- 10 Marks
Question
The Ministry of Health of Federal Republic of Wazobia is currently
considering public-private partnership as a means of improving health
facilities in some rural areas in the country. The Ministry intends to use
Public-Private Partnership (PPP) to construct and manage modern primary
health centres in rural areas to increase access to quality health facilities.
The project would be fully financed by the private sector, but will be built
on land secured from the state governments. The private sector requires
government guarantee to borrow externally to execute the project.
Currently, health services are free, however, the new project, when executed through Public-Private Partnership would be on “user-pay” basis.
The government and the private contractors determine the average fees
payable per user and it will be subject to an upward review from time to
time. In order to stimulate private sector interest in the project, the Ministry
intends to protect the private sector against risks associated with the
project. Meanwhile, the Ministry would insist that local materials and skills
are employed in the construction and management of the primary health
centre projects. The project is also environmentally friendly as there will be
little or no destruction of the forest vegetation. The project when completed,
will be of great benefit to the country as a whole.
Required:
Based on guiding principles of Public-Private Partnership identify and
explain THREE principles and TWO associated risks of the feasibility of the
proposed primary health centre projects by the Ministry of Health.
Answer
Feasibility of Primary Health Centres PPP Project
i. Guiding Principles of PPP:
1. Value for Money: The project is expected to be more cost-effective under PPP than if managed solely by the public sector, as it relies fully on private funding without requiring Ministry expenditure.
2. Risk Allocation: Risk-sharing is vital in PPPs, where the private sector should bear substantial risk. However, in this project, the Ministry’s approach to absolving the private sector of all risks contradicts this principle, as PPP best practices advocate a balanced risk allocation.
3. Ability to Pay: Affordability must be considered; however, transitioning from free healthcare to a user-pay system may challenge the financial feasibility due to potential unaffordability among rural users, risking project failure on affordability grounds.
ii. Associated Risks:
1. Exchange, Default, and Interest Rate Risks: Given the project’s reliance on external financing, currency fluctuations and interest rate changes pose financial risks to the private sector and should be properly allocated within the PPP contract.
2. Demand Risk: The project carries the risk that actual demand for services may fall short of expectations, potentially leading to reduced revenue for private investors. Demand risk allocation should be included in the contract to ensure project viability
- Tags: Health Facilities, PPP, Project Feasibility, Public Sector Finance, Risk Assessment
- Level: Level 2
- Topic: Public Sector Reforms
- Series: MAY 2021
- Uploader: Kwame Aikins