Public-Private Partnerships and Sustainable Development
Making progress toward meeting the UN’s Sustainable Development Goals will require the use of substantial amounts of time, effort, and resources. The achievement of improving standards of living, including reductions in poverty, longer life expectancy, improvement in health, reductions in infant mortality, and other measures of quality of life, is highly correlated with economic growth (e.g., Son 2010; Srinivasan 2013; Warr 2015); and the private sector is the primary contributor of economic growth in a market-based economy (e.g., Fukasaku 2007; Hipsher 2017: Mkapa 2010). Without economic growth in the areas where poverty is widespread, there can be little progress expected in achieving the UN’s Sustainable Development Goals. While both governments and civil society organizations also have a role to play in providing services to the society, in most modern market-based economies, the ultimate funding for both government and civil society programs comes directly or indirectly from the private sector.
We have seen some amazing success in improving the lives of the most disadvantaged and marginalized people of the planet over recent decades. A few examples are as follows: the percentage of people living in extreme poverty in 2012 was a third of what it was in 1990; since 2000 there has been a significant decline in maternal mortality, child mortality has declined by around 50%; in the least developed countries, access to electricity and clean water has increased greatly and labor productivity has also increased, while unemployment has decreased (UN 2018). These amazing advances have occurred during a period of increasing levels of global trade and the private sector taking a larger and freer role, on average, in the economies of the world (Miller and Kim 2017). Despite the long-term positive trends, there are still many concerns, such as a stagnation in progress in poverty reduction due to the recent global economic slowdown, growing income or wealth inequality in many parts of the world, and uneven benefits, where much of the improvements seen in global statistics on reductions of poverty and other measures of standards of living coming primarily from East and Southeast Asian economies such as China and Vietnam which have liberalized their economies to a much greater extent than what has been found in Latin America, South Asia, and sub-Saharan Africa (e.g., Bhagwati and Panagariya 2013, World Bank 2017, and Yan 2016).
One of the primary reasons for forming private-public partnerships is to try to bring in the innovation, creativity, and efficiency which the private sector is known for into areas previously or normally controlled by the public sector (e.g., Ahmad et al. 2018; DiMartino and Thompson 2016; Reynaers 2013). Yet maintaining some public sector control through the partnership arrangement is expected to help protect the public interest. Additionally, in the least developed economies of the world, it has been suggested public-private partnerships and collaborations can help a market economy function more effectively and efficiently by allowing private sector firms to gain better access to the “bottom of the pyramid markets” (Goldsmith 2011; Schuster and Holtbrügge 2014).
Public-private partnerships are a form of cross-sector partnerships. There is no single definition of public-private partnership used consistently in either the academic literature or by development specialists and government officials, and the level of collaboration will differ from one partnership to another (Ahmad et al. 2018, p. 2). Some definitions of public-private partnership include government institutions and civil society organizations, such as NGOs, working in collaboration, but in general the term is used to refer to a partnership between a government agency and a for-profit private organization. Public-private partnerships are often thought of as a way of liberalizing the way public services are provided without going all the way toward privatization (Broadbent and Laughlin 2003). Governments and for-profit firms have been working together for centuries around the world; however the term public-private partnership has become popular more recently and generally implies a relationship which involves shared risk and is more integrated than a typical supplier-buyer arrangement (Hodge and Greve 2018: Schachter et al. 2017).
Public-private partnerships are built upon the assumption that in some situations collaboration can provide better social services to the society than is possible through a contractual agreement. The term collaboration, the idea upon which public-private partnerships are founded, generally has a positive connotation, but collaborations are extremely unique and create extremely variable results, and the effectiveness of each collaboration can be viewed differently by each partner. Two integral factors to consider when evaluating a collaboration are the objective of the partnership and the level of integration. The evolution of the modern concept of a public-private partnership has gone through a number of different stages, each influenced by popular views of economics and the role governments should be playing in the society at different times; and the countries with Anglo-American cultures have been at the forefront in creating, using, and experimenting with different forms of public-private partnerships (Wanna 2008).
Public-private sector partnerships have become increasingly popular in attempts to solve important problems and take advantage of opportunities to improve delivery of social services, yet there is a lack of comparative research on the impact of these types of arrangements as opposed to using contractual relationships or other approaches (Stadtler 2018; Tsamboulas et al. 2013; van Tulder et al. 2016). One of the difficulties in measuring the success of a collaboration, as compared to the results if a contractual arrangement had been used, is new objectives often emerge during the collaboration process and perceptions of success may include elements other than just achieving the initial goals set during the formation of the partnership. Huxham and Hibbert (2008) listed five types of success in a collaboration: (1) achieving outcomes (2), getting the processes to work (3), reaching emergent milestones (4), gaining recognition from the public and other important stakeholders, and (5) acknowledging personal pride in championing a partnership.
One of the criticisms of public-private partnerships is there can be lack of contractual specifics on closing out a project or when moving into an area not specifically covered in the original agreement, although Chung (2016) provides an example of a successful negotiation to end a collaborative infrastructure project in Australia which did not add to the cost for taxpayers. This result suggests it is possible for public-private partnerships to jointly deal with risk and uncertainty as they arise in some situations.
While public-private partnerships have been used in a wide variety of applications and situations, the area where these partnerships might have had the most impact and have the potential to do so in the future is in building, maintaining, and operating programs and projects associated with infrastructure (Hodge and Greve 2018). Many infrastructure projects, such as building and operating airports, roads, and port facilities, could be considered natural monopolies, and as such, and without direct competition, it would be expected, according to economic theory, private sector ownership of these assets would result in monopoly pricing intended to maximize producer surplus and therefore reducing the consumer and overall surplus created, thus reducing the overall benefits to society. Traditionally it has been believed natural monopolies should be controlled by the government or at least heavily regulated. However, many sectors of the economy which were previously thought of as natural monopolies turned into competitive and highly efficient industries after being privatized, which have brought substantial benefits to consumers and societies. Examples include telecommunications, package delivery, and air travel. Successful privatization of government services generally is a result of removing a government monopoly to create a competitive private industry, while privatization which transfers monopoly power from the government to a single private sector firm usually has been seen as much less successful in increasing overall productivity and improvements in standards of living of the people of a society.
Public-private partnerships are increasingly being used in infrastructure projects around the world, yet it is not clear if these partnerships provide more value for money for the public than using traditional procurement procedures (Tsamboulas et al. 2013). Most infrastructure projects are unique and without accurate or easy methods to develop benchmarks with which to measure results. Schachter et al. (2017) studied public-private partnerships funded by the New Jersey Department of Transportation in the USA and found, consistent with economic theory and the general theme of the cross-sector partnership literature, differing worldviews, priorities, and objectives can cause problems and finding some common ground was needed to achieve positive outcomes. Lertsethtakarn (2018) studied the public-private partnership which created the first mass transit system in Bangkok, Thailand, and found many problems have arisen, although in general the project has been a success and has provided an important service to the people of the city. Chung (2016) examined the completion of the first large-scale public-private project, a major roadway, in Australia. And while the resolution of issues arising which were not addressed specifically in the original contact caused problems and challenges, these problems and challenges were resolved in a manner which preserved the value of the project for the general public. While there has been an increased interest in creating public-private partnerships in building the infrastructure needed to create economic growth and otherwise improve the lives of the people in a community, the superiority of this model in producing results over straight procurement remains mostly a subjective opinion without strong empirical evidence to support this conclusion.
There are concerns from some quarters over including the private sector, which is primarily driven by the profit motive, into providing services and running programs which have previously been under the control of the government. “While in many countries the use of public-private partnerships (PPPs) has spread widely over the past two decades, public opinion continues to harbor doubts and mistrust of the PPP mechanism as a provider of infrastructure, public services, and equipment” (Solino and Gago de Santos 2016, p. 96). Much of this concern would seem to be coming from segments of societies which have a strong mistrust of the private sector and the profit motive. Unlike traditional Marxism thinking, it appears these segments of society today are primarily influenced by religious, political, philosophical, and moral concerns and not necessarily overly concerned about economic efficiency (Hipsher 2013, 2017). Reynaers and De Graaf (2014) looked at the impact of public-private partnerships on public values but found the lack of agreement on the definition of the subjective term public values made it difficult to measure, while Reynaers (2013) opined, like with so many other aspects of public-private or other types of cross-sector partnerships, the impact on public values varied from project to project and was often subjectively viewed differently by various individuals involved in the partnership.
Public-Private Partnerships and UN’s Sustainable Development Goals
The nature and usages of public-private partnerships in less economically developed areas, where the attention of the UN’s Sustainable Development Goals is focused, are likely to be significantly different from the nature and usages in more economically developed regions of the world where these partnerships are more common. Most research on public-private partnerships has focused on partnerships in developed economies or China (Osei-Kyei and Chan 2015). Therefore it probably should be realized the implementation of public-private partnerships in less economically developed regions will most likely require some different approaches and will need to address some concerns which are not normally considered as important in partnerships found in more economically developed regions.
Mustafa (2015) made the point that improved infrastructure is necessary to facilitate the economic growth in sub-Sahara Africa which is needed to dramatically reduce poverty and help achieve many of the other UN’s Sustainable Development Goals; and public-private partnerships have the potential to be an effective tool in increasing the pace of infrastructure development. However for these partnerships to be formed and effectively operated, a number of obstacles need to be overcome. The author identified four “soft risks” to successfully implement public-private partnerships in sub-Saharan Africa and other economically developing regions. These four were political instability risk, ineffective institution risk, weak properly rights risk, and corruption risk. While these four risks are not only found in developing and least developed economies, they might possess even more of a challenge in regions where poverty is widespread as opposed to in more developed economies. Furthermore, Mustafa found “South-South” public-private partnerships, especially between governments of African nations and Chinese companies, were on the rise. Hodge and Greve (2018) saw public-private partnerships as playing a central role in the long-term development of countries battling to end extreme poverty, but also felt that to be effective an increased emphasis on improving the integrity of the public sector, developing more transparency, and limiting corruption would be required.
Many of the least economically developed economies, areas where making progress toward achieving the UN’s Sustainable Development Goals can be expected to have the biggest impact on the lives of the citizens, usually have less developed and less efficient political and bureaucratic institutions than found in more economically developed nations, thus creating a further challenge in creating effective public-private partnerships. However these conditions also create problems running government-controlled programs designed to provide public services or in using a more traditional procurement procedure to create infrastructure or provide community services. The effectiveness of all programs, including public-private partnerships, which involve some level of government control, will be dependent to a large extent on the quality of the official institutions and the professionalism of the government officials involved.
Profit Motive and Corruption
One of the rationales for switching from full public control to public-private partnerships is to introduce the profit motive into operations in the expectations the profit motive will encourage cost efficiencies and more innovation and creativity. The profit motive through the use of markets is often either vilified or proposed as the solution to nearly all problems. One of the criticisms of the profit motive is that it is assumed people in the private sector act strictly in a self-interested fashion, while another assumption often made is members of governments and civil society organizations are acting solely due to altruistic motivations. These stereotypes do not stand up to close scrutiny. There is extensive evidence showing for-profit firms actively engaging in corporate social responsibility programs with the intention of providing social services to members of society (e.g., Arkaniand and Theobald 2005, Cheruiyot and Maru 2014, and Hahn 2012). There are also plenty of examples of state-owned enterprises or other government agencies acting in the interest of the officials in the government while making decisions with little regard for the public interest (e.g., Leon 1994; Siddiqui and Uddin 2016; Wright 2004). While many leaders and members of NGOs and civil society organizations, including the United Nations, have been accused of being more interested in furthering their own personal careers and political agendas and maintaining a luxurious lifestyle than in providing quality and cost-efficient services to the most disadvantaged and marginalized people (Easterly 2006; Hancock 1997; Moyo 2009). Beginning evaluations of programs or actions based on stereotypes of the moral superiority or inferiority of individuals in different sectors of the economy is unlikely to be a constructive approach. Most humans are complex and are motivated by many factors, but self-interest is a central feature of human nature; the difference in behavior in the different sectors would seem to have less to do with different amounts of morality or altruism and more due to how individuals are rewarded in the different sectors of an economy.
Many criticisms of the profit motive in business operations are based on the assumption private sector firms benefit financially from exploitation and acting unethically (e.g., Ayres 2004; McPhail 2013; Weissman 2003). Yet the voluntary nature of business activities in a competitive market generally makes unethical and exploitative behavior unprofitable, and there are many examples of companies losing large sums of money and sometimes going out of business due to treating their stakeholders unfairly. If a company in a competitive environment exploits its workers, it will lose its best workers; if a company cheats its customers, it will find its customers switching to competitors; if a company does not pay its suppliers, it will soon be unable to operate due to lack of supplies; and if a company tries to avoid government regulations, it can find itself losing its license to operate or face negative publicity. While there are exceptions, in general businesses are rewarded for meeting the needs of its stakeholders better than competitors (Hipsher 2017). However, when possessing monopoly power, whether from besting competitors or due to being given special protection from competition by the government, the incentives to meet the needs of various non-shareholding stakeholders diminish. The private sector does what it does best, create wealth and jobs and improve products and services when operating in a competitive environment.
On the other hand, government-operated programs and operations have often been criticized for a lack of cost efficiency, innovation, and customer service, due to having a monopoly position and little incentive to improve services to consumers (De Soto 2001; Easterly 2008; Sowell 2015). However, at least in democracies, governments are held accountable to the voters for their overall performance (Kurlantzick 2016; Sen 1999; Slater 2010), thus in theory incentivizing governments to perform their functions effectively and efficiently. However not all countries, especially many of those plagued by poverty and other social problems, have an effective democratic process which could incentivize government to meet the needs of all citizens, and these governments can instead focus on meeting the needs of the special interest groups which help keep the government in power. And even in wealthier countries classified as liberal democracies, the link between accountability to voters and improvement of specific services would seem to be pretty weak. Government agencies in most developed and developing countries have a pretty mixed record on effectiveness and a pretty poor record on efficiency when providing social services.
Corruption is a serious concern for any public-private partnership, especially those in the less and least developed economies. Corruption can only occur when an individual controls resources he or she does not own. While corruption is possible in economic exchanges in business-to-business transactions in which there are agents acting for the business owners, in a competitive market where neither side of a transaction has a monopoly, business-to-business corruption is an inefficient practice and increases costs without increasing value for customers. Therefore private sector firms have an incentive to police their staff to reduce the amount of corruption going on. On the other hand, if one party has monopoly control over specific resources, such as government officials controlling the issuing of necessary permits or licenses, engaging in corruption can create a competitive advantage for a private sector firm by limiting competition (Hipsher 2017). Therefore it would appear in most public-private partnerships opportunities for corruption would exist, although it is not obvious if the risk of corruption would be higher in collaborative partnerships than in a contractual relationship between a government agency and a private sector firm.
Instead of thinking of corruption as a moral failure, it might be better to realize the self-interested aspect of human nature and use this part of human nature to create benefits for the society through the creation of win-win scenarios instead of trying to change human nature by eliminating self-interest. In market transactions, profits are earned through voluntary exchanges and in providing customers more “value” (value is often subjectively defined by each individual customer and not some objective measure which is intended to apply to everyone) than do competitors. The profit motive and competition, as well as the ability of consumer to make their own choices, encourage private sector firms to lower costs in order to offer more attractive prices to their customers and improve quality in order for a firm to better provide value to consumers. Both of these are socially desirable outcomes. On the other hand, if a firm can gain monopoly power through a restriction of competition, through bribery, or other means, the profit motive is likely to lead to socially undesirable results. In designing partnerships, a special focus on what incentives are created for each partner should be carefully examined. Schachter et al. (2017, p. 662) felt it was important to overcome the principal/agent problem and ensure incentives encourage win-win scenarios, but the authors also thought it was better to have incentives lean slightly more toward achieving public as opposed to private objectives.
Suggestions and Best Practices
The first suggestion is to consider in each particular sitution whether a collaboration is likely to more effectively achieve results or would a contractual arrangement be a better match in order to achieve the desired objectives of achieving progress toward one or more of the United Nations’ Sustainable Development Goals. Long-term contracting may not be suitable in situations where there is significant uncertainty over future demand and costs, and therefore a public-private partnership where risks are shared by both partners might be the preferred option (Iossa and Saussier 2018). Partnerships are primarily based on trust and collaboration, but when things do not go as planned, the lack of specifics about responsibilities spelled out in a contract can lead to problems (Johnston and Gudergan 2007). It would appear in some situations one or more partners would prefer a typical procurement arrangement with a detailed contractual arrangement over a public-private partnership to reduce risks.
“A contractual relationship, based initially on compliance, has the potential to be transformed by collaboration. Third-party delivery has the capacity to evolve into a partnership in which public and private goals and values become ever more similar” (Shergold 2008, p. 16). Keeping this principle in mind, when attempting to achieve progress toward meeting one or more of the UN’s Sustainable Development Goals, the parties might want to start off a relationship, if practical, under a limited contractual basis, work on developing trust, and have the parties evolve into a more collaborative arrangement over time which could end up becoming an actual public-private partnership.
Lertsethtakarn (2018) felt once a public-private partnership agreement for a long-term project was finalized, the central government should take a mostly hands-off, but supervisory, approach while delegating authority and power to the designated agencies responsible for the project. The central government may often be tempted to intervene in a project for short-term political purposes, while a bureaucratic agency which would be expected to survive a change in political leadership is more likely to take a longer term and less politically motivated stance on issues as they arise.
“PPPs are not a free lunch. In order for PPPs to be successful, public authorities need to carefully think about the steps of tender design, contract design, and contract management” (Iossa and Saussier (2018, p. 36). Public-private partnerships would seem to be better suited for large-scale complicated projects associated with the UN’s Sustainable Development Goals which go through multiple stages over a long period of time, such as large infrastructure projects, as opposed to being used to fix smaller, less complicated, and shorter-term problems which probably could be better approached using a contractual arrangement between a government and a private sector firm. If a public-private partnership is selected, the government should be willing to devote the time and resources needed to supervise the project all the way to a successful conclusion.
Overlooked in much of the literature is the need to ensure partners have the technical skills and financial ability to accomplish the agreed-upon objectives. It might be considered a best practice to explore the track record of potential partners in other previous collaborative agreements. Mustafa (2015) saw opportunities for companies originating from developing countries, including China, to engage in public-private infrastructure projects in sub-Saharan Africa, but also pointed out these companies may sometimes lack the technical expertise and experience of firms from more developed economies.
Osei-Kyei and Chan (2015) identified a number of critical factors found in successful public-private partnerships which include the allocation and sharing of risk between the partners, political support, community support, and transparency in the procurement process. An inappropriate distribution of risk may lead to opportunistic behavior on the part of one or more of the partners involved, while a lack of political or community support could endanger the continuation of the partnership over a period of time, especially if the partnership or project encounters any serious setbacks. Moreover, a lack of transparency increases opportunities for corrupt practices to become a feature of a partnership.
When attempting the addressed issues associated with the UN’s Sustainable Development Goals, public-private partnerships can in some situations create monopoly power for the private sector partner, which the partner might be able to use to extract excess producer surplus which could come at the expense of the public good. If the expected outcome is to create monopoly power for a private sector for-profit partner, it might be a good idea to explore other options or to ensure the public’s interest is safeguarded through contractual or other means.
Achieving progress toward achieving the UN’s Sustainable Development Goals will require contributions from a variety of organizations and individuals in multiple locations, especially those directly involved in creating goods and services in less and least developed economies. Estes and Zhou (2015) divided segments of society with responsibility for social welfare into four core institutions, the state, the market (private sector enterprises), families and households, and civil society which is primarily made up of NGOs, religious institutions, and other nonprofit organizations. Often members of each institution will work independently to meet the needs of society, while at other times, members will collaborate with other members of the same or different core institutions. Public-private partnerships are often an effort to provide social welfare services in a more effective or efficient manner than could be accomplished by either a private or public institution alone.
Iossa and Saussier (2018) point out that examining the experiences of public-private partnerships globally suggests there is no one-size-fits-all approach “that might simplify the design of a PPP contract for a given objective and sector” (p. 35). Thus when attempting to make progress in achieving the UN’s Sustainable Development Goals, the choice to use a public-private partnership and the design, contract specification, and level of integration should be individually decided and crafted based on the conditions found in each unique situation. The complexities involved might indicate this type of partnership might not be the most cost-efficient approach for smaller-scale and relatively shorter-term projects.
Public-private partnerships would appear to be a viable option to use in making progress toward meeting the UN’s Sustainable Development Goals, but like all tools, such as a hammer or screwdriver, this tool should only be used when it is determined its use is more likely to achieve success than other options which are available.
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