By: Sarfraz Saroya
A Quick Guide
In every country around the world, fiscal or budgetary constraints have seen the governments adopt supplementary and innovative approaches to infrastructure provisioning and funding, away from the traditional role of the government as the only infrastructure service-provider, to include the expertise and finance of the private sector. One such measure is Public-Private Partnership which is an arrangement between the government and a private business for the provision of public assets or services through investment and/or management by the private sector for a specified period of time. It entails clearly defined allocation of risk between partners and payments to the private sector linked to pre-determined benchmarked measureable performance standards.
The term “public–private partnership” describes a range of possible relationships among public and private entities in the context of infrastructure and other services. PPPs are all about striking equilibrium between public and private, risk and reward, cost and benefit, particularly in resource-scarce countries with big chunks of population excluded from the economic mainstream.
Other terms used for this type of activity include private sector participation (PSP) and privatization. While the three terms have often been used interchangeably, there are differences:
1. PPPs present a framework that – while engaging the private sector – acknowledges and structures the role for government in ensuring that social obligations are met and successful sector reforms and public investments achieved.
2. PSP contracts transfer obligations to the private sector rather than emphasizing the opportunity for partnership.
3. Privatization involves the sale of shares or ownership in a company or that of operating assets or services owned by public sector. Privatization is more widely accepted in sectors that are not traditionally considered public services, such as manufacturing, construction, etc.
Public Private Partnerships (PPP) involve the financing, development, operation and maintenance of infrastructure by the private-sector which would otherwise have been provided by the public sector. Instead of the public sector procuring a capital asset and providing a public service, the private sector creates the asset through a dedicated standalone business (usually designed, financed, built, maintained and operated by the private sector) and then delivers a service to the public sector entity/consumer in return for payment that is linked to performance. Therefore, the public sector is able to redirect its efforts to serving other urgent social and economic needs.
1. “Public Private Partnership” means a commercial transaction between a private party and an institution by which the Private Party:
a. performs an institutional function on behalf of the institution; and/or
b. assumes the use of public property for its own commercial purposes;
c. assumes substantial financial, technical and operational risks in connection with the performance of the institutional function or use of the public property; and
d. receives a benefit for performing the institutional function or from utilising the public property, either by way of:
i. consideration to be paid by the institution from its budget or revenue; or
ii. charges or fees to be collected by the Private Party from users or customers of a service provided to them; or
iii. a combination of such consideration and such charges or fees.
2. “Public private partnerships (PPPs) are arrangements typified by joint working between the public and private sector. In the broadest sense, PPPs can cover all types of collaboration across the interface between the public and private sectors to deliver policies, services and infrastructure. Where delivery of public services involves private sector investment in infrastructure, the most common form of PPP is the Private finance initiative.”
(HM Treasury, UK)
PPPs in Pakistan
The substantial investment in infrastructure required in Pakistan can be provided through public private partnerships (PPP) and this PPP policy framework will provide the basis for this new approach in Pakistan.
With an aim to encourage the private sector to participate in the country’s infrastructure development, the Government is implementing a combination of policy reforms, institutional support, incentives and financing modalities to bolster its role and participation in financing, developing and managing ongoing and future infrastructure development projects.
In the early 1990s, Pakistan established a policy and regulatory framework for Public Private Partnership (PPP) in the telecom and power sectors. Unregulated sectors like transport and logistics, water supply, sanitation, solid waste management, real estate and social sectors including education, healthcare and housing have yet to benefit from such a framework.
Experience in the regulated sectors in Pakistan and worldwide suggests that a comprehensive policy, supported by a legal and regulatory framework, financial incentives, guidelines and commitment by the government help in promoting public private partnerships.
Common types of PPP projects
1. Electricity and gas 2. Water and sewerage
3. Ports 4. Hospitals
5. Roads 6. Rail
7. Prisons 8. Airports
BOT, BOO, DBO and DBFO: Build Operate Transfer (BOT) arrangements refer to PPPs where the private partner builds and operates a facility over the contract duration, at the conclusion of which it transfers the assets to the public authority. Under Build Operate Own (BOO) arrangements, the private partner instead retains ownership of the assets at the end of the contract. Design Build Operate (DBO) and Design Build Finance Operate (DBFO) are similar PPP models which do not specify asset ownership at the end of the contract.
Concession PPPs: Arrangements where revenue is raised directly from members of the public as user charges (e.g. toll fees) rather than having the government as the buyer. These arrangements involve significant demand risk transfer to the private operator. Concession PPPs may involve substantial new investment. However, franchise PPPs, a subset of concessions may involve the rehabilitation or extension of existing state-owned assets.
Lease Contract: A private operator leases government-owned assets for a fee over a fixed term. Operational risk is transferred to the private party, but they are not responsible for any significant capital investment.
Management Contract: A short-to-medium term performance contingent contract covering certain operational function of a public facility and also some management functions. The private party contributes working capital but will not necessarily be involved in any significant investment programme and operational risk remains with the government. Management contracts may provide segue to further private involvement. However it is rare for management contracts to involve sufficient risk transfer to be considered to be PPP.
Private Finance Initiative (PFI): A UK PPP procurement programme starting in the 1990s. PFI projects tend to be a certain type of PPP rather than providing a distinct model. Most contracts would be defined as DBFOs, typically last between 20 and 30 years and would be clearly identified as PPP. There has historically been a strong emphasis on provision of social infrastructure such as schools and prisons.
PSP and PPI: Several acronyms are used to categorise private participation that extends beyond PPP. Private Sector Participation (PSP) categorises private sector participation in the provision of public goods, but also includes privatisation of state-owned enterprises. Private Participation in Infrastructure (PPI) labels PSP in infrastructure sectors.
Privatisation: The sale of state-owned assets to private sector parties. This may either be full (where the full equity stake is transferred to the private sector) or partial (where only a portion thereof is sold). Partial privatisation does not necessarily result in the transfer of operations to the private sector. It is an important distinction that privatisation is never PPP even if heavily regulated.
Project Sponsors: Investors who bid for, then develop and lead the project through their investment in the project or through a project holding company.
Public Procurement: The public sector frequently transacts with private companies to deliver a range of goods and services. However typical public procurement is based on delivery of defined inputs over a relatively short period of time with little to no risk transfer.
Service Contract: A short-term contract for a private party to undertake specific operational tasks for a state owned enterprise. Responsibilities are limited but the contract may include performance related payments. These contracts involve little risk transfer and so should not be considered as a core form of PPP.
Whole-life Costing: An allocation of responsibilities such that one party is accountable for coordinating all aspects of a project across its whole life from design to contract maturity. This harmonises incentives to minimise all costs (upfront and ongoing), not just each component in isolation. In particular it encourages consideration of ongoing costs at the design stag.