UGANDA CHRISTIAN UNIVERSITY MUKONO

NAME : WAKHULA STUART CHRIS

COURSE : MASTERS OF PUBLIC ADMINISTRATION AND

YEAR : YEAR 2

SEMESTER : ONE

COURSE UNIT : PROCUREMENT MANAGEMENT PARTNERSHIPS

LECTURER : DR. BERNARD OMUKUNYI

QUESTIONS

COURSE WORK : 1 (a) Explain 2 main factors that motivate governments into

Public Private Partnerships foe infrastructure development.

(b) Assess 5 risks in the Public Private Partnerships(PPPs)

Project and how they can be mitigated.

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1 (a) Explain 2 main factors that motivate governments into Public Private Partnerships
foe infrastructure development.

Public Private Partnerships refer to the long term contracts between a private party and a
government entity for the provision of and or development of public infrastructure in which
responsibilities and rewards are shared (Mutuli, B. 2020).

Infrastructure development refers to improvement or construction of major economic and social

Typically, the 2 main factors that motivate governments into Public Private Partnerships for
infrastructure development are financial constraints and enhanced efficiency as analyzed below.

Enhanced efficiency.

Here governments consider assigning the operation and maintenance of a public asset to a
private partner and tying the public partner payment to specific performance targets. Such
linkage between performance and payment creates an incentive for the private operator to
achieve higher efficiency (Yescombe, E. R. 2018). For example, in the water sector, the
management of water utilities can be contracted out to private operators. To encourage efficiency
gains, the private operators payments are tied to specific targets such as the volume of water
saved through leakage reductions.

In addition, through the performance Based contract, governments set standards that contractors
must maintain (Asian Development Bank. 2019). For example, the standard that all potholes on
Pallisa road in Mbale City must be filled within 3 months can be set by government and if the
contractor meets the standards, he can be paid the full fee. If not, penalties are applied. Hence the
private operator is incentivized to maintain the asset in good condition. Hence leading to
improved efficiency due to the performance Based contract for PPPs.

On the other hand, governments can only employ the Performance Based Model for PPPs with
existing infrastructure as the Private Partner is not making any capital investments.

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The government transfers only a limited amount of risk. A private partner may also be reluctant
to accept the maintenance risks of an asset that it has not constructed, if attaining the
comprehensive assessment of its condition is not immediately pleasing.

Secondly, insufficient capital.

Here due to insufficient capital by governments to finance civic and social infrastructures, they
enter into Private Partnerships (World Bank. 2018).The Private contractor pays a fee for
operating an existing public asset and collecting revenue derived from that asset’s operation,
while the initial capital investment remains the responsibility of the public Authority. For
example, a container terminal where the Public Authority leases out the terminal infrastructure to
a private partner, the private partner then makes the required investment to facilitate operations
such as screens and warehouses, then charges users for handling containers. In this case, the
commercial risk is born by the private sector, as profit depends on the number of containers
handled. Fortunately, the period of contracts in PPP leasing models, are typically long enough to
allow Private Partners to see returns on their operational investments.

Eventually, governments generate increased revenue from a pre- existing asset hence solving the
problem insufficient capital.

However, some regulatory oversight needs to be put in place; for example, regulation might be
required to prevent Private Operators from taking advantage of their monopoly position by
overcharging users.

In conclusion, the 2 main factors that motivate governments into public private partnerships for
infrastructure development are; the need for enhanced efficiency and insufficient capital.

b) Assess 5 risks in the PPPs project and how they can be mitigated.

In PPP, a risk refers to the potential for loss that may arise from uncertainties associated with the
project.

Typically, PPP projects face risks such as supply, infrastructure construction, operational risks,
the asset being in a poor condition at the end of the contract and finally the demand risk (United
Nations Economic Commission for Europe. (UNECE). 2019).

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These are analyzed below with each point having its mitigating factors.

Supply.

Land availability is of critical importance because without it, no infrastructure project can be
realized (Mutuli, B. 2020). Land may not be available or easy to acquire for a number of reasons.
Sometimes the land may be unsuitable, may require restoration or may be contaminated.
Historical sites that require preservation may be discovered, hence creating project delays.

Further delays may occur due to the need for environmental permits or due to population
resettlement requirements.

To mitigate this risk, the public partner is normally in the best position to handle this risk since
legal procedures are required (World Bank. 2018).Whenever possible; it is recommended that
land is secured before the commencement of the tendering process due to the potential impact of
land acquisition factors on project delivery.

Secondly, there’s a risk of infrastructure construction.

Cost overruns and delays can occur during the construction phase (Yescombe, E. R. 2018). .
The infrastructure may not be constructed well or might not deliver the service required. In a
PPP contract, the construction risk is allocated to the Private Partners.

Therefore to mitigate this risk, the Private Partners can employ qualified engineers to oversee
project construction so as to ensure the project is completed in time and with quality “so that it
delivers the service required (Asian Development Bank. 2019). This minimizes delays.

Thirdly, operational risks

These need to be considered, after the construction phase (United Nations Economic
Commission for Europe. (UNECE). 2019). Operating or maintaining an asset needs to be
considered. Operating or maintaining an asset might be more expensive than planned. For
example, salaries or input prices might be higher than anticipated, correspondingly increasing
overall operating costs. Additionally, service interruption may result in considerable revenue
losses. This risk is also allocated to Private Partners in a PPP project (Mutuli, B. 2020).

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To mitigate this risk, tariffs should be automatically adjusted to inflation and through the long
term input supply contracts (World Bank. (018). This will take care of the costs involved.

Fourthly, at the end of the contract, another risk is that the asset may be in a considerably poor
condition than anticipated and extensive upkeep costs may be incurred (Yescombe, E. R. 2018).
This risk is found by the public Authorities if they decided to operate the asset, once the contract
is terminated.

To mitigate this risk, the Public Partner must link the final payment to the condition of the asset
to ensure that the private partner maintains the asset in good condition until the end of the
partnership (United Nations Economic Commission for Europe. (UNECE). 2019).

Fifthly, the demand risk.

The risk involved here is that the number of users of a public asset may be lower than
anticipated, resulting into lower revenue and financial distress (World Bank. 2018).
Unfortunately, forecasting demand over a long period can be particularly difficult. A number of
factors can influence the demand for public services such as economic and demographic change.
Competing services can also reduce the anticipated demand (Mutuli, B. 2020). For example,
the opening of an airport in a nearby region may impact demand for air transport locally. Errors
may occur through an over-estimation of the willingness to pay officers. Some users may decide
not to use a highway, even if it is a faster option. Simply because they may view the costs as
unjustified by the time saved. Such difficulties have contributed to inaccurate forecasting in the
past, which can be overly optimistic on average.

To mitigate this risk, the government can shift it to the Private Partners can incentivize it to
provide high quality services to attract as many users as possible (Yescombe, E. R. 2018). But if
the Private Partner has little influence on the demand for services and forecasts are largely
unreliable, then shifting the risk to the Private Partner may be meaningless.

In conclusion, PPP projects face 5 major risks such a supply which can be mitigated by leaving it
to the Public Partner to handle, then infrastructure construction, which can be mitigated by
employing qualified engineers to oversee infrastructure construction, operational costs which can
be mitigated through tariffs which can be adjusted into inflation.

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REFERENCES

Asian Development Bank. (2019). Public-Private Partnership (PPP) Handbook, Asian

Development Bank, Manila, Philippines.

Mutuli, B. (2020). Public-Private Partnerships for Infrastructure Development in East Africa :

Challenges and Opportunities , Palgrave Macmillan, Cham, Switzerland.

United Nations Economic Commission for Europe. (UNECE). (2019). People-First PPPs for the

Sustainable Development Goals. United Nations Publications, New York, USA.and

World Bank. (2018). Public-Private Partnerships: Reference Guide Version3.0. World Bank

Publications, Washington, D C, USA.

Yescombe, E. R. (2018). Public-Private Partnerships Principles and Practice. Routledge, Taylor

& Francis Group, London, UK, and New York, USA.