PPP Development Stage – Establishing Principles
8.2 What are the key issues?
The following principles, which should be integrated as a standard
part of PPPs, (are outlined in the remainder of this Tool.
They are not listed in any particular order.
Transparency – Competition –
Accountability – Legitimacy and legality –
Clarity and predictability – Specificity
Economic & financial sustainability – Flexibility
Continuous learning –
Equity Inclusiveness Empowerment
Transparency is sharing information and acting in an open
manner. It allows stakeholders to gather information that
may be critical to uncovering abuses and defending their interests.
Transparent systems have clear procedures for public decision-making,
open channels of communication between stakeholders and officials
and make a wide range of information accessible.
Clear rules, fairness and transparency can ensure an
attractive environment for private investors and other potential
partners of local government. Transparency and information
sharing can also eliminate conflicts caused by incomplete
or distorted knowledge.
The private sector requires a secure legal environment
[Tool 15], but it also requires that the process is “transparent”.
Transparency can assist in making sure that all parties
are treated equally and fairly. This underpins private sector
interests; it can also enhance competition and reduce costs.
Civil society requires transparency, as it is a vital aspect
of more accountable, democratic and inclusive urban governance.
It means adopting processes to keep stakeholders informed,
curtail corruption and to make openness and access to information
What does transparency mean in
Transparency is about including, not excluding, all stakeholders;
it is also about building awareness. Stakeholders might include:
consumers, voters, labour organisations, bidders and the
municipality itself. These individuals and groups need proper
information about potential impacts, policies, partnership objectives
and how partners will be chosen and contracted.
Transparency is also about preventing corruption by being
open about government decision-making. Corruption means,
for example, contracts being given to private firms who may
not be suited for the job at the expense of other bidders and
at the expense of the public, especially the poor. There are many
incentives for private sector firms to engage in corruption.
They may want to ensure that they are included in the list
of bidders, whatever their merits. Alternatively, private firms
could attempt to influence the terms for bidders, or they might
simply attempt to be selected regardless of whether or not they
are the most suitable bidder.
What makes a PPP transparent?
Municipalities should establish rules that help them to be
transparent in their activities. The process and any changes
should be made public and should be as open as possible;
this should be the case continuously throughout the project
cycle. These rules to aid transparency should be appropriate
to the local context and the way actors work in the municipality.
For example, when private sector actors and individuals are
bidding they must all:
- have access to the same information about the project;
- comply with the same minimum
- be prohibited from involvement with those awarding the contract;
- be prohibited from collusion with other bidders; and
- be bound
to their proposal and not be able to change it after the
contract is awarded.
Transparency is about including, not
excluding all stakeholders.
Transparency is about building awareness.
Transparency is about preventing corruption.
Competition helps to keep costs low and ensures that services
respond to customer requirements. Competition between potential
providers of an urban service makes it possible for a municipality
to test the market and get the best possible deal for its
residents. Competition encourages those involved to set
lower prices and offer good value for money – to provide
good services efficiently.
Partnerships are only viable when there is a private sector
capable of performing the tasks required. In the absence
of any competition, many of the benefits of PPPs are threatened.
Where the number of potential private operators is limited,
it is crucial to ascertain if those there are would be
able to meet the standards required.
What makes a competitive environment?
There are many facets to creating a competitive environment.
Municipalities need to develop some understanding of what
they can do about those facets, although many occur at higher
levels of government. For example:
- opening markets to all actors, by dropping any legal
barriers that prevent entry is a key to competition in urban
service delivery. (This means that policy and legislation
that prevents small-scale providers from delivering services
needs to be challenged. For instance, contracts with exclusivity
clauses need reconsideration if a number of smaller service providers
could otherwise be delivering services to the poor.);
- ensuring fair and equal access to relevant information;
- building a market of potential service providers and technical
- ensuring respect for commercial freedom;
- avoiding arbitrary intervention; and
- ensuring clarity of output specifications that concern the
scope, duration, asset and service requirements,
ownership and management conditions and standards and risk transfers
(see the subchapter on transparency above).
Competition makes it possible
for a municipality
to get the best
possible deal for its residents.
What are unsolicited bids?
Unsolicited bids are often the starting point for a municipality’s
interest in PPPs. Such bids typically come from private entrepreneurs
who offer the municipality some ideas about how services could
be provided or expanded through their involvement. This can add
useful ideas to the municipality’s thinking, and help it
to address problems to which it might not have previously
had an answer.
However, while unsolicited bids may introduce innovative
solutions, they also pose complex questions.
- Does the proposal actually address a priority of the
- Is it an attractive sounding proposal that will bring benefits
not included in existing development plans?
- Has the municipality made sure that the proposal gives the
best deal in terms of providing this service?
Accountability is responsibility for performance and results;
it involves holding the partners (private or municipal)
responsible for results against agreed upon performance standards.
How is accountability achieved?
In order to develop an accountable PPP arrangement, it is necessary
for the municipality to:
- define the responsibilities of each partner;
- ensure clarity of responsibilities even as roles develop; and
- monitor the achievement of goals over the duration of
Accountability is closely linked to creating incentives
for the different parties. For example:
- elected councils have the incentive of meeting the demands
- municipal officials may be encouraged through performance measurement
that is linked directly to successful delivery through
the partnership; and
- the private partner has the incentives of maintaining a sustainable
business and winning future contracts.
Such incentives should be considered carefully during
the negotiation of a partnership contract.
Accountability to whom?
Customers’ satisfaction is the main objective of accountability.
Mechanisms that allow rapid response to customer needs also facilitate
accountability. Customer complaint handling systems is one important
element, and the introduction of the necessary support systems
should enable service providers to function with sufficient accountability.
The procedure of the public/social auditing could be a way to keep
the project partners accountable to the customers.
Accountability holds the partners
responsible for results against agreed
upon performance standards.
What happens when partners do not perform?
Typically, penalty clauses are included and need to be enforced
if partners fail to meet their obligations in the partnership.
4. Legitimacy and Legality
Partnerships need a firm legal basis. This creates a safe environment
for investors, and a sound basis upon which the delivery
of services can take place. If the legal basis of a partnership
is in question, the accountability of the parties will be
tenuous; this in turn will threaten the successful delivery
of the service.
Nonetheless, PPPs frequently face political, ideological
and historical objections, or the whole process of awarding
contracts may be placed in question.
How is legitimacy and legality ensured?
The key lies in effective management of the process and due
legal process. These involve:
- stakeholder participation (this is essential);
- clarity of objectives of private sector
- openness through articulated policy frameworks and access to
- clarity in the rights and obligations of the participating
- clarity in the legal basis for the partnership.
A firm legal basis creates
a safe environment
investors and a sound foundation
for the delivery of services.
5. Clarity and Predictability
The partnership framework and the contract that results must
be as clear as possible to create a stable context for the
activities relating to the partnership. A lack of clarity
discourages investors, and even if they do enter an agreement
with the municipality, the lack of clarity leaves the whole
arrangement vulnerable to inadequate performance, legal
and technical disputes, and uncertainty. It also makes it more
difficult to monitor and evaluate the partnership accurately,
and thus to take action if service providers do not perform
to the standards expected.
Predictability can be developed through the actions of
key actors and the regulatory arrangements. For example,
investors want to know that a change in political leadership
would not jeopardise the municipality’s commitment to
the partnership. The clearer and firmer the rules about tariff-setting,
determination of levels of service and decision-making processes
in general, the more attractive a partnership becomes to private
and community partners.
The partnership framework
must be as clear
to create a stable context.
To be successful, the partnership framework and the options
for private sector participation must be targeted to the
specific objectives of the municipality and the service
needs under consideration. Any partnership needs to be
designed according to the specific problems and circumstances
it is supposed to address. A good partnership arrangement
is one that builds on the assets of local conditions.
The principle of specificity (i.e., creating a specific
partnership appropriate to the context) is closely tied
- the process of establishing particular objectives and
analysing local conditions;
- the needs of the potential range of partners in a given context;
- the range of tariffs different types of consumers can pay,
and are willing to pay;
- the concerns of different stakeholders;
- the specific development needs in the community; and
- the utilisation and development of local resources as
far as possible.
For this reason, partnership arrangements must be
framed to encourage the use of local labour, arrangements
with small enterprises, the use of local materials and
other locally relevant development interventions (and
these considerations will then need to be specified in
7. Economic and Financial Sustainability
A PPP is only feasible (for the public sector and the private
operator) if it is economically and financially sustainable.
Financial sustainability depends first on whether there
is sufficient demand for the contracted service to sustain
consumer willingness to pay, or a governmental acknowledgement
that it needs to support the service through subsidisation because
people who cannot pay need the service (for this reason, accurate
tariff-setting that reflects demand is essential) [Tool
Economic sustainability can be affected by the economic activity
the partnership generates. For example, if it uses local
labour, stimulates new entrepreneurial activity and creates
new opportunities in the informal sector, the partnership
is likely to attract community support. This would also have the
effect of creating more demand. In this manner a project could
have many spin-offs, which in turn become factors that sustain
or even accelerate its momentum.
Flexibility is a principle applied to all partnerships. Changes
are likely to occur on PPP projects as they develop. In
addition, external conditions can change as well. These changes
are difficult to predict, especially if this is the first PPP project
that a municipality has undertaken [Tool 19].
9. Continuous Learning
Continuous learning means making a conscious effort to turn
daily incidents and activities into “learning moments”.
These learning moments can then be shared with others – in
the case of partnerships, with other project stakeholders.
Soon everyone is involved in a process of learning, discovery
and trial of new ideas or techniques. Thus, continuous learning
allows each partner of the PPP to progress, making the partnership
stronger, more fruitful and satisfying for all participants.
However, continuous learning requires that all partners to
- apply new information and skills;
- take the time to inquire and reflect about the experience;
- obtain up-to-date feedback;
- remove obstacles to accept and understand the feedback;
as open as possible to the feedback (which requires a fair degree
of personal maturity);
- make ongoing adjustments, based on ongoing feedback, to the
way the partnership works;
- and conduct their work in order to more closely meet their
priorities and values.
One of the primary principles of partnerships aiming to deliver
benefits to the poor is equity and this requires explicit
provision in the partnership framework and in the contract.
Large-scale operators seldom have much incentive to cater for
the needs of poorer consumers, because in most cases they are able
to achieve higher profit margins with less risk in non-poor
The key mechanisms to ensure equitability include:
- differentiated service levels;
- alliances or partnerships with community-based service organisations;
- flexible payment options; and
- appointing NGOs as advocates for the poor
Inclusiveness is a principle that implies the removal of
institutional constraints and enhancement of incentives
to increase the access of diverse individuals and groups to
service. The need for increased inclusiveness in the formulation
of national regulations has to be identified clearly at the beginning
of the planning process.
Inclusiveness for all stakeholders in PPP projects is essential
if the outcomes are to truly enhance the availability
and quality of the services. In fact, the degree of inclusion,
or participation of poor and marginalised groups in
shaping PPP policy and enjoying benefits is a major indicator
of pro-poor planning and governance.
In order to promote inclusiveness, participatory techniques
can be used. Specifically, a Participatory Poverty Assessment
can strengthen more conventional poverty assessment processes
[Tool 4 and 5].
However, it is worth pointing out that although inclusiveness
leads to improved government decision-making, this could
at times occur at the expense of efficiency. The use of
a standard set of procedures for participation will result
in increasing efficiency gains.
Empowering the poor is a central principle in partnerships
focused on bringing benefits to poor communities. This form
of empowerment is the expansion of assets and capabilities
of poor people to participate in, negotiate with, influence,
control and hold accountable institutions that affect their lives.
In its broadest sense, empowerment is the expansion of freedom
of choice and action.
This is a participatory process, which places or transfers
decision-making responsibility and the resources to act into
the hands of those who will benefit. The empowering process
- strengthening the legal status of stakeholder organisations;
- capacity development for stakeholder organisations;
- enhancing stakeholder authority to manage funds, hire
and fire workers, supervise work and procure materials;
- enhancing stakeholder authority to certify satisfactory
completion of projects and establish monitoring and evaluation
- support for new and spontaneous initiatives by stakeholders.
does a PPP empower the poor?
Partnerships can become more focused on empowerment through
the development of appropriate procurement procedures
for formal private sector arrangements. For example:
- ensuring participation in all appropriate phases and
- ensuring that community representatives play a role in decision-making;
- promoting the participation of vulnerable groups by developing
- creating supportive institutional mechanisms;
- supporting the rights, conditions and compensations of employees;
- ensuring that informal service providers are empowered to take
on greater roles.
Empowerment is the
expansion of freedom
of choice and action
How is empowerment carried out?
Empowerment may be facilitated by the stakeholder group or
individual alone, through education, coalition building,
community organising, resource development or advocacy assistance.
A mediator can also encourage empowerment; he/she can work
with the person or group of lower power or status to help them
represent themselves more effectively.
Who is involved?
Municipal stakeholders in organising
<– Statement of key principles
<– Monitoring and evaluation