Understanding joint ventures, PPPs and contractual consortium

There are various forms by which the private sector works with the public sector in the provision of public service goods and services.

PURCHASING & SUPPLY: NYASHA CHIZU

The traditional means is the trading arrangements characterised by one off or short-term contracts, where the private sectors supplies the public sector with either goods, services or works in exchange for consideration that could be in form of money or other forms of exchange that include barter trade.

In such arrangements, the public sector remains solely with the responsibility of the operational and maintenance elements of the projects and providing the interface between the public and services required.

The challenge with such traditional arrangements has been the bureaucracy in the public sectors, that has always been the source of poor service delivery.

Hence, the solution has been the adoption of the new paradigm, where the private sector brings in its efficiencies in partnership with the public sector in delivery of public goods and services.

The new trend, on one end, has been the emergence of public-private joint venture companies and public-public joint venture companies, all with the aim of harnessing efficiencies to enhance service delivery.

Both scenarios result in the formation of separate legal persona responsible for executing the joint venture mandate.

In public-private joint ventures, a joint venture company, with its own legal identity, separate from those of its shareholders, is established.

Like any other company, parties agree on the level of risk and liability that is defined by the shareholding. It could be on equity basis or any other ratio as agreed by the parties.

The shareholding determines control of the board and appointment of executives.

In public-public joint ventures, public sector organisations with common interests, but different mandates and expertise come together to form a company to provide public sector goods and services.

Though the ownership is purely public given the shareholding, oversight by the partners, who would have different lines of control, bring an element of efficiency.

In the housing sector in Zimbabwe, the Infrastructure Development Bank of Zimbabwe (IDBZ) partnered the Public Works, Local Government and National Housing ministry to successfully develop various housing projects around the country.

IDBZ would bring in financial modelling expertise, while the Public Works, Local Government and National Housing ministry would provide the land and construction expertise.

This has assisted the government in achieving its millennium goals and the ZimAsset targets.

The arrangement above is limited to specific projects defined. Parties share the proceeds in line with the agreed shareholding at the end of the project, unlike public-private partnerships (PPPs), that establish an arrangement for sharing of revenues over a specified period.

In most cases, the public sector is limited to facilitation, where private sector plays the major role that might include, in some cases, the design, financing, implementation, operation and maintains the project during its life.

The arrangement does not burden the fiscus, since the private sector sources its funds from open markets.

Such projects are viable in the transport, energy, health and education sectors in Africa.

Under this arrangement, no separate legal entity is formed. The public, the receipt of the service, would not interact with the private sector partner. The private sector would operate behind the scenes.

The agreement defines the partner’s legal responsibilities under the project and generally, there is no limitation on liability unless the arrangement was formalised into a limited partnership.

Payments to the private sector could also be in form of fees paid by the government to the service provider.

Rural electrification using solar energy is an idle project under this arrangement, where the public sector can subsidise solar installations through the rural electrification levy collected by the power utility.

There is another dimension, where a contractual consortium is formed.

In this instance, parties contract to work together on a specific project.

There won’t be any concept of sharing of profits, since this will not be a partnership.

Instead, each party is remunerated for specific services provided to the consortium.

They is no need for creation of a separate legal entity and the limitation of liability if at all is set out in the contract.

For any of such arrangements to bear fruits, there is need to restrict the activities of the joint ventures to ensure that they do not indulge in risky activities.

A lot of training to increase awareness is required on these forms of partnerships if Zimbabwe is going to achieve ZimAsset objectives that are taking root from public-private partnerships.

Nyasha Chizu is a fellow of the Chartered Institute of Procurement and Supply writing in his personal capacity.
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