In the modern world, the question of organizing public-private partnership (PPP) increases in its relevance. The effectiveness of innovative activities relies significantly on close interaction between the economy’s sectors, both private and public. The exceptional importance of public-private partnerships (PPPs) as an effective method for implementing latest innovation policy is now widely recognized by many countries. The essence of PPP is the involvement of private resources, including knowledge, technology, experience, and money in infrastructure facility development that traditionally belong to the competence of the country. Also, one of the distinguishing features of PPPs is a clear distribution of responsibility and risks that will affect partners in the public and private sectors.
The realities of the economy require special forms of public-private partnership to achieve significant socio-economic results. The experience of modernization in the Arab oil-exporting countries has shown that the management of the national market cannot be effective without consolidated sectors with state participation. Over the last decade of using PPPs, many countries, including the UAE, have begun to show their interest in developing such a mechanism. In this regard, the possibility of introducing and more clearly structuring special laws on PPPs has encouraged private sector investors to consider options for investing in developing countries, for example, in the UAE. The scope of this project is to explore the public- and private partnership concept in the UAE context, the characteristics of PPP and relevant models, the basic structure of the PPP model, the legal and institutional framework of UAE federal government, and well as to include a PPP case study in the UAE using the example of the Cleveland Clinic.
Overview on Public – Private Partnership Concept and Contracts
The Success Factors of Public-Private Partnership
The success factors contributing (CSF) to PPP are defined as a limited number of variables necessary for guaranteeing and ensuring the success and higher performance of organizations. The CSF are usually a group of conditions, factors, characteristics, or variables that are believed to influence organizational success. In general, several factors would influence the success of the public-private partnership and include the acceptance and support for PPP on the part of the public sector, SMART objectives, a precise specification of risks, benefits, and responsibilities, the positive involvement of all relevant parties in PPP, as well as the acceptance of openness and responsibility with general society (Mohd Mustafa, 2017). As to the first factor, the support of the public sector for PPP implies the dynamic and proactive involvement of political and governmental management, the frequent monitoring and performance evaluation of PPP by government entities, the seeking of help from experts and consultants to agree to detailed plans, as well as the choosing of right partnerships for long-term collaboration.
SMART goal setting contributes to the success of PPs because of the capacity to establish specific, measurable, achievable, relevant, and time-bound goals, all of which are strategically designed to provide business projects support and structure (Al Merri, 2017). PPPs require structure and consistency in their projects due to the possibility of reducing the complexity and costs of preparation and negotiation (Al Merri, 2017). Once an appropriate set of SMART goals has been established, all parties involved in PPP can improve their predictability as well as help businesses evaluate project performance. Similarly, a clear risk, benefit, and responsibility specification contribute to the success of PPPs because it allows to make clear requirements and expectations for collaboration between the private and public sectors. Once an appropriate allocation of relevant risk and benefits between partners is decided upon, the allocation of relevant factors is documented in the form of an agreement to ensure that each part can effectively enforce their rights.
The positive involvement of all relevant parties in PPP is key to partnerships’ success due to the influence on good governance. Good governance is reached through the high degree of involvement of all stakeholders, the following of positive rules that are undertaken to ensure that a PPP does not cause harm or grievance, the establishment of a transparency policy for decision-making and information exchange, accountability to society, as well as fairness and efficiency. Such guiding principles contribute to the success of PPPs because they establish a positive environment that helps the parties involved in a collaboration to reach good governance, which is instrumental for reaching the quality of institutions and their effectiveness aimed at translating policies into successful plan implementation. The final success factor, the openness and responsibility to the general society, is a matter of corporate social responsibility (CSR) aimed to show commitment to society on the part of PPP stakeholders. This factor is crucial because it enhances long-term company policies that are dictated by the mission, vision, and values of a PPP rather than its strategy in an activity market (Zukauskas, Vveinhardt, & Andriukaitiene, 2017). If the implementation practice of PPPs does not address CSR efforts, it is likely that an organization or business has not yet assimilated the valuable processes and is developing its activities by ignoring the key principles of its inner maturity and strategic direction.
Therefore, achieving success in PPP contracts in the UAE depends on the way in which partners approach a variety of collaboration aspects, ranging from risk sharing to transparency and governance. For the partnerships, it is essential to have a modern regulatory and legislative framework that would offer PPP parties clarity on how the will act further. Both transparency and governance are essential success factors, as implied above, since the costs of partnership tenders, activities, project design, and other factors, exceed the participation costs in traditional outsourcing tenders. Having transparent relationships is therefore necessary to ensure that the provisions and conditions are clear and in alignment of the performance measurement standards and total equity between parties involved.
The Motivating Factors for Concluding PPP Contracts
PPP principles can be enshrined in legislation or presented in the form of recommendations. It also allows for non-PPP interaction between business and the public sector (sponsorship, charity, public procurement, and so on). In addition, PPP can both be directly aimed at achieving an innovative effect, and cause this kind of effect in related industries – for example, the industry of manufacturing machinery necessary to implement the project. It is obvious that PPP, generating innovative effects in one form or another, should be considered as a special priority on the part of the state.
PPP is an attractive mechanism due to the fact that it is based on approaches to the development of public and private sector infrastructure. By combining state assets with investment, management, motivational, and other resources of the private sector, a synergistic effect can be obtained. Moreover, an increase in the efficiency of using the potential at the disposal of society for solving socially significant problems can be achieved. The interdependence of the two sectors leads to a growing need for interaction and cooperation.
The advantages received by the parties from various PPP projects through the relevant mechanisms may vary due to the different goals pursued by the parties. For the private sector, the benefit from participation in PPP is to obtain a guaranteed income for a long period of time, as well as the capacity to expand its activities, while for the state, first of all, the aim is improvement in the price-quality ratio of project implementation, which leads to a decrease in the burden on the country, budget and taxpayers (we are talking about budgetary and socio-economic efficiency), as well as boosting the quality of services being offered by attracting innovations from the private sector.
By combining the capabilities of the two sectors with the help of the PPP collaboration, a private sector company can include on its balance sheet the infrastructure object created as part of the implementation from the point of view of the organizational structure. This would be a socially significant project for the state for which the PPP pears responsibility. In this regard, it is essential to emphasize the emergence of a special management company that is developed by the private sector each time to implement a project through a PPP mechanism. The PPP mechanism emerged as one of the methods allowing states to implement, first of all, projects to create public sector infrastructure, as well as to provide services to the population on its basis.
When Partnership with the Private Sector is Applicable
PPP represents alliance, both institutional and organizational, between a country and a particular business aimed at implementing socially relevant projects and programs in a wide variety of markets, industries, and Research & Development areas, up to the service sector. PPP is a kind of concept, a complex phenomenon that has an economic, legal, social, and largely political nature. Obviously, not every exchange between the state- and privately-owned capital in an environment of the mixed economy can be classified as a PPP, but only one in which business, on behalf of the state and with its support, performs functions that were previously assigned to the country. Market principles are introduced into the traditional sphere of state activity, including infrastructure. In the UAE, PPP projects include infrastructure projects, roads, accommodation facilities and, in recent years, medicine and education.
Advantages of Successful PPP
In general, public-private partnership has a number of advantages that make it possible to effectively implement infrastructure projects using the strengths of each partner. One of the main advantages that the appropriate law offers is the freedom of the state to choose alternative project schemes that it deems rational, based on the needs of a specific intended project.
The involvement of interested private partners in the implementation of projects by the state, with their financial, organizational, intellectual resources that complement the capabilities of the state, multiplies the resulting effect, allowing significant intensifying of the implementation of infrastructure and other projects, reducing the time required to provide the consumer with one or another infrastructure capability.
In addition, PPP is an effective way to reduce public spending on project implementation and ensure the most efficient and optimal value for money in the public sector. PPP mechanisms have significant potential to create and implement infrastructure projects that allow more efficient use of public resources and opportunities. Moreover, it gives the possibility to partially free up public resources and opportunities for other projects. It also allows offering conditions for public institutions to achieve a better value for money by improving risk sharing, innovation, improved asset use and management practices. This is achieved by using the experience of the private sector in planning and implementing projects, by reducing the initial projected budgetary costs for the project by attracting private investment (Al-Saadi & Abdou, 2016). At the same time, infrastructure projects implemented within the framework of PPPs, in themselves, act as powerful incentives for minimizing costs throughout the entire life cycle of an infrastructure project, which is extremely difficult to achieve within the framework of an established model of public procurement.
Limitations of the PPP
The law applies to all organizations seeking to participate in tenders, without restrictions on the country of registration, provided that such an organization meets the requirements provided for by a specific tender project; at the same time, funding is provided from the state budget of the Government of the UAE and, therefore, it must be approved by the Supreme Committee (Yeascombe & Farquharson, 2018). However, there are some sector-specific constraints, including the water and electricity sector, and the High Committee may later impose constraints on other sectors.
In addition to the positive aspects of PPP, there are a number of risks that participants in public-private partnerships face, looking for ways to mitigate them. These risks include a lower quality of control and management compared to conventional projects. This is due to the long term of PPP contracts, complex project management, which lacks mobility to adapt to rapidly changing external conditions. Financial risks represent an integral part of public-private partnership projects, since financial flows in such projects depend on a number of factors, some of which are difficult to predict.
The Characteristics of PPP
There is a kind of “transfer mechanism” that reaches the private sector starting from government projects and contracts. One of the main schemes of such a mechanism is government contracts that include the competencies offered by the private sector, which complement macroeconomic projects by involving the private sector. Private capital is involved because, under government contracts, private contractors are forced to provide at their own expense at least a part of capital investments, procurement of materials, expertise, hiring workers, etc. In the UAE, within the system of various projects, such as projects in the field of transport, education, different public services, development and construction of real estate objects, private contractors, as projects develop, begin to invest more than the state.
The economic policy of modernization is carried out primarily in the interests of indigenous citizens (national subjects) and provides them with guarantees of social status, economic benefits and privileges. For example, the UAE has set the goal of “emiratizing” the workforce: the share of UAE citizens in them should reach 54% at some stage in the implementation of the development strategy (PwC, 2020). They already have an average wage of about $3,000 (PwC, 2020). At the same time, the most comfortable conditions are created for work, business, and residence of any foreign specialists. By creating the most convenient conditions for doing business on their territory, the country has made significant progress. The United Arab Emirates ranked 5th globally in the World Bank’s ranking of countries for ease of doing business and 5th in terms of public financial management efficiency (OECD, 2020). This indicates about high potential of PPP policies and practices in UAE.
Models in Public-Private Partnership
Due to the limited constraints associated with the PPPs, government agencies and institutions are investigating various models of public-private partnership to use as tools for maintaining the infrastructures that already exist without significant investments. The advantages of choosing a model that would fit a PPP is associated with developing solutions to problems of financing within partnerships. The disadvantage of such models is the constraints and limitations that are being set by the specific model. The types of models include traditional, operation and maintenance, design-build, design-build-operate, design-build-finance-operate, build-transfer-operate, build-own-operate-transfer, build-own-operate, lease, concession, and other variations that depend on the environment and the goals that the PPPs are pursuing. For example, in the Arab countries of the GCC, the BOT (Build – operate – transfer) scheme is widely used. According to it, the option is widespread when a private investor can build an enterprise, power plant, or other economic facility, operate it for a certain period, providing himself with coverage of costs and the necessary profit, and then transfer it back to the state (the facility is redeemed by the state). Thus, private capital has a guarantee of maneuver and transfer of capital to another sphere, which gives it a flexible position, and the economy receives the necessary planned economic objects (Alteneiji et al., 2016). It must be said that in countries with developed market economies, government programs for economic work and resource development have always been considered strategic indicators of economic development.
Supply and Management Control
A private PPP entity enters into administrative relations and fulfills the will of the public side. At the same time, the public partner controls the fulfillment by the private entity of the relations assigned to it, but does not interfere in its economic activities. Through PPPs, private partners can cut the costs associated with operations and maintenance of equipment through economies of scale, innovation, more flexible supply chain, or through reduced overheads (Delmon, 2017). Thus, using PPPs, in the majority of instances, it is possible to provide services with greater cost efficiency than traditional approaches.
The public and private sector representatives of the economy can act as partners at all steps of the innovation process, including in the decision-making point to conduct research, preparing documentation for participation in a competition, funding research and development, conducting research, project management and commercializing its results. However, at present, the public sector, represented by public research organizations, is predominantly involved during the processes of research and development while the private sector is largely involved in project management.
There are a number of model varieties within the Turnkey Contract, in particular:
- Design, Bid, and Build (DBB) – a project implementation structure implying that the public sector enters into separate contracts with contractors for such processes as planning, construction, and operation of a tollway with full government funding and taking on a variety of risks and barriers associated with its implementation;
- Design and Build (DB) – the state enters into a single agreement for the planning and construction of an investment project under the condition that the risks and obligations are taken up by the private sector;
- Design, Build, and Operate (DBO) – the government enters into a single agreement for designing, constructing, and operating an investment transport project under the condition that the risks related to the obligations under the agreement are transferred to the private sector.
Affermage / Lease
Affermage (contract) looks like this: a private company is supposed to design, build and/or operate an infrastructure facility, with funding provided by the state. When choosing this PPP model, the state concludes a one-time contract for the construction and management of an infrastructure facility with the private sector, while it is possible for a private company to conclude a sub-contract with another private company to manage this facility (Yeascombe & Farquharson, 2018). By giving private partners the opportunity to obtain a single contract to perform different functional tasks, it becomes possible to reduce contract costs because of the planned distribution of costs throughout the project’s complete life cycle. Also, it is possible to enhance the quality of the work performed (as investors will be interested in the high quality of the facility’s construction using innovative solutions to reduce future operating costs).
Concessions that have long been involved in public-private financing affairs are closely linked to PPPs. With the introduction of private sector governance principles, private finance and innovation into the public sector, concessions have been commonly used forms of this type of financing. Concessions are a contractual arrangement in which the public sector transfers an object (real estate) or the right to provide a service to a private enterprise that manages a PPP for a specified period of time. Contracts may involve the construction and design of a facility to produce a service. Typical terminology for such contracts describes, to a greater or lesser extent, their functions. Contracts that include multiple functions are: “concession” contracts or “Design – Build – Finance – Operate” contracts, as they cover all of the above elements: financing, design, construction, management, and maintenance. Often these such contracts are financed by the consumer (for example, payments for transportation, electricity, drinking water, gas, and so on, but this does not apply to “social” PPP in areas such as health care, correctional system, courts, education, roads, and defense) (Delmon, 2017).
Under the concession, a partner in the private sector is selected through a tender by the government to finance, build, and provide services for a defined timeframe, upon the end of which the project is given to the state. Furthermore, the private partner receives remuneration on a quarterly or annually basis from the state (state payments begin after the private sector completed public sector infrastructure facility) for project implementation (the structure of payments is formed in accordance to the operating costs and the private sector capital).
The formation of mixed forms of ownership does not mean the leveling of the internal content of various forms of ownership; in fact, combined forms appear, expressed in PPP, where all forms of ownership participate without losing their basic internal content. The issue of ownership is regulated depending on the chosen form of partnership, that is, either relations arise when each partner retains all property rights for themselves, for example, various kinds of contracts, or there is a complete transfer of ownership rights into the hands of private business, in other words, privatization. Within the framework of these two options for relations, there is a large number of combinations and forms of PPP, which imply different degrees of transfer of property rights from the state to private business.
Of course, it would be unwise to provide the private sector with a full “bundle of property rights” for natural monopoly objects, since the state is responsible to the population for the continuous provision of public goods. Thus, in the PPP mechanism, there is the concept of “splitting of property rights,” which provides for the partial transfer by the state of some rights to this property determined by law and agreement (contract). It is about such key powers as the right to control the use of assets, the right to income, the right to manage, alongside with the right to change the objects of agreements’ capital value.
The Basic Structure of the PPP Model
There are different types of PPPs, created for different reasons, covering a wide range of market segments and reflecting different kinds of government needs for infrastructure services. Despite the variety of PPP types, two key types can be distinguished: institutional PPP, which encompasses all forms of joint ventures between public and private participants; and contractual PPP.
Models of cooperation include any form of joining efforts of partners in order to implement a project, including the organization of holding structures with the aim of creating and subsequent operation of infrastructure facilities. In world practice, the differentiation of PPP forms has been adopted in accordance to the types of property relations and the extent of dependence on the state in matters of financing and risk sharing. Forms of PPP are distinguished based on the following:
- Contracts concluded between the local government and businesses to implement certain types of activities necessary for society;
- Lease relations;
- Concession agreements, under which an object of state (municipal) property is transferred for a particular period of use and ownership to a business, which carries it out at its own expense to reconstruct or modernize this object and to operate it;
- Production sharing agreements, under which the private partner carries out mineral extractions, while the procedure of production sharing is governed by the agreement;
- Joint ventures refer to the of joint stock companies or joint ventures with equity participation.
The Legal and Institutional Framework of the UAE Federal Government
From a legal point of view, PPP forms can be divided into corporate, which are based on the development of a project company with the involvement of the government and businesses, and contractual, when the project is implemented based on an agreement. From the point of view of the goals of project implementation, all the variety of PPP types can be conditionally divided into organizational models, financing models and cooperation models. When choosing a specific option for implementing a PPP project, it is important to initially define as clearly as possible the role of the state, which, in accordance with the proposed classification, can be passive (if, for example, a public authority acts exclusively in the role of a lessee), parity or leading.
In the case of the latter (for instance, when the most socially significant projects are implemented, the transition of which to non-state ownership is impractical), the investor in the private sector can play a secondary role (for example, acting as the owner of the non-controlled project component). Depending on the volume of the rights to property given to the private partner and the stages of PPP, several variations of partnerships are distinguished. In addition, it is also important to classify PPP types depending on the ownership of the partnership object. As a rule, in this area, in one form or another, there are two property rights: ownership and lease. However, the development of types of public-private partnerships based on the use of other property rights provided for by legislation, such as, for example, the right of economic management or operational management, is also promising. Such rights are more “narrow” in content compared to those with the right of ownership, but at the same time they allow the state to more closely monitor the progress of the project and reduce the risk of bad faith on the part of private business representatives.
In case of BOOT (Build, Own, Operate, Transfer – construction – ownership – operation / management – transfer), the partner in the private sector gets not only the right to use, but also own the object throughout the agreement’s term, after which it is being given to the public authority. There is also a reverse BOOT, in which the government finances and builds an infrastructure facility, which is later being transferred into trust with a private partner with the right for the latter to gradually redeem it into its ownership.
The BTO mechanism (Build, Transfer, Operate – construction – transfer – operation / management) involves the transfer of an object to public authority immediately upon completion of construction. After being accepted by the state, it is transferred to the use of a private partner, but without transferring ownership rights to it.
When implementing the BOO mechanism (Build, Own, Operate – construction – ownership – operation / management), the created object after the agreement is expired is not given to public authorities, but remains at the disposal of the investor. There are also some other forms of mechanisms of these kinds. Under the agreement of concession, the concessionaire, or first party, invests in creating or sometimes reconstructing the property that has been previously defined. Also, the ownership belongs or will belong to the concessioner, or the second party. The latter will be involved in procedures (operation) applicable to the concession agreement’s object. In turn, the concessioner is responsible for providing the concessionaire the possession rights regarding the concession agreement’s object for the implementation of the specified activity and for the period established by the agreement.
PPP case study in UAE
A PPP project that has achieved significant success in the UAE is the Cleveland Clinic Abu Dhabi, which is a hospital established in partnership between the US Cleveland Clinical and Mubadala, Danat El Emarat, which is a children’s and women’s hospital that is part of the United Eastern Medical Services and Oasis, which is reportedly the first hospital founded in Abu Dhabi in 1960 (Postelnicu, 2019). The PPP was to foster collaboration between two thousand stakeholders, Abu Dhabi’s private and public care providers, to meet the strategic priorities of the healthcare sector. The most crucial goal of the PPP is to work on ensuring that effective and high-quality care is provided to the population by integrating the latest technologies, such as electronic health records.
The Cleveland Clinic PPP enables other healthcare institutions to join the initiative, with more patient information being added into the EHR, which would lead to the subsequent development of innovative analytics services that can benefit population health on a long-term basis. The PPP operates on the basis of the latest and most advanced measures of compliance with the local and federal standards of security in order to reach an effective and safe exchange of patients’ personal information (Postelnicu, 2019). Thus, the collaboration between public and private healthcare institutions in Abu Dhabi facilitates a series of future initiatives to increase the use of digital solutions to improve care delivery and the subsequent positive outcomes for patients. For instance, the launch of the Artificial Intelligence lab under the PPP’s initiative is beneficial for focusing on such healthcare areas as wellness and prevention, clinical care, clinical disease management, as well as regulatory management.
The overall move to PPP within the healthcare practice in the UAE has been changing and will continue improving the healthcare landscape in the Emirate. The collaboration between the healthcare institutions to create a top-quality facility in the UAE was successful due to the ability of the private sector to accelerate implementation while the federal government would manage the cash flow more efficiently (Federal Competitiveness and Statistics Authority, 2020). Apart from the Cleveland Clinic, John Hopkins has also been working in the Emirate under the PPP framework, with both clinics currently managing healthcare institutions in Abu Dhabi under long-term contracts. The need to advance the healthcare services in the region has facilitated the development of PPP that would be instrumental in combining different levels of infrastructure as well as looking for private players to share the work and speed up the process of reaching the established public health objectives.
The last decades for the UAE have been a period of struggle for the efficiency of economic development and increasing the level of competitiveness through the development of key elements of the national infrastructure. As a result, there was an increase in interest in private enterprises from the state in terms of using their potential for financing, creating and implementing special projects aimed at developing infrastructure. Previously poorly developed and sparse public-private partnership has now become a tool to enhance economic competitiveness and develop infrastructure services.
By involving the private sector in financing and implementing a project, a public partner can minimize or almost completely eliminate the need to use state budget funds. Operating on a long-term basis, PPP contracts are effective in providing relevant public services to the population of the UAE and establishing the infrastructures by using the efficiency and financial potentials of the private sector. A private partner, being a PPP participant, has the opportunity to become profitable at the stage of project implementation, and, in the cases specified by the agreement, enjoy guarantees (such as various compensation payments that are carried out by the public sector), alongside with benefits and other preferences, if they are ensured with the help of the agreement and do not contradict the latest legislation.
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