Public-private partnerships, or PPP, involve “a contract between a public-sector authority and a private party, in which the private party provides a public service or project and assumes substantial financial, technical and operational risk in the project”. It combines the efficiency of private firms with the “trustworthiness” related to a public enterprise. This solution addresses the following (NCPPP, 2010) (US Dept of Federal Highway Administration, 2010):
· Reduces public capital investment
· Improves efficiency due to strong profit incentive
· Private entity is more accountable than government
· Expedited project completion by grouping multiple responsibilities into a single contract
· Specialized expertise
· Relieves government from staffing issues
· Shares risk/responsibility
· Government can still step in when private entities are misbehaving
Identifying and negotiating the common interest
Financing the Solution
Regulatory/contractual and legal issues
Choosing an organizational design/scope based on the above
Evaluating and terminating partnerships (if applicable)
Source: Hartwich, F. J.-A. (2007). Building Public–Private Partnerships for Agricultural Innovation. Food Security in Practice technical guide series. . Washington, D.C.: IFPRI.
An example of a successful PPP was in Mandaluyong City, Malaysia, (1991) where a market destroyed in a fire had to be rebuilt. The steps above are laid out in context of this case study:
- Identifying and negotiating the common interest:The local government did not have the funds (P$50 million) or the ability to take a loan. The private sector could step in and aid in the process, thus making a profit from product delivery and the government would receive a cheaper and more efficient means of rebuilding. So a business consortium, MFD, was hired to deliver the product.
- Regulatory/contractual and legal issues:Based on the Phillipines’ Build-Operate-Transfer law of 1991 that contracted private companies for product delivery.
- Financing the Solution: The cost actually increased from P$50 to P$300 million. Financed 25% from MFD, 25% in advances from shops and charity as well as 50% from the debt held by private companies.
- Choosing an organizational design/scope based on the above:
- Operating partnerships:
- Evaluating and terminating partnerships (if applicable)
Public-Private Partnerships could be broadly classified into:
2. Supply-chain systems and Agricultural R&D
It is oft-debated whether the world food crisis stems from inadequate production of food, or mismanaged distribution. Poor infrastructure is a problem that adversely affects both food production and food distribution. Agricultural infrastructure has suffered neglect compared to its urban counterpart in many developing nations, logistics management strategies are unsuitable and often outdated, lack of cooperation and organized effort leads to unreasonable distribution networks, and management systems are rudimentary. Problems are exacerbated by proprietorship ambiguities, loss of properties and large fluctuations in investment. (Ping & Zhilin, 2010).
The extraordinary importance of infrastructure in development has been recognized by many Western models of thought, to great merit. Infrastructure provides better access to both input and output markets, promoting the access of remoter areas to monetized exchange systems
,; the consequent reduction of production costs shifts the production possibility frontier outwards, eventually leading to a more efficient allocation of scarce resources (Felloni et al., 2001).
In his speech at the IFAD (International Food and Agricultural Development) conference in April 2008, Joachim von Braun, Director-General of IFPRI (International Food Policy Research Institute) stated that in Kenya, a 1.0 percent increase in irrigation investments decreases poverty by 3.9 percent while a 1.0 percent increase in rural road investments decreases poverty by 2.4 percent. In Mauritania, the Nakhlet small-scale irrigation scheme has achieved an internal rate of return to farmers of 103%.
Implementation in Developing Nations
Currently the success of infrastructural investment in terms of economic growth, poverty reduction and food security has been most apparent in the developed nations, who have been investing heavily in this sector. Indeed, the NASDA (National Association of State Departments of Agriculture) website avers that
“The twentieth century was “America’s century,” and the success of our agricultural sector was critical to the nation’s preeminence. Infrastructure investments made in the nineteenth and twentieth century led our country into prosperity...Without a substantial investment in our infrastructure, we cannot hold our preeminent position in food production”
In its broadest sense, infrastructure is a keystone in the developmental model of almost every single developing country in the world. This particular plan is derived from case studies and strategies being implemented in countries like China, India, Fiji, Egypt, Poland. Profiling these countries, one realizes that these countries are all 1. Developing nations with an adequate measure of past progress, 2. Of varying population densities, from the most populous India and China to the lesser populated Poland, 3. Relatively stable political environments, indicating that the Government is in a position provide support and funding (at least partial) to the project, 4. Increasing corporate and private Foreign Direct Investment into the country, implying a moderately stable financial environment as well, 5. Have increasing privatization of resources and where legislatively it is possible to own private companies. In this light, an extrapolation of this plan would be most effective in other developing and/ or developed countries that share these basic characteristics. In either case, this model could be adapted slightly to fit individual country parameters, especially in terms of the ratio between public and private ownership of infrastructural investment.
Methods of Implementation
Farm-to-market paths: Road development, where not commercially supported because of the infrequency of the routes, could be facilitated via NGO help by locals themselves. This model has already met with success in the Kakira Outgrowers Rural Development Fund, Uganda. Alternatively, integration of agricultural infrastructure such as rods, ferries, power and water supply into a single network has been implemented in the Kalangala Integrated Infrastructure Programme in Uganda. This type of project enables a PPP to generate revenue from multiples sources, reach a profitable size for investors, mitigate volatility in demand risk and even generate tax revenues for the Government.
Irrigation: By professionalizing irrigation asset management and introducing a neutral third party financially autonomous government agency such as the Water User Association, we can improve the operations and maintenance of water access. Larger-scale irrigation projects must be demand-driven to ensure market equilibrium and incentive to produce; while the credit risk must be maintained with the Government sector that capital is not charged the high commercial rates.
Agro-processing:Agro-processing is extremely important in that the food produce can be stored for another season, wastage is reduced, all the produce is not let out into the market thereby helping to keep prices reasonably high and to improve the raw value of the produce. Although private participation is ricky in terms of monopoly formation and corruption, broadening the infrastructure to include not only specialized agro-processing but also marketing and whole-sale trading may make the venture more attractive to potential funders and mitigate volatility.
Information and Communications Technology: Supply Chain Management ICT-platforms would enable transactions to be cashless, which would incentivize farmers to buy insurance against failing purchase agreements, reducing debt defaulting, immediate and efficient credit transfer. (Warner M. & Kahan D., 2008) This would work even in areas with low-level native technologies because the interface is designed to be user-friendly and simple, but intended to record a wider variety of complex data.
There are three key considerations to take into account while deciding who should fund it. Firstly, consider revenue sources, ie. user fees, subsidies, purchase agreements, bonds, shares and stocks, and decide whether these would be sufficient to cover the high preliminary investment costs in order to earn a profit. Secondly, onemust look at whether this commercialization has the opportunity to operate at a scale that will warrant the high costs involved, cover risks and bear price reductions through competitive bidding by private parties. Thirdly, one wishes to verify that the proposed infrastructure has the potential for growth, for example if it is located in areas of high agricultural growth, offers potential for innovation and expansion to raise revenues over time. These three conditions being satisfied, the new infrastructure investment project will be financed, and profitably so, by a combination of governmental, private and corporate sources. While the focus here is on private expenditure, we wish to make it clear that this in no way undermines the importance of Government support and funding in infrastructure, and even encourages it. This is purely a supplement, not a substitute.
Certain organizations can help in implementing and funding the plan:
Overseas Development Institute - ODI is the UK’s leading independent think tank on international development and humanitarian issues.
National Association of the State Department of Agriculture - NASDA represents the state departments of agriculture in the development, implementation, and communication of sound public policy and programs which support and promote the American agricultural industry, while protecting consumers and the environment.
Food and Agricultural Organization - FAO is a subsidiary of the United Nations leading international pan-governmental efforts to eradicate world hunger.
World Food Programme - WFP is anotherfood aid branch of the United Nations, and the world's largest humanitarian organization addressing hunger worldwide.
We would also need the support of local Governments, banks, investors, hedge funds, even financial consultants indigenous to the respective countries to correctly assess the nature and extent of the market, aid production by upgrading facilities and infrastructure in the most optimum manner and enable smooth transactions to occur.
Timescale of Implementation
Larger-scale projects involving heavy Government investment, third-party collaborators and inter-governmental approval may take up to five years to get approved, and even longer for implementation and results. Infrastructure deals with the creation of facilities that better utilize factors of production, and it is meant to endure. High initial capital costs may also take some time to procure, and one would estimate at least another five years to get the facility fully running and autonomous enough for independent survival.
Estimated year of completion based on above estimates: 2025-2030
Smaller projects, especially those run by NGOs that may not require technology that is too sophisticated and are less expensive will take shorter time period to run and show effects, approximately overall 3-5 years for a substantial impact. However, it is important to remember that their range of operation is small as well, and the smaller they are, the less people they feed.
Estimated year of completion: 2014-2017
This PPP (Public Private Partnership) model for infrastructure does not apply to all countries, the main focus being developing countries of the type listed earlier. Communist nations such as North Korea, Laos, Cuba and Vietnam are not likely to open their agricultural sector to private investment. Indeed, China is unusual in that despite being Communist, its economy is more open to private investment, even if indirect. Furthermore, the Chinese Government is taking massive measures to ensure the progress of the nation.
Funding may raise issues once again if the nation’s political factors are not conducive to private investment, or if lack of natural or otherwise resources makes it difficult for investors to seek opportunities. In these worst-case scenarios, viability of a successful PPP is almost nil. Instead, these countries will need to continue to depend upon aid and small-scale projects that may not have high returns because of their scale, rather lack thereof.
There are considerable market costs in researching the right area and scale to set up any new enterprise, and the risk is quite high when it comes to previously unexplored markets.
2. Supply-chain systems with Agricultural Research & Development
This solution seeks to address the distribution problems inherent to agricultural supply chains by advocating public-private partnerships (PPPs).
“Supply chain management refers to the process of managing, designing, transforming, and optimizing the flow of materials, processes, information, and services in the supply chain in a manner that adds value for its stakeholders” (Rich & Narrod, p3). The agricultural supply chain is highly complex, and can be represented by the diagram below:
Due to the complexity of the chain and the numbers of middlemen involved, there are a number of issues inherent to the system:
· Information asymmetries as there is no information transfer between the customer and the producer
· High transaction costs
· Large transportation times, resulting in high transportation costs, food deterioration and possible contamination/rotting
· Farmers do not receive market price for their product, reducing the profit incentive of producing it
· There is a sufficient dent in the “value added” to a raw product as it is processed due to all the aforementioned negative costs.
This leads to a market failure situation, where the optimal economic conditions are not being taken into account.
The PPP solution we are proposing would be to work to coordinate the bottlenecks in this situation by establishing a market infrastructure which includes case-specific interventions. Eg: Storage facilities that allow intermediate storage of milk while in transfer. This brings in the significance of agricultural research to form technology that can enhance such distribution techniques to shorten the supply chain. An example of this is growing demands for food safety adherence. Bringing in PPPs to monitor and assist the farmers in maintaining safety standards especially for livestock and dairy is essential, so that smallholder farms are not cut out of the supply chain by large corporate farms or imported goods. (Narrod et al)
Agricultural research is extremely significant because it is not widespread enough in developing countries. There is a need for a framework to allow private companies to enter the agricultural technology market, and this is closely linked to the supply chain because the implementation of R&D would affect the passage of the chain. Furthermore, the two could be mutually exclusive if R&D is aimed at even theoretically exploring technologies that could be implemented at some point in the future, or technology that would be sold directly to farmers as capital, without any third-party involvement in the issue. Models of PPP in R&D include:
- University-Private firm partnerships
- The agricultural/development section of the ministry working with a firm
- Government wholly funding a private entity to conduct research
Applicable supply chains
PPPs and coordination systems involve transaction costs which must be outweighed by the net benefit/positive externality these systems have. Research has shown that PPP systems in India eg. The Mother Dairy system have worked well because the milk sector lacked an efficient structure. Thus, these sort of measures should be applied to regions with:
· Smallholder farms/growing cooperatives. Countries with large farms/industrial agriculture would already have strong supply chain models in place and replacing them with newer models would not be efficient or necessary.
· Countries which have a comparative advantage over an agricultural good but have not been producing to their full capacity
· Countries with a strong enough public sector to control this process (sound, responsible government)
· Industries which have potential growth due to their comparable advantage/high profit possibilities. Without the rewards outweighing the costs of implementation of new systems, this whole process would be useless.
Top candidates: Dairy, livestock
Top countries: most LDCs that produce such goods in high quantities but inefficiently
Method of Implementation
This is a highly contextual solution: before implementing or even conceiving of such an idea, a detailed analysis of the food chain must be carried out.
The rest of the implementation strategy follows the common PPP Protocol of Implementation as listed in the main problem statement.
Funding and Data Analysis
The idea of this PPP is that the government will “fund” it by bringing in a private contractor and either pay them to set up the project or give them partial ownership/ a dividend of the amont. For example, a company brought in to set up an Information Technology/Telecom network to allow producers to communicate directly with buyers would be under contract throughout the lifespan of the solution and in this case it would make sense to give the company a percentage of the profits. In cases of only product delivery (eg: agricultural research, or setting up of storage facilities) the government can expect to pay a lumpsum to the contractor.
R&D payoffs will be far more invisible and will only be evident in the long term.
Due to these payoffs, even aid entities such as USAID would be interested in investing in such efforts.
IFPRI/IFAD and other think-tanks in addition to private analysis companies would greatly aid in the implementation process. There would also be UN/WFP involvement based on the nature of the problem in question. However the idea of PPP is to try to use the highly specialized private sector in tandem with the domestic public sector, thus eliminating the need for UN bodies except as a source of funding
Unresolved Topics- Corrpution and Efficiency Issues
The primary unresolved issue is the rampant corruption in LDCs and the scope for exploiting PPPs. In addition, there are frictional factors preventing systems from adapting to PPP-based models, and there are resistances to R&D development which may be in the form of economic disadvantages of implementation in the short run, or actual public opposition in the case of G.M. Crops etc. The key is to focus increasing supply chain efficiency on methods that will be highly complementary to the system as a whole.
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Narrod, C; Roy, D.; Okello, J.; Avendaño, B; & Rich, K. (2007) The role of PPPs and collective action in ensuring smallholder participation in high value fruit and vegetable supply chains. IFPRI.
NCPPP. (2010). PPP Fundamentals. Retrieved November 18, 2010, from http://www.ncppp.org/howpart/PPPfundamentals.html
Rich, K. M., & Narrod, C. A. (2010). The role of public–private partnerships in promoting smallholder access to livestock markets in developing countries. IFPRI.
US Dept of Federal Highway Administration. (2010). PPP FAQs. Retrieved November 18, 2010, from http://www.fhwa.dot.gov/ipd/p3/faqs/index.htm#6
Von Braun, J. Poverty, Climate Change, Rising Food Prices and the Small Farmer. [Powerpoint slides] Retrieved November 20, 2010, from www.ifad.org/gbdocs/repl/8/ii/e/presentations/IFAD_21-04-08.pps
Warner, M., Kahan, D. (2008). Market-oriented agricultural infrastructure: Appraisal of public–private partnerships. FAO and ODI: London. Retrieved November 20, 2010, from ftp://ftp.fao.org/docrep/fao/011/i0465e/i0465e00.pdf
United Nations Development Programme. (n.d.). Mandaluyong City, Phillippines Case Study. Retrieved November 24th, 2010, from South-South Cooperation: http://www.ncppp.org/undp/mandaluyong.html