Two Heads – One Public, One Private – Are Better Than One

Two Heads – One Public, One Private – Are Better Than One

The FINANCIAL -- Back in October 2015, a team of ISET researchers visited Charity House Catharsis to donate food on World Food Day, celebrated around the globe on October 16th. Catharsis was founded in 1990 and provides daily dinner to 310 elderly in need. Although the major function of the charity house is to provide food, Catharsis also offers other services like medical assistance, a relaxation room, chapel, rehabilitation hall, library and café.

According to Elene Cucqiridze, one of the managers of Catharsis, the NGO a joint effort of government and the private sector. Around 1,000 private companies donate money to Catharsis, and more than 100 donate products and medicines on a regular basis. 

The Georgian Government, in turn, offers the building free of rent, and supplies Catharsis with free labor in the form of the so-called “brothers of virtue,” for whom the work at Catharsis is an alternative to serving in the military. Working in Catharsis is a great option compared to other alternatives used by Georgian youth to avoid military service (Read more about this in our blog “On Education and the Sacred Duty of Defending One’s Motherland”). 

The way Catharsis works is similar to a public-private partnership (PPP), defined as “a long-term contract between a private party and a government entity, for providing a public asset or service, in which the private party bears significant risk and management responsibility, and remuneration is linked to performance” (PPP Knowledge Lab). Although Catharsis might not fully satisfy the formal definition of a PPP, it definitely contains elements of collaboration between the public and private sectors. 

Theory and application of PPPs

In economic theory, public-private partnerships are typically viewed through the prism of contract theory. Back in 2003, the concept of PPP was first studied from an economic theory perspective by Oliver Hart, Professor of Economics at Harvard University, who received the Nobel Memorial Prize in Economic Sciences in 2016. Several research studies used and expanded Hart’s model (e.g., Francesconi & Muthoo 2006; Chong et al. 2007). 

PPPs typically follow the “design-build-finance-operate” (DBFO) scheme. Under this model, the government specifies the services it wants the private sector to provide. The private sector, in turn, designs the project, finances the costs of construction, and delivers the service directly to customers (the general public) or a public entity. PPPs may also be of the “build-operate-transfer” (BOT) type when the constructed asset is transferred to the government at the end of the operating contract (Hemming R., 2006).

PPPs are attractive to both the government and private sectors. The private sector’s involvement ensures greater innovation, better management and stronger incentives to decrease costs and increase efficiency. The quality of services is also usually higher when provided by the private instead of the public sector. Moreover, PPPs allow the private sector to work in new fields to which it previously did not have access. Finally, PPPs allow to combine public and private resources and skills.

More and more countries are adopting PPP models for a wide range of economic and social projects. PPPs are particularly common in the case of economic infrastructure projects (such as toll roads), due to high economic returns. Unlike economic infrastructure projects, social infrastructure projects (e.g. healthcare, education) have lower economic returns but higher social returns, which makes them less attractive for the private sector. Although not a formal PPP, Catharsis falls into the category of social projects heavily sponsored by both the private sector and the government, but generating only social returns. 

What about PPPs in agriculture?

Compared to the infrastructure, health and education sectors, PPPs are relatively new in agriculture. Nevertheless, because of the significant potential of agri-PPPs to modernize agricultural value chains, improve market infrastructure, and facilitate skill and technology transfers, such partnerships are increasingly on governments’ agendas around the world. A recent publication by the Food and Agriculture Organization of the United Nations (FAO, 2016) reviews 70 case studies from 15 developing countries on the use of PPPs for agribusiness development.

In developing countries, the main focus is on the potential of agri-PPPs to involve smallholder farmers in agricultural value chains. The majority of research studies report positive impacts on farmers’ income from PPP initiatives, mainly related to the adoption of new technologies, better market access, increased productivity, and engaging in on- and off-farm diversification activities (FAO, 2016).

Another important benefit of PPPs comes from the possibility of risk-sharing between private and public actors. Agriculture in general, but particularly in developing countries, is associated with many uncertainties and risks. To assist with designing cost-effective policy measures, governments could partner with private actors who are often better suited to manage such risks. Studies point out that market risk is mostly born by lead actors in the chain (mostly agribusinesses), while production risk is either carried by farmers, or shared between farmers and the government. A good example of the latter is subsidized agricultural insurance.

Agri-PPPs in developed countries are mostly initiated and led by private actors; governments provide only modest support. One example is the Swiss “Culinarium”. While the main purpose of this network is to provide dinners to elderly in need, it goes well beyond food relief by constructing a whole value chain in food production and delivery. Culinarium is a joint endeavor of different actors such as farmers, food processors, catering companies, and food retailers. The label “Culinarium”, developed through a public-private partnership, is well recognized by Swiss consumers as it enables value chain actors to have direct contact with end users. The restaurants, catering companies and retailers who work under this label are supplied with fresh fruits and vegetables by Swiss farmers located in the regions. This helps the farmers to be integrated into the value chain and secures employment in the region. The Swiss government is contributing to this project by providing some financial and human resources for operating the network, but for the most part, it is paid for by private sector actors. 

PPPs in Georgian agriculture 

The Ministry of Agriculture (MoA) of Georgia is using different forms of agri-PPPs in recently designed projects. One of the most successful examples is the “Preferential Agro Credit” project, implemented by the Agricultural Projects Management Agency (APMA) in March 2013. The purpose of this project is to improve farmers’ access to finance through long-term loans with preferential rates. APMA guarantees farmers’ credit, but applications are reviewed by commercial banks and financial institutions. The government is trying a similar PPP scheme with its Agricultural Insurance Program, by closely collaborating with insurance companies and co-financing insurance premiums.

Despite these recent attempts, the potential of agri-PPPs is surely not yet fully exploited in Georgian agriculture. In particular, the government should be more proactive in facilitating and coordinating collaboration between leading agribusinesses (large buyers and processors) and smallholders. Private provision of extension services, private sector’s involvement in organizing farmer coops and associations, constructing food processing, storage and packaging facilities, and supplying Catharsis and similar organizations with food from Georgian villages are only a few examples where building a partnership would add value to both private and public actors.