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Module 3 - 08 Establishing Principles


8.1 Why establish partnership principles?
8.2 What are the key issues?
Further Guidance

Key Questions:


 
 
 
 

Related Tools:


07 Defining Parameters (scope)
10 Establishing Partnership Processes
13 Financing (cost recovery)



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

 

 

 

 

1. Transparency

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 long-lasting goals.

What does transparency mean in practice?

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 requirements;
  • 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.

2. Competition

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 experts;
  • 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 municipal council?
  • 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?

3. Accountability

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 the PPP.

Accountability is closely linked to creating incentives for the different parties. For example:

  • elected councils have the incentive of meeting the demands of voters;
  • 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 participation;
  • openness through articulated policy frameworks and access to information;
  • clarity in the rights and obligations of the participating partners; and
  • clarity in the legal basis for the partnership.

 

A firm legal basis creates
a safe environment for
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 as possible
to create a stable context.


6. Specificity

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 to:

  • 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 the contract).

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 13].

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.

 

8. Flexibility

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 the arrangement:

  • 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;
  • remain 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.

10. Equity

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 communities.

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

11. Inclusiveness

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.

12. Empowerment

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 can include:

  • 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 indicators; and
  • support for new and spontaneous initiatives by stakeholders.

How 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 activities;
  • ensuring that community representatives play a role in decision-making;
  • promoting the participation of vulnerable groups by developing capacity;
  • creating supportive institutional mechanisms;
  • supporting the rights, conditions and compensations of employees; and
  • 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 the processes
Civil society




Outputs

<– Statement of key principles
<– Monitoring and evaluation

 



 
     
  S T A R T P A G E  
  Module 1 - Before PPPs  
  01-Starting Out  
  02-Strategic Planning  
  Module 2 - Preparation Stage  
  03-Planning & Organising  
  04-Collecting Information  
  Module 3 - PPP Development Stage  
  05-Identifying Constraints  
  06-Defining Objectives  
  07-Defing Parameters (Scope)  
  08-Establishing Principles  
  09-Identifying Partners  
  10-Establishing Partnership  
  11-Selecting Options  
  12-Financing (Investment)  
  13-Financing (Cost Recovery)  
  14-Preparing Business Plans  
  15-Regulating the PPP  
  Module 4 - Implementation  
  16-Tendering & Procurement  
  17-Negotiating & Contracting  
  18-Managing PPPs  
  19-Monitoring & Evaluation  
  20-Managing Conflict  
  21-Capacity Development  
  Contact Information