controlled by the states. Consequently, the Commonwealth (i.e. federal) government has a less significant presence in the PPP arena than the larger States such as Victoria, and the Commonwealth does not exert direct influence upon State PPP programs (although Commonwealth actions can have indirect impacts through such mechanisms as inter-governmental financial arrangements). In terms of co-ordination, the Commonwealth PPP Unit is just another of the Australian government PPP Units that are members of our National PPP Forum. In other federal systems, different relationships between the different levels of government may result in the national government’s PPP Unit taking a primary role, with State Units being secondary.

The question of how should we appraise performance of the PPP Unit is a tough one. The appraisal should not be based on the number of projects delivered, as this is likely to either be out of the PPP Unit’s control, or (if within the PPP Unit’s control) will create an incentive for inappropriate projects to be pushed down the PPP path. Compliance of projects with policy may be appropriate, providing the central unit has sufficient influence over individual projects. Measures relating to policy development are also important, given that PPP markets and practices develop over time, and the central PPP Unit should be responding to (or in some cases anticipating) these changes.

[4] Author: Edward Farquharson

Organization:

Project Director, Partnerships UK

Web discussion on PPP Units

Here are some reflections from a UK perspective. As Richard rightly mentioned, we are faced in the UK with managing a programme across a range of levels of government (including devolved government) and sectors.

The issue of control and coordination: you need both but clearly this has to fit with the existing structures of government and essentially the extent to which levels of government have control over their own budgetary resources. In the UK the underlying principle is that procuring authorities/departments are responsible for and involved in their PPP projects throughout the process - after all they will managing these contracts throughout the delivery phase. But they do so in accordance with certain rules (guidance). In the UK, the policy unit in HM Treasury is responsible for overall policy (and development of top line guidance eg value for money) and to the extent that devolved Governments have their own responsibility. Line ministries with active programmes will have private finance units to manage line ministry level programmes and on occasions detailed guidance. Some issue are cross cutting: for example use of standard contracts where there is a process to control the PFI contract before signature to ensure that any departures from standard contracts are approved (a role delegated by HM Treasury to PUK). PUK therefore plays a regulatory function (delegated by Treasury) as indeed we also play a role in the review of all local authority PPP Outline Business Cases at the point just prior to market launch and as a source of technical input in the development of guidance. Taking a broad historical perspective, we started at central government in 1997 with a PPP Taskforce located within Treasury (there was predecessor body established in the early 90’s) and in 2000 we ‘split’ this with the creation of PUK with the Treasury Unit continuing its policy function and PUK created by Treasury and the Scottish Ministers as a source of detailed public sector focused PPP technical support (for both projects and policy development and for both Treasury, line ministries and Devolved Government PPP policy units).

But there is another important role that I believe does not perhaps appear on your list of functions and that is one of support to procuring authorities: there needs to be a capability within the public sector that can support procuring authorities to different degrees throughout the project preparation process and, as we are increasingly experiencing here, to support the public sector contract managers during the contract management phase. Yes, you can outsource some of this to financial legal and technical advisors and we actively do so and are keen to see the development of this capacity in the private sector, but someone in the public sector needs to have experience of managing these advisors, helping the procuring authority with the governance of the whole process: in many cases the procuring authority might only be dealing with this one project or there might be lessons learnt in other sectors that can be applied elsewhere. So, at PUK we operate a helpdesk for short sharp assistance interventions right through to where we might be involved with the procuring authority sitting on the project board from an early stage and throughout the process over months or years: this is particularly useful for projects in new or complex sectors.

Should the Unit be inside the bureaucratic system? In order to be effective, the PPP unit needs to be able to work through the machinery of government so the immediate answer is that units are probably likely to work better within the government system. So why PUK which is technically a private sector body? In the unique context of the UK public sector, we have found that our structure has effectively enabled Treasury to create a stable platform to attract and retain experienced PPP experts from the public and private sectors to carry out a public sector mission (ie we can offer commercially based employment condition to attract private as well as public sector practitioners to carry out a public sector mission). One of the challenges that may be faced by a public sector based PPP unit is that its experienced officers may depart for the private sector attracted by higher salaries etc or, within the modus operandum of the civil service, will be rotated to other functions after 2 or 3 years. To be effective, a PPP unit needs to be able to build up and retain institutional memory and experience and this can be a challenge of sitting within the public sector. If however this practical issue can be resolved (and it can be in some jurisdictions) while still remaining within the public administration, then that is probably preferable, especially in the early days of a programme (as in the UK with the Treasury Taskforce). It may be added that having our own capital base does give us a certain flexibility to deploy such capital quickly and flexibly in for example the development of new PPP approaches, or assisting procuring authorities with the costs of preparing projects for market or in ‘public good’ initiatives such as the development of the PPP database.

Governance structure: PUK has a normal corporate structure but in addition we have an advisory council chaired by Treasury and populated by other senior public servants - this ensures we are true to our public mission.

Measurement of performance - I agree with Richard’s points. Perhaps uniquely, because PUK is not a department and relies on and can only receive income for the service it actually delivers and because there is no compulsion to use PUK, then our performance is monitored by the extent to which we continue to be used by our public sector users. As we are usually best used for solving difficult project procurements or new issues, use of counterfactuals in assessing our effectiveness is not straightforward. At a project level, when we may sometimes support a project under a development partnership agreement (a sort of procurement joint venture) then our capital is very much at risk to performance which is based on the achievement of having a project successfully bid and achieving value for money. There are sufficient project approval processes external to the DPA to ensure there is not a conflict of interest i.e. pushing a ‘bad’ project through to financial close.

In summary, PPP units play a vital role in helping to ensure policy and practice consistency and coherence across a programme, acting as a vital quality control mechanism but equally importantly, supporting procuring authorities with these complex transaction and contracts.

[5] Author: Paul Noumba Um

Richard Foster of Partnership Victoria provided a sound analysis on the role of PPP unit, and why one size can’t fit all. I fully agree with his reading of the facts. As he stated, the role of PPP units depends on a wide range of factors including - the machinery of government, the scope of the program itself, and I will add progress made in effectively decentralizing decision making from central government to local / state governments. At the early stage of PPP development in a country, it might make sense to start with a central unit to gain expertise and demonstrate results. As the program develops and grows, the need to revisit the institutional setting will become crucial to avoid excessive red tape or deficiencies stemming from centralization.

In terms of roles, Richard suggested the following ones:

• guardian and developer of policy
• "gate keeper" - ensuring that a consistent approach is applied
• Evaluator and adviser in relation to risks
• centre of best practice and expertise

While I agree that for the sake of consistency in program implementation, all these roles should be performed by one organization, it is important to reflect in depth on potential deficiencies that could develop or arise. For example, being guardian or developer of policy and ensuring consistent approach in implementation can go together with centre of best practice. Conversely, the evaluation function is much more controversial and deter the credibility or acceptability of PPP units in case they have to perform the evaluation of projects and subsequently perform the role of gate keeper. This can lead to some potential conflict of interest... The gate keeper role is by all standard the most important to ensure that selected projects deliver value for money. The guardian and policy developer role is also critical, but might be problematic to perform effectively if the PPP unit is established as an autonomous entity - and not within a department of the government.

These issues are by all means very important as they will condition the performance of PPP units. For countries with established PPP programs, the issue is probably to refine the attributes devoted to PPP units whereas the situation is much more complex in countries initiating first steps in PPP development. In such conditions, building PPP institutions does not that much differ from developing any other new institutions such regulatory agencies, FDI development agencies, etc... To do this effectively, one has to pay attention to the machinery of government, and its overall interactions with the political system.

[6] Author: Hirohiko Machida

I appreciate for Mr. Um’s excellent moderation very much. I quite agree that there are several roles of PPP units as Mr. Foster suggested and we should examine one by one whether those roles fit the criteria of the sub-topics, e.g. inside the bureaucrat system, or not.

The reason why I am so interested in this theme is, as I commented on the occasion on the PPPI days WBI held, that the roles of PPP unit, especially in the U. K. or some other countries which have very strict fiscal rules is assumed to need an additional factor, i.e. regulator for keeping a fiscal health.

The most obvious advantage of PPP on the public finances is to reduce current spending and replace it with future liabilities. As far as I understand, this is the exact reason why the U. K. introduced PFI/PPP in 1992, about the time when Maastricht Treaty was concluded. However, simultaneously there is a disadvantage of causing invisible fiscal debt. These advantage and disadvantage are, so to say, both sides of the coin. In order to prevent this disadvantage, there is a need to set a regulator for keeping a fiscal health.

The PPP Unit in the U. K. (HM Treasury and PUK) is doing remarkable job in this context. I would like to refer to clear evidence. The ratio of PFI/PPP investment to the total investment in public services in the U. K. has been consistently 10% in recent years. I assume it is because all the PFI/PPP projects in the U. K. are under the strict control of the PPP unit by using PFI Credit so that controllability of the total sum of the PFI/PPP investment is grasped by the hand of the PPP unit. I understand the PPP unit of the Republic Korea has almost the same function.

Japan introduced PFI/PPP as an effective way to overcome fiscal problem, i.e. reducing fiscal deficit. Our PPP unit, however, has the jurisdiction only to set institutional framework or coordinate the interest of the party concerned. It is quite contradictory. I assume other participants would be more or less aware of the same issue in the individual context. I would be very grateful if other participants suggest their own experience on this issue.