The Municipal Corporation of Greater Mumbai (MCGM) has been providing citizens with water supply and sewerage services, solid waste collection and disposal facilities, maintenance of roads and bridges, prisons, municipal hospitals and schools. It is the statutory body vested with the responsibility of providing these services. In its present role, MCGM is the service provider, which establishes and operates these facilities through public funds.
However, it is possible to conceptualize the MCGM as a buyer of the above services from the private sector. Its statutory responsibility can be translated into a contract between the MCGM and private sector service provider. The MCGM, as a buyer, would buy the services in the form of a well maintained and a well-staffed school or a hospital, a clean street, a well functioning water pipeline, or a well functioning processing instead of providing the services itself. All these services would continue to be supported by public funds, but the essential difference would be in terms of the utilization of the public funds. Efficiency gains can be generated by incorporating into the arrangement, a system of performance-linked compensation. This structure was conceived so as to tap private sector innovation and management skills to deliver improved performance and efficiency, over the substantial life of the public asset.
What is PFI?
The Private Finance Initiative (PFI) was part of an effort to reform public services that was launched in 1992 by the Conservative Government in the United Kingdom, headed by Ms Margaret Thatcher. Today, PFI is one of the most developed forms of Public Private Partnerships (PPPs) that offers government the opportunity to involve private sector management and capital in modernizing and improving the quality of public services, without undermining the government's responsibility to the taxpayer for the quality of the service provided. It must also be mentioned that PFI is not privatization. Unlike in privatization, the government retains full political accountability for the provision of the public service, and the private sector is employed to improve its own performance in provision of the public service.
Typical Project Categories
PPP Projects can be broadly classified into three types - the first category, the 'privatisable' projects, includes projects where the role of the public sector is limited to enable project development by undertaking some of the initial planning, licensing, providing ancillary works or assisting with statutory procedures, whereas the private sector undertakes the project on the basis that costs will be entirely recovered through charges for services to the final user. Projects developed in the telecom and certain port projects fall under this category. The second category includes the 'commercialisable' projects, where the cost of projects is met partly from public funds and partly from other sources of income, while overall project control rests with the private sector. Superior operational and managerial capability of the private sector helps in (i) implementing the project at cost and on schedule, and (ii) maintaining minimum efficiency levels in service provision. Hotels and tourist resorts, airport and port terminals constitute this category of projects.
The last category pertains to projects where services are sold to the public sector. In such projects, the cost of the project and the cost of operation and maintenance are met wholly or largely by fees charged by the private sector provider to the public sector body, which awards the contract. While the project is implemented through public funds, its operation and maintenance is carried out by the private sector. This is classic PFI, which if implemented properly, will lead to greater private sector involvement in the provision of public services. A majority of urban services such as solid waste collection and disposal, urban transport facilities, primary health and education facilities constitute this category of projects.
Value for Money
Central to the PFI structure is the concept of value for money. This parameter enables the public agency to decide on the best option. Basically, the option, which delivers the best value for money, is recommended. Competition is the best guarantor of value for money. As a result of the competitive process, the best PFI options should emerge. These may involve comparison with a conventionally procured alternative - the Public Sector Comparator (PSC). The Infrastructure Development Finance Company Ltd. (IDFC) has helped National Highways Authority of India (NHAI) develop a Public Sector Comparator to evaluate the reasonableness of the PFI quotes (under the annuity scheme) received for the national highway projects developed using this format.
This comparison entails identification and quantification of risks between PFI and the conventional service delivery option. A comparator can offer assurance that any decision is soundly based on value for money principles. A pre-requisite to a successful PFI project is the way in which the bidding process facilitates competition and maintains transparency, and in the way that the PFI contract specifies the service outputs required by the public sector. The emphasis here needs to be on how the service is to be delivered rather than the configuration of the public asset. Unnecessary constraints on the private sector's discretion to deliver these outputs through innovation in the design and construction of the physical assets, or on the method of subsequent operation also need to be avoided so as to demonstrate gains.
PFI Benefits
The introduction of measures to facilitate the PFI and other PPPs has the potential to promote private sector investment in public services. Since 1992 in the UK, a steady stream of PFI projects have been either funded or operated by the private sector in diverse sectors such as transportation, health, defence, housing, information systems, education, prisons, water and sewerage among others. About 1000 potential PFI projects with a capital value of around £ 25 billion (USD 40 billion) have been identified.
The PFI arrangement can result in a more efficient allocation of risks, whereby public assets can be better utilized, public funds can be better spent, so as to deliver value to the tax payer. In the long term, this arrangement can be a vehicle to create public private partnerships in the true sense.