Infrastructure Projects Ministry of Works & Urban Development - - PowerPoint PPT Presentation

Public-Private Partnerships

Infrastructure Projects

Ministry of Works & Urban Development

Contents

Introduction What are Public-Private Partnerships? Potential Benefits & Risks of PPPs Identify the Business Need Possible Reasons for Involving Private Sector Types of PPPs

Introduction

A public–private partnership (PPP) is a government service or private business venture. Funded and

• perated

through a partnership of government and one or more private sector companies. Referred to as PPP, P3 or P3.

Introduction

A contract between a public sector authority and a private party, in which the private party provides a public service or project and assumes substantial financial, technical and operational risk in the project.

What are PPPs

PPP refers to arrangements that are:

• typically medium to long term,
• between the public and private sectors
• some of the services that fall under the

responsibilities of the public sector are provided by the private sector

• clear agreement on shared objectives for

delivery of public infrastructure and/ or public services.

What is PPPs

PPPs combine the skills and resources of public and private sectors in new ways through sharing

• f

risks and responsibilities.

• Enables

governments to benefit from expertise of the private sector

• Allows them to focus on policy, planning and

regulation by delegating day-to-day

• perations.

What is PPPs

For a successful partnership, a careful analysis of the long-term development

• bjectives and risk allocation is essential.

Legal framework must adequately support this new model of service delivery and be able to monitor and regulate the outputs and services provided.

What is PPPs

A well-drafted PPP agreement would be informed by both the laws of the country and international best practices to clearly delineate risks and responsibilities.

What is PPPs

PPPs are used worldwide to develop the following infrastructure projects:

• roads and bridges
• airports and ports
• power plants
• water purification plants
• sewerage treatment plants
• hospitals
• telecommunications
• prisons.

Funding for PPP

Cost of using the service is borne exclusively by the users of the service and not by the taxpayer. Capital investment is made by the private sector on the basis of a contract with government to provide agreed services. Government can provide tax breaks or remove guaranteed annual revenues for a fixed time period.

Infrastructure & PPP

For infrastructure projects, the government may provide a capital subsidy in the form

• f a one-time grant, making it more

attractive to the private investors. Can be a means to enabling the development or improvement of energy, water, transport and telecommunications and information technology through the participation of private and government entities.

Infrastructure & PPP

Where governments are facing aging infrastructure and require more efficient services, a partnership with the private sector can help foster new solutions, including clean technology.

Common Types of PPP

Definitions of PPP Contract Types

Acronym Definition Existing or New Asset Key Features O&M Operations and Maintenance Existing The private party is contracted by the public authority to operate and maintain an asset or set of assets, with compensation based on performance relative to the service levels specified in the contract. OMM Operations, Maintenance, and Management Existing Similar to the O&M contract, but the private party is also given broader responsibilities to manage the asset

• r assets.

Sources: Castalia; National Council on Public-Private

• Partnerships. "Types of Partnerships

Definitions of PPP Contract Types

Sale- Leaseback Existing The owner of an asset sells the asset and then leases it back from the new owner. Such an arrangement could be done with the public sector as the original owner, leasing the asset back from a private buyer, or it could be done in reverse. Lease- Purchase Existing The private party builds an asset and leases it to the public authority. The public authority

• perates the asset and accrues equity in the

asset with each lease payment such that the public authority has full ownership of the asset at the end of the contract.

Sources: Castalia; National Council on Public-Private

• Partnerships. "Types of Partnerships

Definitions of PPP Contract Types

BOOT Build- Own- Operate- Transfer New Similar to a design-build arrangement except that the design specifications are pre-determined by the public entity, thus restricting the private party from any potential changes

• r

improvements to the asset's design. BOLT Build- Own- Lease- Transfer New The private party builds an asset and

• wns it, but then leases it to the public
• authority. Similar to a Lease-

Purchase, the public authority accrues equity and ownership lS transferred completely to the public authority at the end of the contract.

Sources: Castalia; National Council on Public-Private

• Partnerships. "Types of Partnerships

Definitions of PPP Contract Types

DB Design-Build New This is most similar to a traditional competitive public procurement; the private party designs and builds the asset, but the public sector owns and operates it DBOM Design-Build- Operate- Maintain New In addition to the DB arrangement, the private party also operates and maintains the asset, creating more space for cost-savings and a better incentive for the private sector to minimise lifetime service costs.

Sources: Castalia; National Council on Public-Private

• Partnerships. "Types of Partnerships

Definitions of PPP Contract Types

DBFOM Design-Build- Finance-Operate- Maintain New Like a DBOM, but the private party also rmses financing for the project. DBOT Design-Build- Operate-Transfer New Like a DBOM, but the private party owns the asset and then transfers ownership to the public sector at the end of the contract period.

Sources: Castalia; National Council on Public-Private

• Partnerships. "Types of Partnerships

Definitions of PPP Contract Types

DBOO Design-Build- Own-Operate New Similar to the DBOT, but the private party does not transfer

• wnership to the public sector;

this is most similar to a full privatisation of the asset.

Sources: Castalia; National Council on Public-Private

• Partnerships. "Types of Partnerships

Potential Benefits of PPP

The financial crisis of 2008-11 has brought about renewed interest in PPP in both developed and developing countries. Governments are increasingly turning to the private sector as an alternative additional source of funding to meet the funding gap.

Potential Benefits of PPP

Outside of fiscal leveraging of projects, governments look to the private sector to help them deliver infrastructure for a number of other reasons:

• Exploring PPPs as a way of introducing

private sector technology and innovation in providing better public services through improved operational efficiency.

• Incentivizing the private sector to deliver

projects on time and within budgets.

Potential Benefits of PPP

• Imposing budgetary certainty by setting

present and the future costs of infrastructure projects over time

• Utilizing PPPs as a way of developing local

private sector capabilities through joint

• wnership with large international firms, as

well as sub-contracting opportunities for local firms in areas such as civil works, electrical works, facilities management, security services, cleaning services, maintenance services, etc.

Potential Benefits of PPP

• Using PPPs as a way of gradually exposing

state owned enterprises and government to increasing level of private sector participation (especially foreign) and structuring PPPs in a way so as to ensure transfer of skills leading to capacitated entities that can eventually export their competencies by bidding for projects/ joint ventures.

Potential Benefits of PPP

• Creating diversification in the economy by

making the country more competitive in terms

• f its facilitating infrastructure base as well as

giving a boost to its business and industry associated with infrastructure development (such as construction, equipment, support services, etc.)

• Supplementing limited public sector capacities

to meet the growing demand for infrastructure development

Potential Benefits of PPP

• Extracting long-term value-for-money through

appropriate risk transfer to the private sector

• ver the life of the project – from design/

construction to operations/ maintenance

Potential Risks of PPP

Failure to attract qualified bids. Poor value for the public sector from lack

• f competition.

Hidden fiscal costs. Policy inflexibility (PPP contracts can be difficult and expensive to amend / terminate

Potential Risks of PPP

There is a cost attached to debt

• While private sector can make it easier to get

finance

• Finance will only be available where the
• perating cash flows of the project company

are expected to provide a return

• n

investment (i.e., the cost has to be borne either by the customers or the government through subsidies, etc.)

Potential Risks of PPP

Some projects will generate revenue in local currency only (eg water projects & roads) Others (eg ports and airports) will provide currency in dollar or other international currency So constraints of local finance markets may have less impact

Potential Risks of PPP

Some projects may be more politically or socially challenging to introduce and implement than others -

• particularly if there is an existing public sector

workforce that fears being transferred to the private sector

• if significant tariff increases are required to

make the project viable

• if there are significant land or resettlement

issues, etc.

Potential Risks of PPP

There is no unlimited risk bearing

• Private firms (and their lenders) will be

cautious about accepting major risks beyond their control, such as exchange rate risks/risk

• f existing assets.
• If they bear these risks then their price for the

service will reflect this.

Potential Risks of PPP

There is no unlimited risk bearing

• Private firms will want to know that the rules of

the game are to be respected by government as regards undertakings to increase tariffs/fair regulation, etc.

• Private sector will also expect a significant

level of control over operations if it is to accept significant risks

Potential Risks of PPP

Private sector will do what it is paid to do and no more than that

• therefore

incentives and performance requirements need to be clearly set out in the contract.

• Focus

should be

• n

performance requirements that are out-put based and relatively easy to monitor.

Potential Risks of PPP

The private sector is likely to have more expertise and after a short time have an advantage in the data relating to the project.

• It is important to ensure that there are clear and

detailed reporting requirements imposed on the private operator to reduce this potential imbalance

A clear legal and regulatory framework is crucial to achieving a sustainable solution.

Identify the Business Need

The first step in developing a project is for the responsible government agency to identify the need for new public infrastructure or improvements in existing infrastructure or public service delivery.

Identify the Business Need

A need for additional assets

• r

improvements may be identified when, for example, there is:

• a lack of capacity of a public service to meet

the community needs—e.g. water treatment capacity

• a low service level and improvement is

necessary

• a risk of service level falling in the near future

and this merits action now

• low operating efficiency of facilities.

Identify the Business Need

The government will also need to consider whether any investment that is required can and should be met through public funds or whether it might be appropriate to involve the private sector.

Possible Reasons for Involving Private Sector

Additional sources of financing Broader expertise and technology Involvement of the private sector is not always appropriate or even a viable option

• if the project cannot be well-defined
• the costs of the project are too high,
• if the technology that is to be used is

unproven

• if there is too much uncertainty in the enabling

environment (legal, financial, political).

Possible Reasons for Involving Private Sector

The Government should carefully appraise the options available to it and ensure that there is a clear business case for proceeding with a project via PPP.

Acknowledgements

Caribbean Development Bank: “Public Private Partnership in the Caribbean: Building on Early Lessons” World Bank Group Wikipedia

Questions