Innovative Capitalization: Pondering Policy Implications of the Public-Private Partnership Model

Innovative Capitalization: Pondering Policy Implications of the Public Private Partnership Model

One of the most innovative funding strategies is the Public-Private Partnership (P3) model. The Public-Private Partnership is quickly becoming the future for most infrastructure projects. The Public-Private Partnership is a contractual arrangement between a public agency (federal, state or local) and a private sector entity. Through the derivative agreement, the skills and assets of each sector (public and private) are shared in delivering goods, services or facilities for the use of the general public efficiently and effectively. In addition to the sharing of resources, each party shares in the risks and rewards potential in the delivery of the good, service or facility. Given current government fiscal and budget crises, viable funding options are being evaluated for building and renovating infrastructures using small amounts of money from governments or non-governmental organizations. Often, the Public-Private Partnership can be the solution to financing problems, completion of jobs and investing in large projects without sacrificing the government limited financial resources. There is significant and growing empirical evidence that Public-Private Partnership projects come in substantially lower than their initial estimated cost making them very attractive and preferred funding option for many organizations.

The assistance of competent financial advisers may be required. Often, financial advisers’ executive portfolio includes designing and deploying sound financial accounting system with strong internal controls. Further, they may assist in formulating company-wide financial objectives, policies, procedures, and processes to assure all stakeholders of a continuously sound and transparent financial accounting structure.

Moreover, financial advisers may design and execute fraud detection and mitigation strategies. Their assignments may deal with key aspects of fraud examination including fraud detection, deterrence and prevention, internal controls, auditing and investigation techniques, pertinent law and evidence, and fraud schemes involving business-to-business, corporate and personal financing, financial institutions, healthcare, insurance, intellectual property, and securities.

Finally, financial advisers employ managerial economic techniques to mitigate moral hazards and adverse selection for insurance and re-insurance portfolios and corporate clients. Drawing on strategic linkages to pertinent aspects of interdisciplinary competencies in managerial (cost) accounting, managerial economics, managerial finance, business methods, information technology, criminal justice, and law enforcement they formulate appropriate corporate financial management strategies that mitigate financial loss, protect and preserve financial assets.

However, what keeps financial advisers awake at night and occupy most of their professional time are not the objectives of internal control-assuring achievement of an organization’s objectives in operational efficiency and effectiveness, reliable financial reporting, and compliance with pertinent laws, regulations and policies or elements of internal control-control environment, risk assessment, control activities, information and communication, and monitoring but identifying appropriate sources of funds for the enterprise and corporate clients particularly governments and non-governmental organizations.

There are several types of Public-Private Partnerships, depending on the needs, options available and the size of the project being considered. Based on available meta-data and meta-analysis, the most suited public projects to be executed using Public-Private Partnerships are power generator projects and infrastructure projects. The most frequently used formats are: Traditional-Under this funding strategy, the public component of the partnership acts as a contracting officer; look for funding, and has the overall control over the project and its assets; Operation and Maintenance-Under this funding strategy, the private component of the partnership operates and maintains the installation of the project, while the public agency acts as the owner of the project; Design and Build-Under this funding strategy, the private partner designs and builds the facility; while the public partner provides the funds for the project, and has control over the possession and assets generated by the project; Design-Build-Operate-Under this funding strategy, the private partner designs, builds, and operates the facility or project. The public partner acts as the owner of the installation and gets the fund for construction and operation; Design-Build-Finance-Operate-Under this funding strategy, the private sector provides finance, design, build, possess and operates the project, while the public partner only provides funding while the project is being used or active; Design-Build-Operate-Transfer-Under this funding strategy, the private partner designs, builds, and operates, for a limited time the project, and after that specific period of time, the facility is transferred to the public partner.

Others include, Build-Transfer-Operate-Under this funding strategy, the private partner builds and transfers the project to the corresponding public partner. Afterward, the public partner chooses to lease the operation of the facility to the private sector, under a long-term leasing agreement; Build-Own-Operate-Transfer-Under this funding strategy, the public partner builds, possess and operate the project for a limited time, until some time when the installation is transferred, free of charge, including ownership to the private agency; Lease-Under this funding strategy, the public owner leases the facility to a private firm. The private company must operate and will provide maintenance for the facility per specified terms, including additions or remodeling process; Concession-Under this funding strategy, the public agency will be partnering with a private company, conceding all exclusive rights to operate, maintain for a specific period of time, under specific contract terms. The public partner will have the power over the ownership, but the private partner will possess owner rights over any addition incurred while being operated under its domain; Divestiture-Under this funding strategy, the public partner will make a complete or partial transference of the installation to the private sector. The government might include specific clauses in the sales agreement requiring investment and modernizations on the facility, and continuation of the services being provided.

As in all business decisions, there are costs and benefits associated with all capitalization strategies. Financial advisers assist their clients to isolate and weigh the costs and benefits of each funding strategy. And recommend the funding option that provides the maximum net benefit pursuant to the stipulated evaluation criteria. In the next article we will examine some keys to successful Public-Private Partnerships considered as best industry practices.

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