Business Model Choices for Government

IIIT-H

Tools…

•Goods and Services•Direct Loans•Income Support…

Direct Government

•Contracting•Grants•Loan Guarantees•Insurance…

Indirect Government

PPP

2

3

Public Private Partnership

• long-term arrangements in which the governments purchases services under a contract either directly or by subsidizing supplies to consumers …the government bears substantial risks - for example, by guaranteeing revenue or returns - on projects that sell directly to consumers

World Bank

• Among other things, PPP is a procurement decision

• As a procurement decision, PPP attempts to find answer to the question– Should Govt provide service “x” on its

own in the traditional format or – should Govt. enter into a partnership

with the Private Sector to fulfill its commitment

Decision dimensions

• Expertise• Political – [encourage Pvt Sector]• Philosophical – [reducing role of govt]• Resources – [Human]• Resources – [Time]• Resources – [Funds]

YearCosts incurred/

Investments made by Government

Costs incurred / Investments made by

Government

[a] [conventional] [Under PPP]

  [b] [e]

     

     o 1,000 0

1 900 1,250

2 900 1,250

3 900 1,250

4 900 1,250

5 1,500 1,250

Time Value of Money

• How to calculate NPV?

Ct

NPV = ∑----------- (1+i)t

– Ct = Amount of Cash flow (inflow – outflow)

– i = discount rate (or rate of return that could be earned on an investment)

– t = time of the cash flow (year 1, year 2…)

Exercise…NPV analysis

YearCosts incurred/

Investments made by Government

Costs incurred / Investments made by

Government

[a] [conventional] [Under PPP]

  [b] [e]

     

     o 1,000 0

1 900 1,250

2 900 1,250

3 900 1,250

4 900 1,250

5 1,500 1,250

Cross-over Rate

Derivation of discount rate / return on capital

• Required return is the sum of the risk-free rate of interest and a compensation for bearing risk.

A discount rate is therefore a composite…

Value for Money

• VfM is defined as “the optimum combination of the whole of life cost and quality (or fitness for purpose) of the good or service to meet the user’s requirements”.

• It is linked in many ways to cost-benefit analysis.

• VfM may include benefits that are not monetized (as it is not always easy to do so).

1 2 3

Prog A [eGov based child and women care right up to village level]Total Cost 1600 2100 2600Lives Saved/value of lives saved 120 243 485

Prog B [eGov based child and women care right up to district level]Total Cost 2000 2375 1100Lives Saved 50 216 432

Prog C [additional training without any major expansion]Total Cost 500 525 50Lives Saved 50 90 179

Discount Rate 4 8 12

Exercise…Perform Cost effectiveness analysis

1 2 3

Prog A [eGov based child and women care right up to village level]

Total Cost 1600 2100 2600

Lives Saved/value of lives saved 120 243 485

Prog B [eGov based child and women care right up to district level]

Total Cost 2000 2375 1100

Lives Saved 50 216 432

Prog C [additional training without any major expansion]

Total Cost 500 525 50

Lives Saved 50 90 179

Discount Rate 4 8 12

Present value of Costs

Program A 5,791 5,346 4,953

Program B 5,097 4,761 4,462

Program C 1,011 953 901

Discounted Lives/value of lives Saved

Program A 682 641 604

Program B 607 570 537

Program C 252 237 223

Cost per 'life' saved

Program A 8,491 8,342 8,206

Program B 8,395 8,348 8,305

Program C 4,010 4,024 4,037

Cost effectiveness analysis

• Coordinating work effectively often turns out to be much harder than dividing it.

• Partnerships are one of the coordinating devices

• The choice of tools is a difficult cultural / political / Legal / economic decision. Decisions should be taken only after DETAILED analysis

Govt.PROCUREMENT

Decisions

• Make or buy?• Two State or Three Stage process?– Request for Information– Request for Proposal– Contract

• Pre-qualification• Selection criteria– L1– Quality and cost based selection [QCBS]

• SLA [Service Level Agreement]