PRIORITY ANALYSIS OF MULTI CRITERIA ATTRIBUTES COST AND BENEFITS FOR MANAGER DECISIONS MAKING OF URBAN PUBLIC PRIVATE PARTNERSHIPS (PPPs) CONTRACT AGREEMENT - INDONESIA
Putu Indrajaya Lembut1 and Sendy Cahyadi2(1,2Faculty of Economics and Business - Ma Chung University) E-mail:
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ABSTRACT
Public sector reform through NPM since the 1980s up till now is always focused on the main agenda that is in line with global corporations ie cost reduction demands. PPPs is a scheme for reform of public services based on public service concessions between contracted and government-bound private parties that include the right and obligation, which explains contracts for the private sector to have exclusive rights to operate, invest and maintain responsibility or utility, whereby private companies receive part or all of the revenues from infrastructure operations. Uncertainty raises material costs, especially for private parties as contractors and as private providers. This condition implies that when viewed from the contractual agreement, the fact that the cost-benefit aspect cannot be accurately estimated. This research is especially aimed to understand themotivation underlying the agreement of the collaboration contract between the executive and the manager, that is how the manager's response to the executive in relation to the contract policy. This research uses expectation analysis that can be measured using Analytical Hierarchy Process (AHP)analysis. The actual cost of planning is the main priority (criterion) that can influence the manager's behavior to approve or reject the concession contract. This study proves that the Cost of Planning Attribute is the most important thing for managers to consider, especially before contract agreement.
Key words: Analytical Hierarchy Process, actual cost of planning, cost-benefit aspect, cost reduction demands, Public Private Partners (PPPs).
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1.Introduction
Public sector reform through NPM since the 1980s up till now is always focused on the main agenda that is in line with global corporations ie cost reduction demands (Wescott, 1999). The concept of the agenda reflects the changing operation of public sector organizations by referring to the actual corporate entities that these two organizations have different values and objectives, in which the public sector places greater emphasis on maximizing the use of resources to maximize public services, while the private sector aims at sustainability business operations (able to compete) with the consequences of maximizing the effort and using resources efficiently and effectively, thus efforts in the private sector are more focused on achieving maximum profit.
Therefore, at the beginning of the year, demands for the effectiveness of the implementation of the "results-based management" concept have not been successful in the public sector (Thiel & Leeuw, 2002). So that the inefficiency of the occurrence of deficit State finance in the public sector is still possible to happen and can not be resolved properly. This means that financial management reform should redesign the incentive structure to align the interests of managers (public-private) with collective goals that also involve stakeholders. Institutionalize competitive ways, providing market-based services and pricing techniques that can lower the cost of services or cheap commodity prices.
Responding to these problems, based on the perspective of government, the State financial deficit can be solved by collaboration mechanism with other parties (Backstraad, 1998). In such collaboration between the private sector and partners may act as a substitute or complement to the role of the government and build a bridge to the relationships between different actors who cooperate (Rondinelli & London, 2003; Selsky & Parker, 2005; Westley & Vredenburg, 1991). This is especially needed by the government because public policy can not be effectively implemented unilaterally without any cooperation with other parties (Ruggie, 2004). This is done because it is perceived that public administration improves inefficiency, wastes the State's finances and is unresponsive to the aspirations of society and considers that public administration (government) is responsible for the financial crisis of the State.
PPPSs is a scheme for reform of public services based on public service concessions between contracted and government-bound private parties that include the right and obligation, which explains contracts for the private sector to have exclusive rights to operate, invest and maintain responsibility or utility, whereby private companies receive part or all of the revenues from infrastructure operations.
Viewed from the perspective of the interests of public and private institutions in the policy-making process in the PPPs consensus, it is more likely to reflect the arena in which there is often a conflict about the distribution of risks channeled to private institutions. PPPs by Page et al. (2008) is an infrastructure project that distributes financing risks such as construction, operation, maintenance to the private sector. Based on the cost-benefit aspect, Bajari & Tadelis (2001) reported that in PPPs it is possible that there is uncertainty given that the concession characteristic in PPPs is generally long term ie 25 to 30 years or more. Therefore, important changes, such as design, or failure to design, risky location and environmental conditions to changes in regulations due to exchanges, may occur after the contract is signed. Uncertainty raises material costs, especially for private parties as contractors and as private providers. This condition implies that when viewed from the contractual agreement, the fact that the cost-benefit aspect can not be accurately estimated. Therefore Prud'homme (2004) also said that as a consequence to the inherent level of risks in public infrastructure projects that can not be accurately estimated, the costs are generally underestimated and overestimated. It argues that:
“error of 50 percent or more seem to be rule rather than the exception”.
Its reflects the number of 50% or more, estimates of PPPs projects in terms of contracts, meaning that there are conflicts in contractual decisions that both parties have to agree on making partnerships.
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This research, on the one hand, seeks to fill gaps in the scientific literature by analyzing the incentives of the private institutions in the dynamics of PPPs collaboration ie the relationship between the executive (public administrator) and the manager (in this case the private sector) and their relation to the important priority factor for the approval of the concession contract agreement behind the process of formation, agreement, and implementation especially on the (contract) policy. On the other hand, this study seeks to explain the differences of interests and demands between public institutions and private parties that are simultaneously manifested in the priorities underlying the collaboration decisions. Oates (2013) points out that many previous studies have focused only on patterns of interaction between managers and stakeholders both in the private and public sectors without being based on what are important priorities in the manufacturing process until the implementation of the (contract) policy. In view of the development of the PPPs scheme, the synthesis of substantive contributions of research in this area presents an important opportunity for reflection, to consider the viability and potential future direction of general research in the public sector and specifically in the field of PPPs (Broadbent and Laughlin, 1999, 2004) .
1.1The Importance of PPPSs on Build, Operate and Transfer (BOT) in Indonesia
Indonesian Public Private Partnerships (PPPs) started from the economic crisis in 1997. Those situation has been a weakening national economic condition characterized by failed market conditions, which is also characterized by low levels of economic activity and resulting in thin market, inadequate co-ordination to the market, high transaction and risk expenses as well as high unit costs to infrastructure development. Individuals or organizations, lacking broad access to generating resources, especially financial and public funding, are heavily dependent on politics, thus facing high costs of accessing information and in enforcing property rights over assets. This high social cost hampers both market development and access to existing markets, which in turn hampers economic and technological development, Dorward (2005). So the reform agenda to date has focused on the management of public resources.
Response to the demands of the reform, President Bambang Yudhoyono started in 2011 consistently expressed the importance of promoting national economic growth, one of which is by building infrastructure. It shows that there is still limited funding from the government to meet all development needs in the national public service sector (infrastructure). Until 2016, compared to the available budget there has been a gap, as shown in Figure 1:
Figure 1. Total Infrastructure Financing Needs in Indonesia (2010 to 2016)
Source: Indonesia Infrastructure Financial Budget – by author (2016)
Figure 1, shown that total financing needs for infrastructure is Rp1,507 trillion, while the government budget capacity is Rp772 trillion (51.3%) so that the financing needs of the private sector reached Rp735 trillions or there is still a gap of (49%) (Figure 1). In this fact, Indonesia investment program through PPPs is still opens opportunities for private parties to work together to build infrastructure. In addition, the PPPS project in Indonesia is aimed at fulfilling Presidential Regulation (Perpres) no. 67/2005 on collaboration between the Government and the Business Entities in the
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provision of infrastructure (as amended by Perpres No. 13/2010, Perpres No. 56/2011 and Perpres No. 66/2013) and recent regulations of the Indonesia Minister No.19/2016 pertaining utilization of regional assets/properties and stipulated in the jurisdiction of the State of Indonesia. Explicitly and in detail that the capitalization scheme in PPPS has not been established, but capitalization refers to the BOT / Built-Operate-Transfer or Design-Built-Operate-Maintenance (DBOM) options. The two options have been integrated in the collaboration that combines the responsibility of infrastructure for design-build and operate and maintain (maintenance). Contracts for design, transfer, construction and operation may be sole or jointly shared to the private sector as partners.
1.2Some PPPs Problems and Research Question
Closely related to contractual approval, in the context of policy-making, managers must identify risks to infrastructure projects to be decided, with the objectives of cost-benefit planning. In the context of contractual or even investment contract policies, managers must respond to demands and be more accountable to bureaucrats and even more than others, such as public or community groups (Oates & Kloot, 2013). Bureaucratic groups may (and often) have conflicting demands and priorities. The executive (on the part of the government) may influence and suppress the management of the private organization in accordance with the priorities required to be met in the cooperative concession.
An option to change the concession by changing clauses in the contract or changing the scope of collaboration, both are highly unlikely in PPPs. It is based on the reasons, Firstly, the government, which is a partner in the alliance must maintain a degree of credibility and certainly to procedural transparency. So it is difficult to influence even modify though with little scope against the contract clause. This makes the contract clause too binding not only in motivation for contract approval but also in implementation. Secondly, when viewed from the contract, that PPPs contracts allow to have evolved both from the regime prior to the implementation of the agreement until the regime of the completion of the contract. So from a decade of experienced government with PPPs where contracts are built, the regime has strong institutional support. Therefore, any attempt to change the contract requires not only changes that will argue with rational logic, but the need to change the contract must also be communicated to the new regime and accepted by various project participants as shareholders. Therefore PPPs, in general, does not provide flexibility or modification, otherwise PPPs concessions require a high commitment from both parties (Public-Private) to collaborate, although at the time of the concession there are unanticipated conditions and this certainly has an impact on costs operations that must be borne primarily by the private sector (Garg, 2012).
Research on the dynamics of how organizations are in form, is still limited in the types of stakeholders and public organizations as fundamental studies, and theoretically still sustainable to develop (Chiles, Meyer, and Hench, 2005; Singh, 2006: 179). In the study, an evolutionary typology is proposed at the interaction (relationship) stage between stakeholders and public organizations. Typology is seen as a process of interaction in the integration between actors without looking at the main factors and priorities in interaction, especially in collaboration between public-private institutions. Therefore, this research also fill the limitations of previous research. In addition, this research seeks to understand the motivation of managers as mira in the provision of public facilities and services that are reflected in the priorities underlying the PPPs concession contract agreement. This research seeks to understand the interaction of the two different forms of organization (public vs private) that arise and be maintained through the process of selection and organizational practices that arise and converge through the adaptive process. Furthermore, the question in the study is:
"What is the priority of the manager's expectations, or which are the most important priority attributes to the lowest priority to agree or not for approving the contract in PPPs”?
1.3Research Objectives
A study of the PPPs contract process is essential to conduct an investigation prior to the approval process. Instead of trying to explain how the government should build a fair policy, the focus on "how
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the deal process is truly effective or feasible?" is inseparable from understanding earlier dimensions of decisions primarily concerned with cost-benefits as a basis for building government policy, for example, in PPPs, contracts reflect policy processes that have consequences directly or indirectly for unanticipated and uncontrolled costs that are often undertaken by various stakeholders (Wildavsky, 1974). This phenomenon refers to the motivation of actors in collaboration and which is crucial in the formulation of contract collaboration policy, the complexity inherent in the contract decision and how the actors need to base on priority, "satisfic" and rely on "heuristic decisions" which are believed to contain conflict.
The organization has a very important and vital role in determining policy priorities based on its own appropriate way. In the contract of cooperation agreement, conflict allows to occur when looking at the interests of both parties, reflecting the process of compromise and the need to judgment and maintain their position based on the rules and requirements that must be balanced. The consequences of institutional conflicts between private organizations (represented by managers) and public institutions (represented by public officers) result in more complex policy frameworks.
Given that managers as those who are more at risk of losses to project implementation, may take action not to approve or even propose policies whose must be submitted by the executive. Thus the agreement and bargaining in the price-contract in PPPs is more based on cost-benefit analysis based on the implementation of forces often creates a conflict, this is if focusing on the priority of interest to collaboration.
This research is especially aimed to understand the motivation underlying the agreement of the collaboration contract between the executive and the manager, that is how the manager's response to the executive in relation to the contract policy. In general, through manager priorities understanding are reflect the responses used by managers in relation to deal the interests of executives who involved in the contract agreement is an important issue to understand the cost-benefits in the PPPs.
1.4Contributions
Some studies in the field of PPPs has been built based on the economic approach, namely: value for money (VFM) and the risks and factors that influence the success of the PPPs program. The absence of a scientific study of cost-benefit priority is a study to be done given the fact that PPPs more reflects the distribution of risks to private parties as contractors. Collaboration therefore principally built on planning where there are consequences reflected in a contract to achieve a mutually beneficial consensus, although in the process there is an uncertainty. This is because managers are confronted by various attributes experienced based on the cost-benefit attribute. Accordingly, to determining the priority of decisions to be made by the manager, the contribution of this research is to explain the attributes as determinant for the underlying manager in making contract decision especially in BOT concession. The result is expected to contribute to the cost-benefits attribute as the main attribute in PPPs and from that concept can be the basis for contract policy especially between private and government actors.
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- Theoretical Framework
- 1 Rationality of PPPs
An explicit consideration of the nature of PPPs is provided by Linder (1999); Maguire and Malinovitch (2004), whose reported based on neo-liberal contextual or neo-conservative premises that are rationally connected in the use the term of PPPs. Linder (1999) recognizes six different meanings as being linked to how PPPs has been discussed, promoted and scientifically understood:
1)PPPs as management reform.
2)PPPs is to try on solutions concerning government budget problems.
3)PPPs as a moral regeneration.
4)PPPs as a risk shift from government to private parties.
5)PPPs was emphasis on a restructuring of public services.
6)PPPs represent the power enforcement.
According to Linder (1999), each of these meanings "claims about what a partnership is and an understanding of its purpose and its significance". To reveals of this meaning, Linder (1999) indeed criticizes the nature of PPPs, by researching it based on the premise (neoconservative / neoliberal) in which they operate and how the idea of "partnerships" to build of commercial participation in a better public domain. Maguire and Malinovitch (2004) present a more evolutionary illustration of the nature of PPPs through their study of partnerships regulation in Victoria, Australia. In this case, the authors identified three different periods of PPPs evolution.
1)Initially (from the late 1980s to 1992), PPPs has been used as a method to achieve off-balance sheet financing to provide assistance the limits that may government borrowed.