IN public-private partnerships (PPPs), what is the correlation between and among functions-risks-costs-tariffs-rewards? Who assumes the functions and bears the risks in PPPs? What happens if most of the functions and risks are borne by the private-sector proponent (PSP)? How do we avoid “white elephants”?
One of the hallmarks of a PPP is exchange of resources, sharing of responsibilities and allocation of risks. In a collaborative arrangement for a PPP project, the financing, designing, building and operations thereof are typically assumed by the PSP. This is not without consequence.
The functions performed by the PSP, the costs it bears, the charges the people will pay, and the rewards for the PSP are directly proportional to
these factors.
- Function-risk correlation. The logical effect of a party assuming a responsibility is the assumption of the corresponding cost. The PSP who designs and constructs the bridge will be the one to absorb the design and construction risk. If the bridge collapses or built with substandard materials, the PSP bears the liability.
If, under the PPP contract, the government commits to secure all the government approvals and clearances and warrants against any changes in law and policies, then it shall be responsible if and when these do not happen or when they happen.
Critical, therefore, in any PPP arrangement is the clear allocation of functions and risks. The more functions the PSP is obliged to perform, the more risks it will shoulder.
- Risk-cost correlation. Risks are not cost-free. When a PSP implements and operates a water-distribution project, it will pay the salaries of the work force. If the government will take care of right-of-way projects, then
it will pay for this cost.
This is the risk-cost correlation. The more risks the PSP shoulders, the higher the cost for the PSP.
The actual value of the cost or exposure will depend, however, on the likelihood of the risk happening and the significance or impact if it happens.
- Cost-tariff correlation. Higher tariff or end-user fees will necessarily result from higher costs. Costs incurred by the PSP are, more often than not, passed on to the consumers.
Transmission lines, water pipes and cost of reclamation are not procured for free.
We pay for these.
- Tariff-rewards correlation. The PSP is rewarded for undertaking a project that the government should provide and for assuming most of the functions and risks. The rewards or profit of the PSP will increase when
tariff increases.
However, tariff rates and rewards must not be unrestricted or unbridled. In order for a project to be viable and profitable for the PSP while ensuring the social acceptability of the tariff, the government must have a “skin” in the game. The government may allocate public funds, issue guarantees, extend subsidies, allow its property to be used or issue
tax incentives.
We must not only be willing to use a PPP project, we must be able to pay. Otherwise, the project may become a white elephant.