Publicprivate Partnership for Rural Infrastructure

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Public-private Partnership for Rural
Infrastructure

• FAO-AGS September 2006

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Outline of presentation

• What is PPP?
• Why PPP?
• PPP Arrangements Models
• Stages of PPP development
• Issues

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• What is a PPP?

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• Arrangements where private parties participate in
  or provide support for the provision of
  infrastructure.
• Arrangements between the government and the
  private sector with the main objective of
  securing investment and greater efficiency in the
  delivery of local infrastructure and support
  services

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Questions about PPPs

• Where did the idea of PPPs originate?
• What caused the re-growth of PPPs?
• What is wrong with traditional public procurement
  methods?
• Can PPPs be structured to achieve value for
  money?
• Can governments transform themselves from
  purchasers of infrastructure assets to managers
  of long term contractual relations?
• What are the administrative requirements needed
  for them to do so?

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Division of responsibilities and functions

• The public sector transfers land, property or
  facilities controlled by it to the private sector
  entity for the term of the arrangement.
• The private sector entity builds, extends and
  renovates a facility.
• The public sector entity specifies the operating
  services of the facility
• Services are provided by the private sector
  entity using the facility for a defined period of
  time.
• The private sector entity agrees to transfer the
  facility to the public sector at the end of the
  arrangement.

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What are the common characteristics of PPPs?

• Participants Two or more parties with a least
  one of them a public body.
• Relationship Partnerships need to be enduring
  and reliable
• Resourcing Each participant must bring something
  of value to the partnership
• Sharing Collaborative framework for sharing
  responsibility and risk for outcomes mutual
  interest and unifiedcommitment.
• Continuity Underpinning the partnership will be
  a framework contract which sets out the rules of
  the game

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Specific characteristics

• Type economic, social, soft, hard
• Focus on services paid by government to private
  entity services delivered through privately
  owned or rented infrastructure
• Whole-of-life cycle costing complete integration
  design, construction, service delivery,
  operational, maintenance and refurbishment costs.
• Innovation focus on output specifications
• Risk allocation transfer of risk to private
  sector lowers cost to government

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Common misconceptions

• How do PPPs differ from privatisation?
• How do PPPs differ from contracting out?
• What is the impact of a PPP agenda on public
  sector management?

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How do PPPs differ from privatization?

• Privatization- The transfer of a public service
  or facility to the private sector costs and
  revenues are in private hands.
• PPP - public sector actors share costs, revenues
  and responsibilities bringing private management
  into public service.

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How do PPPs differ from contracting out?

• Privatisation a privatised business is
  independent of the creation of competition (may
  hold a monopoly situation)
• Contracting out involves opening up competition
  to new economic activities.

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What is the impact of PPPs on public sector
management?

• They have the potential to introduce market
  discipline into public services.
• PPPs encourage a shift in the problem solution
  from processes towards outputs and outcomes
• PPPs allow for financial risks to be shifted from
  public to private investors.
• Partnership can be used to restructure public
  services.
• PPPs can alter business-government relations
  creating an ethos of cooperation and trust,
  sharing of information, knowledge.

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• Why PPP?

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Public character of infrastructure

• Provision of network services that bind economic
  activity together.
• Infrastructure gives rise to natural monopolies
• Infrastructure involves very large investments
• Network externalities (spill overs of costs and
  benefits)

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Private sector contribution

• Closer attention to revenues, costs and market
  demands.
• Access to equity and private loan finance
• Involves creating a management structure with
  clear goals, making managers accountable for
  performance.

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Benefits

• Value for money
• Bundling
• Capital requirements
• Whole-life costing
• Cost savings
• Risk sharing
• Improved level of services
• Enhancement of income
• More efficient implementation
• Investing in human capital

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• PPP Arrangements and Models

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PPP Arrangements

• There is no one type public private partnership
  arrangement that can be recommended as best for
  all parties.
• Arrangements vary from place to place, depending
  on the type of infrastructure, the nature and
  strength of the private sector etc.
• In general PPP collaboration can take two forms
  
• Formal types of partnerships through contracts,
  leasing arrangements and joint ventures and
• Informal partnerships by forging alliances,
  clustering business enterprises, developing value
  chains and collaborative arrangements between
  different stakeholders.

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Rules of engagement

• The public sector defines the services it
  requires over a given period specifies outputs
  and performance criteria.
• No payments are made until the asset is delivered
  and working and subsequent payments are subject
  to reduction if performance standards are not
  met.
• Design decisions are left to the private sector
  entity and assets are often owned and operated by
  the private sector.
• Public sector provides no funding during the
  construction phase and risks of no meeting
  performance targets rests with the private
  sector.
• Public sector devolves control over assets and
  resources needed to the private sector the
  latter bears the risk and receives the rewards of
  effective ownership.

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Managing risk

• PPP is about putting in place appropriate
  strategies for appraising and managing the risks.
  
• PPP is a process that ensures that all risks
  (public and private) are taken into account and
  valued.
• Having equity capital and borrowing at risk
  ensures that calculations are more realistic.

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Common features of arrangements

• Focus on services with the emphasis on the
  delivery of infrastructure services
• Planning and specification so that desired
  outcomes and outputs are clear to the market
• Creating a viable business case for private
  entities
• Up front mobilisation of resources to enable
  governments to advance the project.
• Clear contractual requirements centred on key
  performance specifications.
• Contract management to monitor and implement the
  contract.

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Delivery models

• Public sector delivery of services with private
  entities providing infrastructure related
  services
• Public sector delivery of core services with
  private parties providing infrastructure related
  and ancillary services
• Public delivery of core services with private
  parties providing infrastructure related and
  ancillary services together with some services to
  the community
• Private sector delivery of a full range of
  services to the community inclusive of
  infrastructure

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Range of commercial scenarios

• an arrangement where demand is effectively
  controlled by government and the costs of service
  delivery are substantially or fully funded by
  government
• an arrangement where government has little
  control over demand and shares the costs of
  service provision with users
• an arrangement where government has no control
  over demand, costs of service delivery are fully
  funded by users and governments role is limited
  to providing some supporting infrastructure or
  project facilitation in areas such as planning.

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Common models

• Build Operate Transfer (BOT)
• Build Own Operate (BOO)
• Leasing
• Concessions
• Joint ventures
• Operational management contracts
• Cooperative arrangements

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• Stages of PPP development

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Stages of a PPP transaction

• Pre-implementation
• Identify the service need
• Appraisal of options
• Development of business case
• Bidding/ tendering process
• Selection of private sector contractors
• Final negotiation and contract signing
• Financial commitment

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Stages of a PPP transaction (contd.)

• Implementation
• Design
• Construction
• Operations
• Maintenance

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Changed role of government

• authorize contracts
• evaluate infrastructure needs
• Provide supporting facilities (e.g. land)
• Define performance outcomes and standards,
• Undertake procurement planning
• Ensure facilities are constructed, used and
  maintained satisfactorily
• Require compliance with standards and
  specifications
• Monitor business and financial viability
• Assess environmental impacts
• Guarantee community access and achieve social
  policy objectives

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Organisational arrangements

• Partners public sector procurers, private
  sector, financiers, subcontractors, consultants
  and service providers
• Organisational structure
• Special Purpose Vehicle (SPV). This could be a
  project company to contract the public procurer
  and sub-contractors.

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Critical factors for success

• Creating common interest (compatible goals)
• Public support (accountability to its customers)
• Enabling environment (economic, business,
  regulatory, legal, political)

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• Issues

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• Fully integrated or bundled structures?
• Are PPPs good value for money?
• How should risk and uncertainty be handled?
• How should PPPs be accounted for?
• Can PPPs adequately provide for the public
  interest?

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Issues (Contd.)

• How to make the transition from public to
  private?
• How to ensure fair contractual arrangements and
  transparency?
• How and when to design incentives, subsidies and
  compensation?
• What is the role of NGOs?
• How to access investment finance?
• What mechanisms can be used to resolve disputes?

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Mechanisms used to resolve disputes

• Negotiation
• Mediation
• Conciliation
• Neutral evaluation
• Expert determination
• Adjudication
• Arbitration
• Litigation

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Summary of issues

• the need to create a common interest
• create a conducive environment to promote
  partnerships
• ensure that public support exists
• ensure a smooth transition from public to private
  management
• ensure transparency with respect to contractual
  matters and
• make effective use of incentives and subsidies.

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When should PPPs be used?

• Service outcomes can be clearly specified and
  measured
• There exists both potential and the incentive to
  design innovations and operational changes that
  can raise efficiency
• Payment mechanisms give the operators the
  motivation to maintain service quality
• Value for money can be demonstrated after taking
  into account the costs of project development and
  the costs of monitoring the contract
• An integrated service can be provided with close
  working relationships and good communication
  between service providers and
• There are transparent accountability procedures
  and due regard for the public interest.

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Some concerns about PPPs

• Return to at least partial private sector
  financing and operation of infrastructure is
  privatization through the back door.
• Whether private sector participation in
  infrastructure will dilute accountability and
  erode the public interest.