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POLITICAL ENVIRONMENT AND CIVIL

ENGINEERING WORK PUBLIC
PRIVATE SECTOR INVOLVEMENT
CE 3231 Project Formulation
Ganga Samarasekara

Course Description
2

1. Private and Public Sector Involvement in infrastructure

funding
a)
Features of Public sector involvement
b)
Features of Private sector involvement
2. Institutional arrangements for infrastructure provision
a)
b)
c)
d)

Option A Public Provision

Option B Delegate to private sector
Option C Private Provision
Option D - Communal (supportive) arrangement, self help

Learning Outcomes
3

Understand the capabilities & incapabilities of the

private and public sector in providing infrastructure
Be aware of the options available for public
private sector involvement

References
4

World Development Report 1994, Infrastructure for

Development, Oxford University Press.
http://go.worldbank.org/PIZVDKP300
Yuzo Akastuka, Tsunaki Yoshida. 1999. Systems for
Infrastructure Development, Japans Experience. Japan
International Cooperation Publishing Co., Ltd.

1. Private and Public Sector

Involvement in Civil Engineering work
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The mechanism of funding/ management may come

through
Public sector
Private sector

Features of public sector involvement

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The developer of most infrastructure projects (Table1)

Autonomous (i.e. self-government or being
independent or full control)
Capacity to handle different stages of the
development process (Box 1)
Creditworthiness
Governments are entrusted with the Adjusting of the
distribution of resources & Distribution of income (tax
revenues) infrastructure is one way of such distribution
Prioritizes the equal distribution of resources over
and above profit motives

Features of public sector involvement

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Specifically participate in the provision of

Pure public goods ( where there is neither competition
nor exclusion of use)
Projects to provide facilities or services public in nature
and which involves a considerable investment risk
Large projects for the provision of public goods for
which the initial capital cannot be supplied by the
private sector
Facilities which alleviate the negative consequences
certain other public goods - Ex. Environment pollution
by private industries

Features of private sector involvement

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Plays a supportive role for most infrastructure projects

Managerial skills - rapid and flexible decision making due to a
clear structure of incentives (individual rewards based on
performance)
Productive efficiency- private sectors are less constrained than
public sector by bureaucratic or political issues regarding
procurement (i.e. acquisition) and labor practices (resulting from
motivation to make profit)
Dynamic efficiency motivation to invest in and maintain capital
needed to expand and introduce technological improvements
Accountability to customers motivation and flexibility to adapt
production to changing markets and achieve better service quality
and customer satisfactions

Public sector Vs Private Sector

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Public sector is expected to provide the services at an

affordable price to everyone.
Prioritizing such social objectives may lead to
losses. Further they may lack of innovation, suffer from
bureaucracy and political intervention.
Private sector has capabilities to improve efficiency,
innovative skills, is more flexible and accountable to
the customers.
But they may not have the capacity (financial and
operational) and do not prioritize social objectives.

Table 3: Common management

Problems
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Box 2 - Botswanas Water Utility

Corporation (BWUC) Case
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Supply portable water to the countrys principle urban areas

while operating a self supporting service
Autonomy Use expatriates(foreigners) as managers on
short term contract
Low levels of water losses (25%) Accountability of
managers and can afford higher salaries
Tariff control
- higher rates demand control & no need of subsidies
Increasing block tariff fairness & demand control
- Increase when necessary drought, inflation

Box 2 - Botswanas Water Utility

Corporation (BWUC) Case
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Credit management
Monthly billing
Thirty day settling period
Immediate service termination for defaulting customers
& reconnection charges
Government customers billed through Ministry of Finance
& deducted from cash allocations
Present situation deterioration of control, risk of losses
and increasing demand in a water scarce country

Institutional arrangements for

infrastructure provision
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a)
b)
c)
d)

Option A Public Provision

Option B Delegate to private sector
Option C Private Provision
Option D - Communal (supportive) arrangement, self help

Option A: Public Provision

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Ownership and operation by public entity, public

enterprise, public authority, or government
department-owned controlled by the central,
regional, or local government
Running on commercial principles and
encouraging competition can improve performance
EX: Irrigation Department

Option B: Delegate to Private Sector

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Delegate the operation of infrastructure facilities

concessions or leases to the private sector
Basic legal framework of contract law, including
believable enforcement mechanism in place
Contracts clearly specify monitorable performance
targets, responsibilities of owner and operator,
processes for periodic review (Especially to account for
unforeseen changes in input costs), mechanics to resolve
disputes and sanctions (approval/penalty) for non
performance
Contracts awarded by transparent selection process,
preferably competitive bidding

Option B: Lease Contracts

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Exclusive rights to operate facilities of the public sector

No responsibility for major investments
Contractor will retain all or part of the revenue
Level of risk to the private operator will be higher as he
invests the working capital and depends basically its return
from its operating performance
The public sector responsible for fixed investment and debt
servicing while the contractor normally must finance working
capital and replacement of short-lived assets
Government reduces political risk of tariff setting
6-12 years contract

Option B: Lease Contracts

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Franchise (rights given) or license

In transportation area it is called competitive
tendering for the rights to operate a particular route
Ex: Thailand introduced competitive tendering for
the operation of certain passenger lines in 1985 and
as of 1990; it was found to have succeeded in
attracting the road users to the railway while
generating profit
Used for decades in urban water supply and
sewerage in France and Spain

Option B: Concession contracts

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Incorporate all features of lease, but the contractors

have the additional responsibility for financing
certain specified replacements to fixed assets
Investment plans and implementation are subject to
review by the authority issuing the contract
The assets go back to the public owner upon
completion of the concession
The contractors compensation is based on tariffs
which are also determined according to agreement set
out in the concession contract
Normally at least 15 years

Option B: Concession contracts - BOT

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Built Operate and Transfer

Private sector designs, builds and operates the
projects for and agreed period and then transfers
ownership of the facility to the government
Private sector gets the income from revenue
Public sector develops the detail specifications of the
tender documents in order to ensure that (strong
regulatory framework)
- Bids are comparable and fulfill the public interests
- A proposed BOT scheme is financially viable (i.e.
traffic volume forecasts, possible government
guarantees)

Option B: Concession contracts - BOT

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Operational in Asian developing countries mainly in

power sector and transportation sector
Popularly used in toll roads in many countries
(France 5500 km motorway as of 1990)
Usually 15 30 years, operate before transfer
BOO (Build-Own-Operate) facility is not
transferred but remains in private hands
BTO (Build-Transfer-Operate) Mainly grant basis
DBT (Design-Build-Transfer) Where inability to
design and build

Option C : Private Provision

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Used when there is a high potential for revenues

and when commercial risk and political risk are
low
Where there is no competition, regulations may be
necessary
Better for activities with competition, such as
telecommunications, power, gas, railways, and ports
(with appropriate tariff policies)
Less likely for waste disposal or rural roads

Option D: Communal arrangement, self help

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Mobilizing labor and capital to construct smallscale, local infrastructure locals act as the full or
partial owners, financiers and suppliers
Selected, designed, and implemented locally-not
imposed from outside
Independent from government oversight (omission)
Village feeder roads, water supply and sanitation,
and canals, or small scale power generation off the
national grid