Public Private Partnership and Telecom Infrastructure development

Research Paper (postgraduate) 2012 10 Pages

Business economics - Investment and Finance



This report outlines the potential of Public Private Partnerships (PPP) in developing telecommunication infrastructure. Deploying telecommunication infrastructure is a very expensive venture (Williams, 2011). In the cities and commercially viable areas, population, a better standard of living and booming commerce enables the different network operators to rely of the booming market to cover their operational and capital expenditure. However in rural areas and economically challenged areas, subsidies and some other long term market intervention measures may be needed. But the further challenge lies on where the cost bearing will emanate from. Financing telecommunication infrastructure development by the public isn’t always the best choice bearing in mind the public’s control of telecom infrastructure in the monopoly era. Secondly financing telecommunication infrastructure development has been successful under the privatization era, but non-profitable areas are left out. Hence there is a need for a synergy in public and private financing, where the strength of each sector is used to leverage the financing of telecommunication infrastructure.

To shed more light on the potential of PPP there will be a brief overview of PPP, the rationale for proposing PPP and examples of PPP and telecommunications development.

A brief overview of PPP

Public Private Partnerships is an ambiguous term used to define possible relationships between the public and private sector in delivering infrastructure development (See for instance Sadka 2006; Savas, 2000; Weihu, 2006; Khanom 2010). The lack of a clear definition for PPP has led Weihu 2006 to describe the ambiguous definition of PPP as nothing in specific. His argument is; if PPP encompasses every relationship then it means nothing at all.

A clear way of understanding a concept most at times is by visiting its root. In this manner, one would understand the purpose of the concept and try to correlate the origins with its current implementations. However, the origin of PPP is as elusive as the concept itself. There are school of thought that traces PPP back to the fifth century BC, pre-colonial America (OTCC, 2003) and the advent of privatization (Hearne et al 2009, Jamali 2004). In the fifth century, outsourcing of the development of private infrastructure is sighted as an example. In the EU, Ghobadian et al (2004)

mentions that the public services like harbours, markets, public baths etc. were conceded to private providers. Although according to Ghobadian et al (2004) they add that the practice disappeared during the fifth century, it actually reappeared during the Middle Ages for the construction of new fortified towns in the south western region of France. The fact that the practice of PPP dates far back as pre-colonial America is suggested in the Oregon Telecommunications Coordinating Council report on ‘The role of Public Private Partnerships in Oregon Telecommunications’ (OTCC, 2003). Wettenhall, (2003, 2005) corroborates the historical corporation between the public and the private sector as quoted by Hodge and Greve (2009). The Oregon Telecom Coordinating Council report further corroborating this fact narrated an interesting example of such a PPP which existed before American Independence (OTCC, 2003). The OTCC (2003) mentions that in 1652, the water works company of Boston became the first private firm to provide drinking water to the American Public. Another interesting example from pre-colonial America is from the US Department of transport report to congress on PPP in 2004. In their report, it is stated that: ‘Public-private partnerships are not a new concept to transportation infrastructure development. For highways, the private sector historically had an important role in highway construction operation and financing’ (FHWA, 2004). To buttress their point, they mentioned 1792 when the first turnpike was chartered to private companies. These pre-colonial American PPPs, according to OTCC (2003) paper, was facilitated by a contractual arrangement between Government entities and private companies for the delivery of services or facilities of public good for example provision of water, transportation, urban development and the delivery of social services

As indicated above, for pre-colonial America, examples of privatizing of public infrastructure like roads, rail tracks etc. are cited. For the advent of privatization, the evolution of privatization to Public Financial Initiatives (PFI’s) which occurred in the UK in the Margret Thatcher days are cited as examples.

One core similarity that runs through each perceived advent of PPP is the opening up of infrastructure development to private financing. The advantage was to bring in the efficiency of the private sector into the building, operating and management of the infrastructure being developed. In the Margaret Thatcher days, the focus was on the reduction of public debt. Hence PPP became an alternative financing option.

Today PPP has evolved from the injection of private finance alone. Public finance is now being used to subsidize private sector initiatives. This was to act as a way of enabling the Universal access of infrastructure development in an area or a region, especially in areas where the market alone can deliver the infrastructure. As a matter of fact, the world bank and other international development agencies have been major drivers to the adoption of PPP. They now see PPP as a means of enabling the development of infrastructure in both developed and especially developing countries. The push from these international financial donors comes from the backdrop that government especially that of developing countries should shift to an efficient and facilitative role by encouraging liberalization and privatization (Jamali, 2004). Hughes (1998) points out that financial assistance from these organizations is often tied to the change in focus of a government from direct involvement in infrastructure development to facilitating and partnering as a means of achieving development. As a means of helping countries forge these partnerships, the World Bank has developed the PPP in Infrastructure Resource Centre (PPPIRC) for contracts, laws and regulations. The centre provides

materials that can be used in planning, designing and developing a legal structure of any Infrastructure project (PPPIRC 2011). Sectors in which they provide assistance include, clean technology, energy and power, solid waste, telecom and ICT, transportation and water supply.

If the trend of the origins and concepts of PPP is being investigated, one will still not be able to grant an accurate non-ambiguous definition of PPP. This is because; to large extent different public infrastructures have different development dynamic as well as priority level to the government. Although water is a very important public utility, its delivery method isn’t as pervasive as telecommunications. Hence in developing PPP frameworks to deliver water, it may be different from a PPP framework to develop telecommunications. The governance structure and development structure may differ. Hence it is difficult to give an umbrella definition for PPP. Secondly the possibilities for a PPP are divergent.

Once could say that PPP is a myriad of possible relationships between the public and private sector. Critics have raised the question against bundling privatization, outsourcing, contracting and a whole lot of other possibilities as either part of PPP or forms of PPP. Although there might be slight differences, these concepts may not necessarily be PPP but PPP is always possible in any of these concepts (see Poole 2008).

Aside the open-ended forms of PPP, there are some established operational concepts of PPP. These includes the Operations and Maintenance (O&M), Operations, Maintenance & Management (OMM), Design-Build (DB), Design-Build-Maintain (DBM), Build-Design-Operate (DBO), Design-Build-Operate- Maintain (DBOM), Design-Build-Finance-Operate-Maintain (DBFOM), Build-Operate-Transfer (BOT), Build-Own-Operate (BOO), Buy-Build-Operate (BBO), Developer Finance (DF), Enhanced Use Leasing (EUL) or Underutilized Asset (UA), Lease-Develop-Operate (LDO), Build-Develop-Operate (BDO), Lease/Purchase, Sale/ Leaseback, Tax-Exempt Lease, Turnkey (Source: NCPPP; Khanom 2010). In most of the Build-design concepts, In some cases, the public sector isn’t dealing with a single private entity but with a consortia of private entities called Special Purpose Vehicles (SPVs) whose purpose is to develop build, maintain and Operate the asset for a contracted period (Moszoro and Gasiorowski ,2008).

Ra tionale for PPP

In a nutshell as mentioned earlier the quest for efficiency in the savings as well as the reduction of burden on strained public resource has made Public Private Partnership a viable infrastructure funding mechanism (Jamali 2004). In order to maximize scarce public resources, there is a need to source for alternative infrastructure funding mechanisms that will promote efficiency in public infrastructure delivery, enable prudent utilization of financial investment and appropriate control to the most qualified sector.

Efficiency in the delivery of Infrastructure:

The liberalization of basic government controlled monopolies was mainly driven by the quest for the economic and technical efficiency in the development and delivery of infrastructure. This quest led to the various forms of privatization which eventually resulted in the development of various forms

of PPP. This quest was largely driven by the need to deliver public infrastructure in a manner that will not be detrimental to the annual budget of a country, hence PPP became a handy public financing initiative. The advantages of PPP in the delivery of technically and economic efficient infrastructure were buttressed by the following perceived advantages.

1. ‘PPP is perceived as an institutional arrangement as they are believed to remedy the lack of dynamism in traditional public service delivery. This perception of PPP is centred on efficiency in public savings as well as reduction of the burden on strained public resources (Jamali 2004).
2. PPP enables the inflow of private financing for expanding public services. The involvement
of the private sector enables clearer objectives, new ideas, flexibility, better planning, and improved incentives for competitive tendering and greater value for money for public services. (Jamali, 2004; Spackman, 2002; Nijkamp et al, 2002). Further argument for private sector participation is; Private sector participation leads to the lowering of cost and risk for the public sector (Miller, 2000; Leitch and Motion, 2003).
3. PPP enables the Public and private sector to seek mutual advantages that will enable them

to synergise to develop infrastructure. For the Public sector, they earn improvement on the performance of programme performance, cost efficiencies, better services provision and the appropriate allocation of risks and responsibilities (Pongsiri, 2002). For the private sector they expect a better investment potential that will enable them to make a reasonable profit and have the opportunity to expand their business (Scharle, 2002).

Utilization of financial investment:

The financial arrangement to the funding of Infrastructure can also be accessed under efficiency because in actual fact, the main reason for adopting PPP was to develop infrastructure with ‘value for money’ at the back of the mind of the public sector (Grimsey and Lewis 2005). One may rightly say that other efficiencies gunned for in a PPP project is as a result of ensuring financial efficiency.

Funding of public projects were initially either the prerogative of the public or private sector. In these regards, both of them had full financial obligation towards the project. However as Public Private Partnership developed, the main aim was to attract private financing to fund public infrastructure without the private sector necessarily owning the infrastructure (Hearne et al, 2009). Most of the design, build models of Public Private Partnerships fall into this category where private financing is employed to fund infrastructure development. The financing in some cases is carried out by a consortium of financiers who in are sometimes part of the private consortia involved in the organization and implementation of the project. This private consortium which includes, not just the financiers are known as Special Purpose Vehicles (SPVs). Some examples can be found in the EU which includes the building of the tunnel under the English Channel. The building of the English Channel which actually involved both the UK Government and that of France was developed with the Build-Own-Operate-Transfer (BOOT) model of PPP (Flyvbjerg et al, 2003). A Bi-national project organization TransManche Link (TML) was in charge of the building and designing of the tunnel. Eurotunnel, a consortia made up of shareholders, banks, The Channel Tunnel group ltd and France Manche S.A financed the project. The French and British Government controlled the final engineering and safety decisions; currently the Channel Tunnel Safety Authority handles that aspect.

The British and French Government granted Eurotunnel an initial 55 year and later 65 year operating concession to repay loans and pay dividends (IGC). However in recent times, there has been a shift from a pure private financing of infrastructure to a contribution of public financing to cushion the financial risks the private sector may face in developing public infrastructure. These forms of public financial aid come in form of subsidies, loans, grants, equity funding etc. An example of this is the EU Initiative in developing ICT. In this example the EU agreed to contribute 700 Million Euros over a seven year period to industry to enable them strengthen their Research and Development (R&D) in ICT. Companies that participated in the programme from its inception in 2007 include Daimler Chrysler AG, Nokia Corp, koninklijke Philips Electronics NV (Techtalk, 2007).

Although these financial aspects of PPP exist, there is no one angle that really guarantees the value for money tag. By observation of successful PPP’s, the value for money comes as a result of the design of the interactions between the public and private sector in financing the project. It is difficult to say, that private financing alone or the sharing of cost by both the public and private sector will actually lead to developing an infrastructure and earning value for money. There are cases in the UK where some PPP projects have not led to the expected ‘value for money tag’ as some PPP projects are as expensive as projects handled directly by the public sector. These in most cases occur because the public sector acts as a guarantor to loans contracted by the private sector to carry out PPP projects. However what makes these rationales still valid is that the open ended definition of PPP grants flexibility as to how a model of PPP can be implemented. Hence according to Jamali (2004), PPP under the right conditions can provide effective mechanism for capitalizing on the peculiarities of the public and the private sector to meet the rationale for PPP. The rationale in this case serves as the common objective the partners want to achieve. Examples of successful PPP projects abound worldwide in the area of infrastructure development. In Germany, the federal government is providing subsidies to telecom operators who will deploy broadband services in rural areas where investments are risky (German Broadband strategy 2009).



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Aalborg University – Centre for Communication Media and Information Technology
Public Private Partnership PPP telecommunication telecom infrastructure development governance public private partnership




Title: Public Private Partnership and Telecom Infrastructure development