Improve Your Skills through Office Politics
Work Politics in certain cases can also develop inner skills of an individual. Let us find out how office politics sometimes can also help individuals hone their skills: An individual indulges in politics when he is not secure about his job. He tries his level best to tarnish the reputation of his fellow worker and […]
What is Inventory Management – Definition & Types of Inventory
In any business or organization, all functions are interlinked and connected to each other and are often overlapping. Some key aspects like supply chain management, logistics and inventory form the backbone of the business delivery function. Therefore these functions are extremely important to marketing managers as well as finance controllers. Inventory management is a very […]
Importance of Data Quality in Risk Management
The overall risk management of a firm is largely based on statistical measures. This is because most of the models used for managing and mitigating risks are based on advanced statistics. These statistical models are based on gathering large volumes of complex data, rigorously processing it via running complex statistical operations, and using the resultant […]
Minimum Viable Product
We have already learned about the technique of proof of concept in the previous article. However, proof of concept isn’t the only technique that is used by entrepreneurs. There are other techniques that are frequently used as well. Minimum viable product is one of those techniques which is widely used by several entrepreneurs. In this […]
How to Invest In Commodities Markets
There is more than one entry route if one wants to gain an exposure in the commodities market. Positions can be built via many alternate routes. In this article we will look at some of these routes as well as their pros and cons. Physical Purchase Physically purchasing the commodities is the most direct and […]
In every public-private partnership, it is the job of the public party to provide remuneration to the private party. There are various mechanisms in which this payment can be provided. In this article, we will discuss the mechanisms which are commonly used in public-private partnerships.
User charges are a commonly used mechanism when it comes to providing compensation to private parties in a contract. Toll roads and bridges are the best examples of how user charges can be used to provide remuneration to private parties. This mechanism has limited usability since it can only be used when the number of users is expected to be significant.
In case, user charges are chosen to be the remuneration method, and the private party is given the authority to collect money from the common people. However, the rate cannot be fixed by the private party. Since toll roads and other infrastructure projects fall under the category of monopoly services, their prices are heavily regulated. Hence, the government fixed the prices even though the private party collects them.
The prices which can be charged in such projects are not fixed arbitrarily. Instead, they are charged based on a pre-agreed formula. This formula takes into account factors such as traffic and inflation in order to decide the rates which will be paid by the public. In other cases, the prices are decided by a government-appointed committee. In some cases, a combination of the two approaches mentioned above is used.
A major criticism of the user fees model is that it is used to line the pockets of private contractors. Critics of the model often say that the revenue formula shows unrealistically low assumptions. As a result, per unit charges are increased. In reality, the traffic is much higher than the projections. As a result, the higher unit charge multiplied by higher traffic creates massive revenue. This revenue is used to enrich a handful of contractors at the expense of the larger public.
To overcome the shortcomings of this model, revenue-based payments are often used. This model operates just like the user charges model. There is only one key difference. The difference is that a ceiling level is set. Once the ceiling is reached, the payments no longer go to the private sectors. Instead, the excess payments go to the government. The benefit is that the risks and rewards of both parties are managed. The private sector faces a lower risk since they have the first right to receive compensation.
In many cases, the government guarantees a fixed payment to the private sector. In such cases, the risk of the private sector virtually goes down to zero. This is because they have a predictable stream of cash flows, which they can look forward to as long as they perform the tasks which they are supposed to.
If the quality of the work is below the agreed-upon quality, then the contractor may have to face some fines and penalties.
Similarly, if the work is behind schedule, there may be some more fines and penalties. Thus the private party only carries execution risk.
On the other hand, the demand risk is managed by the government. If the demand is lower than expected, there is no impact on the private party since they still get paid. Such contracts are considered to be quite favorable to the private sector. Hence, they are usually awarded when the government is trying to encourage the private sector to invest in public works projects.
In certain extraordinary cases, the payments related to an infrastructure project is not derived from the project. Instead, it is derived from a third-party source. This is often done when the project involves the use of a new or unproven technology where the financial inflows are difficult to predict. For instance, solar energy is a relatively new mode of energy. Hence, it would be incorrect to assume that it will be financially viable from day one.
In such cases, the government funds infrastructure projects related to solar energy by levying a tax on other goods and services. Commonly the tax is levied on the economic alternatives in order to make them more expensive. The money collected from these taxes is paid to the private party executing the project. Sometimes a fixed dollar amount is collected. At other times, private sector companies are willing to bear the risk of the uncertainty involved.
The bottom line is that the payment mechanism is considered to be vital for infrastructure projects. This is because of the fact that these mechanisms determine who will be bearing which risk. If the wrong payment mechanism is used, it creates a weak foundation for the entire project.
Your email address will not be published. Required fields are marked *
