- 10 Marks
Question
Musko Technical University (MTU) is a public University in Ghana. The University has a student population of about Twelve Thousand (12,000). It relies on Government subvention and Internally Generated Fund in running its operations and developing public infrastructure. As a result of the fiscal challenges the Government is experiencing, it has reduced its funding support to the University. This problem together with low Internally Generated Fund has resulted in the University expending greater proportion of its Internally Generated Fund on Goods and Services which reduces spending on infrastructure development. Currently, the University needs a good Library, Lecture Theatre and Hostel facility for the smooth running of its operations. The University is aware of the new Public Funding Initiative called Public Private Partnership (PPP). Fortunately, it has been approached by a South African investor who wishes to enter into a PPP contract with the University to build 8,400-unit capacity hostel facility in the University within two years. This arrangement is expected to reduce students’ internal accommodation deficit from 90% to 20%. Currently, the University’s challenge is how to maintain their control on the Hostel Facility after the construction under PPP.
Required: i) Explain THREE (3) PPP investment models suitable for addressing the needs of MTU. (6 marks)
ii) Discuss FOUR (4) benefits MTU may obtain from such initiatives. (4 marks)
Answer
i)Investment models that will appropriately address their challenges and meet their other investment objectives:
- Build-Operate and Transfer (BOT): In this model, the South African Investor finances and acquires the asset for the provision of Accommodation for the candidates, operates it for an agreed duration to recoup its investment and transfers ownership to MTU. The features of BOT are:
- The South African investor invests its capital to build the asset.
- Risk associated with the condition of the asset will be shared between the South African Investor and MTU.
- It will take a longer duration for recoupment to occur.
- Residual interest will be transferred to MTU upon expiration of the agreement.
- Build-Transfer and Operate (BTO): In this model, the South African Investor will find the financial resources to build the hostel facility and upon completion will transfer the Hostel facility to MTU before MTU in turn will grant the South African Investor the right to operate the hostel to recoup the investment.
- Joint Venture: In this model, the South African Investor and MTU will jointly finance the construction of the 8,400-unit capacity hostel, share management and risk of managing/running the hostel facility.
(2 marks each = 6 marks)
ii) Benefits MTU will be derived from the Private Public Partnership are as follows;
- Increase in candidates’ enrollment.
- Ensuring quality provision and smooth running of academic programs.
- It will create more jobs both formal and informal.
- Risk from the investment will be shared by the University and the South African Investor.
- It will lead to increase in the University’s Internally Generated Fund.
- The University could use the resources which could have been used in the construction of the hostel facility to construct equally important academic facilities such as a good library and lecture theatre etc.
- MTU can also benefit from the residual value of the hostel facility at the terminal year of the contract if the investment model is BOT or BTO.
(Any 4 points @ 1 mark each = 4 marks)
- Topic: Public sector financing initiatives
- Series: NOV 2023
- Uploader: Sarah