THE management of the health sector in Bangladesh is physician-based which has advantages. When clinicians, however, venture into public health, they wade into a quagmire of issues which they cannot fathom. They hardly understand the difference between contracting in, contracting out, the purchasing of goods, works or services and public-private-partnership.
It was Muhammad Ali, the ruler of Egypt, who in the early 19th century sued private companies to implement public projects at a minimum cost, by allowing concessions. Concession is granting a legal authority of rights, of land or property and an exclusive right to operate, maintain and carry out investment in or for a public utility for a given number of years.
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PPP in recent times
Public-private partnership schemes made big profits from infrastructural projects such as railway, roads and dams in the late 18th century in the United States. The 1970s and 1980s saw pressure by interested parties to adopt public-private partnership as a solution to the cash crunch in the public sector, which however, was not beyond question. In 1992, the John Major government in the United Kingdom introduced the private finance initiative as a form of public-private partnership to reduce the public-sector borrowing. To expedite the initiative, Major created institutions with influencers from London and accountancy and consultancy firms.
During his first term in office, Tony Blair made public-private partnership the norm for government procurement in the United Kingdom. In 1997, the Labour government expanded the private finance initiative but emphasised its efficiency through risk sharing. Blair created Partnerships UK, a new semi-independent organisation, to promote and implement private finance initiative. About the same time, public-private partnership schemes were initiated in OECD countries. The first governments to implement public-private partnership schemes were those which were short on revenues. They were looking for alternative forms of public procurement. These early public-private partnership projects were supported by wealthy business magnates.
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PPP financing
PRIORITY to a competitive project may sometimes handicap the allocation of public fund for other projects. At times, fund may not be available immediately for a project that may become a priority later. This is one reason of the adoption of public-private partnership schemes by the public sector.
In the United Kingdom, bonds are used rather than bank loans for financing the private sector. In some public-private partnership schemes, the price of using the public-private partnership services is borne by users of the services, eg tolls from highway and freeway users. In private finance initiatives, capital investment is made by the private sector under a contractual agreement with the government to provide services, some costs of which are borne wholly or partly by the government upfront or later.
Private-sector partners may form a special company/consortium called a special-purpose vehicle to develop, build, maintain and operate infrastructure for the contracted period. Special-purpose vehicles are usually financed from pension funds, life insurance companies, sovereign wealth and superannuation funds and banks. Governments may also invest in the projects with an equity share. The parties to the consortium may be made up of a building contractor, a maintenance company and one or more equity investors. The building contractor and the maintenance company are the decision makers who are paid back to clear their debts to the creditors/debt holders and ownership rests back on the public sector.
The construction of hospital buildings were financed in Europe by private developers and then leased out to hospital authorities. The private developer or a third party manages the hotel component of the hospital. Governments sometimes make contributions in kind to a public-private schemes, eg the transfer of existing assets. Governments may also provide revenue subsidies, eg tax breaks or by guaranteed annual revenues for a fixed period.
Public-private partnership contracts may include some innovative aspects 鈥� for example, post-business hour renting of facilities, which may reduce the cost of the project upfront to the users or charging fees for certain services, eg contracting in of a cafeteria managing party. Monetisation may also occur through revenue-generating assets, eg parking lots, garage and metres, public lights, toll roads, etc. Public bodies may lease them to private entities in exchange for covering operation and maintenance.
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PPP conditions and management
Public-private partnership schemes transfer risk to private partners of project failure or cost overruns. It is assumed that the private sector entrepreneurs are more adept at managing risks which however, has no guarantee. Some projects may be too complex to understand at the initiation. This may end up in increased risk management costs and, hence, increase public-private partnership cost. The understanding of the risk sharing aspects of a public-private partnership scheme needs knowledgeable and experienced partners on both the sides. The public sector officials should have a plan of exit in case risks get too high and unmanageable.
Public-private partnership schemes are encouraged with the belief that the private sector is inherently more innovative and efficient in management. Public sector managers are also agile and smart.
The monitoring of the quality, progress, cost and its intentional or unintentional cost overrun should be built into the public-private partnership contract in unambiguous terms.
By practice, public-private partnership schemes are long-term contractual arrangements, for 15 to 30 years. With regard to the designing, building, operating, maintaining and transferring of ownership, different forms and conditions of public-private partnership schemes exist globally.
Bangladesh has a public-private partnership authority, set up under the Prime Minister鈥檚 Office. The authority is governed by an a 2015 law and has rules and guidelines to go by. It assists line ministries to identify, develop, tender, negotiate, finance and monitor public-private partnership projects.
Unsolicited public-private partnership projects are also encouraged by the public sector, based on marker needs.
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Available PPP support
THE World Bank supports public-private partnership in member countries. The United Nations鈥� Sustainable Development Goal 17, target 17 encourages and promotes public-private partnership and civil society partnerships. The success of this target is measured by the amount in US dollars committed to public鈥損rivate partnerships for infrastructure worldwide.
USAID promotes public-private partnership globally through the Development Credit Authority. This has been merged into the Overseas Private Investment Corporation in 2019. The US state department also promotes public-private partnership through its Office of Global Partnerships.
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Common PPP types
Build-operate-transfer: The same contracts/contractors undertake the design, construction, operation, maintenance, and the financing of the project. Finally, the facility is transferred to the public sector after recovering the invested amounts and the margins.
Build-own-operate-transfer: During the agreed concession period, the private company owns and operates the facility with the prime goal to recover the costs of investment and maintenance.
Build-own-operate: In a build-own-operate project, the ownership of the project remains usually with the project company. This framework is used when the physical life of the project coincides with the concession period. A build-own-operate scheme involves large amounts of finance and long payback period.
Build-lease-transfer: Under build-lease-transfer schemes, a private entity builds a complete project and leases it out to the government. The ownership remains with the shareholders. After the expiry of the leasing, the ownership of the asset and the operational responsibility are transferred to the government at a previously agreed price.
Design-build-finance-maintain: The private sector designs, builds and finances a project and provides facility management or maintenance services under a long-term agreement. The public sector operates services in the facility.
Design-build-operate-transfer: When the client has no skills or knowledge of technicality of the design, building and management of a project, a company is contracted to design, build, operate, and then transfer it to the government.
Design-build-finance-maintain-operate: A private company designs and finances construction for the government. The private party assumes the financial risks until the end of the contract period. The private sector assumes the responsibility for maintenance and operation. Usually, the public sector begins payments to the private sector for using the asset.
Operation and maintenance contract: A private company operates a publicly-owned structure for a specific period of time.
Social impact bond: Social impact bonds are public-private partnership schemes which fund for social services through a performance-based contract. These operate for a fixed period of time; the rate of return is flexible. Generally, repayment to investors is contingent on a specified social outcome being achieved.
Public-private-community partnership: Public-private partnership schemes may assume a public-private-community partnership. This may also be joined by community-based organisations and non-governmental organisations which participate in planning and management. This is, however, not a public-private partnership in the strict sense if there is no risk sharing by non-public partners and if the contract is not for a considerably long period.
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PPP caveats
PUBLIC-PRIVATE partnership schemes may impart on the public sector the expertise and efficiencies that the private sector can ensure, such as innovative construction of facilities and astute provision of services. Criticism is, however, not infrequent, which claims that public-private partnership schemes privatise public services for profits of the private sector. Lack of transparency has frustrated many Public-private partnership projects globally.
Although loans obtained by the public sector from public funds entail lower interest, borrowing is rather common by the private sector from other sources at a high interest rate, with or without any back-up guarantee by the government. This heightens the risk of the private sector, which it tries to recuperate from the government/owner through its adept pricing.
When the cost of using the service of the completed project is borne by the end-users or paid by the government in instalments, the public-private partnership schemes are known as 鈥榦ff-balance sheet鈥� financing by the public sector as it offloads the costs of the project to service users or future governments.
The public sector sometimes pays the private sector through 鈥榓vailability payments鈥� when the project reaches a usable stage. This is an 鈥榦n-balance sheet鈥� financing. This deferred payment appears an efficient buy but the public-private partnership projects are ultimately to have cost significantly more than direct public financing for understandable reasons.
Public-private partnership contracts are complex, extensive and tortuous than publicly financed contracts. The contracts are always legal instruments and time-consuming before the stage of agreement is reached. They entail legal costs and payments for consultants.
Unsolicited public-private partnership schemes may be costlier than competitive procurements. If a deferred payment is based on the borrowing rate of the payment dates, an element of uncertainty creeps in. If the public sector builds a project, its borrowing rate will also be lower as stated earlier as the risk is low of failure to return besides other reasons.
Risk sharing by the private sector in a public-private partnership scheme is its fundamental condition. But the clever consultants and lawyers chip in tricks to their private sector clients to share the risk with the clients. The value of the risk may also be appraised too high that might compel the government to cover this overestimated risk unknowingly.
Dual centres of responsibility and ownership do not allow the compliance of a request by one part to the other, without a time-consuming process of going through the top of the divided units with their own consequences especially in hospitals.
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PPP in Bangladesh health sector
THE International Finance Corporation, a subsidiary of the World Bank, was appointed as the public-private partnership transaction adviser by the Bangladesh public-private partnership office to assist in formulating the public-private partnership transaction structure, preparing the tender documents and conducting the bid for selecting a private operator through a competitive process for the existing dialysis facilities at the National Institute of Kidney Diseases and Urology and the Chattogram Medical College and Hospital. The International Finance Corporation conducted detailed technical, financial, environmental, regulatory and legal aspects and provided recommendations on the financing mechanism and risk allocation. A tripartite memorandum was signed, thereafter, between the international corporation, the public-private partnership office and the health and family welfare ministry.
The winning bidder, Sandor, India is responsible for financing, refurbishing, staffing, operating and maintaining the dialysis centres in these two facilities. The private partners installed 70 dialysis stations at the National Institute of Kidney Diseases and Urology and 40 at Chattogram Medical College Hospital. The contract, signed in 2015, is meant for 10 years. In order to enable all service recipients to avail care, staggered prices are collected from service recipients, one band paying the existing market price. All users are, however, given dialysis by washing each dialyser/filtre for three patients. To cover the poor, who pay a small amount, the government pays $ 700,000 each year to the operator.
In 2023, Sandor demanded an additional financing for the additional number of patients served. This created a complex and nagging payment dilemma that irritated Sandor management as well as the payer, the Directorate General of Health Services. The bone of contention was a lack of knowledge about the contract conditions in the Directorate General of Health Services, which is the paymaster and, of course, in charge of the management of the two hospitals.
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AM Zakir Hussain is a former director, Primary Health Care and Disease Control, former director of IEDCR, DGHS, former regional adviser of SEARO, WHO and former staff consultant, Asian Development Bank, Bangladesh.
