United Nations Human Settlements ProgrammeNairobi 2011                                             Sec1:i
The Global Urban Economic Dialogue SeriesPublic-Private Partnerships in Housing and Urban DevelopmentFirst published in Na...
FOREWORD                              Ur b a n i z a t i o n   are essential for poverty reduction and the                ...
Public-Private Partnerships in Housing and Urban DevelopmentContentsFOREWORD 		                                           ...
Key Principles	                                 10            Methods and Instruments 	                       10          ...
Public-Private Partnerships in Housing and Urban DevelopmentChapter 11: 	 PATTERNS IN APPLYING THE PPP MODEL              ...
ABBREVIATIONSPublic-Private Partnerships (PPPs)United Kingdom (UK)United States (US)Value for Money (VfM)Public Sector Com...
Public-Private Partnerships in Housing and Urban Developmentviii
chapter one IntroductionChapter 1: Introduction   It is estimated that more than half of the         facing enormous urban...
Public-Private Partnerships in Housing and Urban DevelopmentChapter 2: THE IMPORTANCE OF PUBLIC-           PRIVATE PARTNER...
Chapter Three THE ADVANTAGES AND DISADVANTAGES OF PPPsChapter 3:	THE ADVANTAGES AND          DISADVANTAGES OF PPPs   The p...
Public-Private Partnerships in Housing and Urban DevelopmentPPPs Deliver On-Time                                money for ...
Chapter Three THE ADVANTAGES AND DISADVANTAGES OF PPPs Unless cost savings generated by the private         Rigidities in ...
Public-Private Partnerships in Housing and Urban DevelopmentChapter 4: CHALLENGES FOR PPPs IN HOUSING           AND URBAN ...
Chapter four CHALLENGES FOR PPPs IN HOUSING AND URBAN DEVELOPMENTCapacity Challenges at the                             eq...
Public-Private Partnerships in Housing and Urban DevelopmentChapter 5: RELATIONSHIPS WITH LENDERS           AND OTHER PART...
Chapter five RELATIONSHIPS WITH LENDERS AND OTHER PARTIESFigure 2: Generic Relationship Structure for PPPs                ...
Public-Private Partnerships in Housing and Urban DevelopmentChapter 6: KEY PRINCIPLES, INSTRUMENTS           AND METHODS  ...
Chapter six KEY PRINCIPLES, INSTRUMENTS AND METHODStest. Used widely, the VfM test focuses on                   PPP Unitso...
Public-Private Partnerships in Housing and Urban DevelopmentChapter 7: DIFFERENT APPROACHES           AND MODELS OF PPPS  ...
Chapter sEVEN DIFFERENT APPROACHES AND MODELS OF PPPS                                                                     ...
Public-Private Partnerships in Housing and Urban DevelopmentChapter 8: GOOD PRACTICES IN           LEGAL, REGULATORY AND  ...
Chapter EIGHT GOOD PRACTICES IN LEGAL, REGULATORY AND FINANCE STRUCTURE      awarding the investment contracts in a       ...
Public-Private Partnerships in Housing and Urban Developmentdebt is properly managed and performance is        One signifi...
Chapter NINE PUBLIC-PRIVATE PARTNERSHIP ORGANIZATIONAL AND ADMINISTRATIVE EFFECTIVENESSChapter 9: PUBLIC-PRIVATE PARTNERSH...
Public-Private Partnerships in Housing and Urban Developmentdeliver government services places more, not         Strong Le...
Chapter TEN IMPLEMENTING HOUSING AND URBAN SECTOR PPPsChapter 10: IMPLEMENTING HOUSING            AND URBAN SECTOR PPPs  O...
Public-Private Partnerships in Housing and Urban Developmentprocess is fundamental to the formation of a         who can p...
Chapter TEN IMPLEMENTING HOUSING AND URBAN SECTOR PPPsStakeholder Engagement                          of key stakeholder g...
Public-Private Partnerships in Housing and Urban DevelopmentChapter 11: PATTERNS IN APPLYING THE            PPP MODEL TO H...
Chapter ELEVEN PATTERNS IN APPLYING THE PPP MODEL TO HOUSING AND URBAN DEVELOPMENTUrban Transport                         ...
Public-Private Partnerships in Housing and Urban Development
Public-Private Partnerships in Housing and Urban Development
Public-Private Partnerships in Housing and Urban Development
Public-Private Partnerships in Housing and Urban Development
Public-Private Partnerships in Housing and Urban Development
Public-Private Partnerships in Housing and Urban Development
Public-Private Partnerships in Housing and Urban Development
Public-Private Partnerships in Housing and Urban Development
Public-Private Partnerships in Housing and Urban Development
Public-Private Partnerships in Housing and Urban Development
Public-Private Partnerships in Housing and Urban Development
Public-Private Partnerships in Housing and Urban Development
Public-Private Partnerships in Housing and Urban Development
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Public-Private Partnerships in Housing and Urban Development

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The Global Urban Economic Dialogue Series, UN Habitat, 2011

Public-Private Partnerships in Housing and Urban Development

  1. 1. United Nations Human Settlements ProgrammeNairobi 2011 Sec1:i
  2. 2. The Global Urban Economic Dialogue SeriesPublic-Private Partnerships in Housing and Urban DevelopmentFirst published in Nairobi in 2011 by UN-HABITAT.Copyright © United Nations Human Settlements Programme 2011HS Number: HS/062/11EISBN Number (Series): 978-92-1-132027-5ISBN Number (Volume): 978-92-1-132356-6DisclaimerThe designations employed and the presentation of the material in this publication donot imply the expression of any opinion whatsoever on the part of the Secretariat ofthe United Nations concerning the legal status of any country, territory, city or areaor of its authorities, or concerning the delimitation of its frontiers of boundaries.Views expressed in this publication do not necessarily reflect those of the UnitedNations Human Settlements Programme, the United Nations, or its Member States.Excerpts may be reproduced without authorization, on condition that the source is indicated.Acknowledgements:Director: Oyebanji OyeyinkaChief Editor and Manager: Xing Quan ZhangPrincipal Author: Alexandra MoskalykEnglish Editor: Eric OrinaLayout: Irene JumaCover design: Victor MgendiCover Photo ©: 1971yes /Shutterstockii
  3. 3. FOREWORD Ur b a n i z a t i o n are essential for poverty reduction and the is one of the provision of adequate housing, infrastructure, most powerful, education, health, safety, and basic services. irreversible forces in the world. It The Global Urban Economic Dialogue series is estimated that presented here is a platform for all sectors 93 percent of of the society to address urban economic the future urban development and particularly its contribution population growth to addressing housing issues. This work carries will occur in the many new ideas, solutions and innovative cities of Asia and best practices from some of the world’sAfrica, and to a lesser extent, Latin America leading urban thinkers and practitionersand the Caribbean. from international organisations, national governments, local authorities, the private We live in a new urban era with most of sector, and civil society.humanity now living in towns and cities. This series also gives us an interesting Global poverty is moving into cities, mostly insight and deeper understanding of the widein developing countries, in a process we call range of urban economic development andthe urbanisation of poverty. human settlements development issues. It will serve UN member States well in their quest The world’s slums are growing and growing for better policies and strategies to addressas are the global urban populations. Indeed, increasing global challenges in these areas.this is one of the greatest challenges we face inthe new millennium. The persistent problems of poverty andslums are in large part due to weak urbaneconomies. Urban economic development isfundamental to UN-HABITAT’s mandate. Joan ClosCities act as engines of national economic Under-Secretary-General, United Nations,development. Strong urban economies Executive Director, UN-HABITAT iii
  4. 4. Public-Private Partnerships in Housing and Urban DevelopmentContentsFOREWORD iiiContents ivPART I: INTRODUCTION 1Chapter 1: Introduction 1Chapter 2: THE IMPORTANCE OF PUBLIC-PRIVATE PARTNERSHIPS 2 Cost Savings 3 Whole of Life-Cycle 3 Output-Based Contracts 3 Risk sharing 3Chapter 3: THE ADVANTAGES AND DISADVANTAGES OF PPPs 3 PPPs Deliver On-Time 4 Enhancing Public Management 4 Improved Levels of Service 4 Increased Availability of Infrastructure Funds 4 Some disadvantages of PPPs can be defined as follows: 4 Additional Costs 4 Reduced Control of Public Assets 5 Loss of Accountability 5 Mitigating Risk 5 Rigidities in Long-Term Contract 5 Differing Goals 6 Public Acceptability 6Chapter 4: CHALLENGES FOR PPPs IN HOUSING AND URBAN DEVELOPMENT 6 Capacity Challenges at the Local Level 7 Challenges in Governance for Sustainable Development 7 Financing Challenges for PPPs 7Chapter 5: RELATIONSHIPS WITH LENDERS AND OTHER PARTIES 8iv
  5. 5. Key Principles 10 Methods and Instruments 10 PPP Suitability 10 Project Screening Instruments 10Chapter 6: KEY PRINCIPLES, INSTRUMENTS AND METHODS 10 Applying Lessons Learned 11 Disciplined Planning 11 PPP Units 11 Adopting a Holistic Approach 11 Models and their Structure 12 Approaches 12Chapter 7: DIFFERENT APPROACHES AND MODELS OF PPPS 12 The Scale of Public-Private Partnerships: Risk Transfer and Private Sector Involvement 12 Legal Structure 14Chapter 8: GOOD PRACTICES IN LEGAL, REGULATORY AND FINANCE STRUCTURE 14 Regulatory Structure 15 Finance Structure 15 Partner Selection 17 Building Strong Relationships through Clear Communication 17 Clear Roles and Responsibilities 17 Procedures 17 Strong Public Administration 17Chapter 9: PUBLIC-PRIVATE PARTNERSHIP ORGANIZATIONAL AND ADMINISTRATIVE EFFECTIVENESS 17 Strong Leadership 18 Building Capacity 19 Refining the Scope of the Project 19 Selecting the Preferred Procurement Process 19Chapter 10: IMPLEMENTING HOUSING AND URBAN SECTOR PPPs 19 Competitive Negotiations 20 Pre-Qualification 20 Finalizing Contract Terms 20 Stakeholder Engagement 21 Urban Housing 22 v
  6. 6. Public-Private Partnerships in Housing and Urban DevelopmentChapter 11: PATTERNS IN APPLYING THE PPP MODEL TO HOUSING AND URBAN DEVELOPMENT 22 Urban Transport 23 Urban Water and Sanitation Management 23 Urban Schools and Hospitals 24 Regent Park (Toronto, Canada) 25 Background 25 Key Observations and Issues 25Chapter 12: CASE STUDIES 25 Yitzhak Rabin Trans-Israel Highway 6 (Tel Aviv, Israel) 27 Background 27 Key Observations and Issues 28 Ilembe District Municipality - Siza Water Company (South Africa) 29 Background 29 Key Observations and Issues 30 Meleka-Manipal Medical College (Malaysia-India). 31 Background 31 Key Observations and Issues 32Chapter 13: CONCLUSION 33REFERENCES 34vi
  7. 7. ABBREVIATIONSPublic-Private Partnerships (PPPs)United Kingdom (UK)United States (US)Value for Money (VfM)Public Sector Comparator (PSC)Request for Proposal (RFP)Request for Qualifications (RFQ)Toronto Community Housing Corporation (TCHC)Siza Water Company (SWC)Melaka-Manipal Medical College (MMMC)LIST OF TABLESTable 1. Regional Summary of Private Sector Investment in Transport from 2000-2008Table 2. Regional Summary of Private Sector Investment in Water and WasteManagement from 2000-2008LIST OF FIGURESFigure 1. Common Risk Sharing Areas for PPPsFigure 2. Generic Relationship Structure for PPPsFigure 3. The Public-Private Spectrum and Model DefinitionsFigure 4. Required Government In-House Skills for Public-Private PartnershipsFigure 5. Perspective View of Regent Park North Prior to Project DevelopmentFigure 6. A Model of the Refurbished Regent Park Development ProjectFigure 7. A View of Highway 6 in IsraelFigure 8. Ilembe District Community Water and Wastewater PlantFigure 9. Manipal University Medical College in Manipal, India vii
  8. 8. Public-Private Partnerships in Housing and Urban Developmentviii
  9. 9. chapter one IntroductionChapter 1: Introduction It is estimated that more than half of the facing enormous urban challenges. Economicworld’s six billion people now live in cities, growth has not kept pace with the rise in thetowns and other urban spaces. Current trends urban population. As a result, there is a severepredict that this number will continue to shortage of adequate housing and much of therise with urban population growth being basic infrastructure so desperately needed tosignificantly more pervasive and rapid in the sustain urban growth is either deteriorating, ordeveloping world than that of the developed. non-existent.According to the World Bank, over 90percent of recent urbanization has occurred This study, prepared for the United Nationsin developing countries, with urban areas Human Settlement Programme, aims to providegaining an estimated 70 million new residents insight into how the public-private partnershipeach year. This trend is especially prevalent in (PPP) model can help promote sustainableSouth Asia and Sub-Saharan Africa, the two housing and urban development for countriespoorest regions in the world, where the urban at all levels of economic development. Thepopulation is expected to double by 2030.1 selected case studies illustrated towards the end of this study cross-reference against PPP best Adequate, well-managed cities are an practices and governing principles outlined inimportant element of a sound, prosperous sections throughout this report. While the keynational economy and a significant contributor ideas and guidelines presented here can be usedto quality of life. Consequently, as cities grow to help shape future government policy, it isand the urbanization process continues, there important to recognize that the application ofis rising pressure on governments to house the the PPP model is not described in full detail.world’s poor and provide them with access Much more resources and skills are needed forto basic human needs such as healthcare, governments looking to apply this approachclean water, and sanitation. As it stands, a to housing and wider urban developmentmajority of the developing cities expected projects in their communities.to absorb the greatest number of people are1 World Bank (2009:1), Systems of Cities: HarnessingUrbanization for Growth and Poverty Alleviation. 1
  10. 10. Public-Private Partnerships in Housing and Urban DevelopmentChapter 2: THE IMPORTANCE OF PUBLIC- PRIVATE PARTNERSHIPS While urban areas across the globe are being solely provided by the public authority.characterized by their own set of complex It is also important not to confuse PPPs withissues, the financial challenges are notably the privatization - a situation where responsibilitysame; at all levels of economic development, over the delivery of the public service is fullythere is a far greater financing need for urban transferred to the private partner with little ordevelopment projects than can be provided by no government oversight.the traditional public purse alone. Recognizingthis, governments around the world are turning Almost all countries around the world haveto PPPs as one possible financing option for large witnessed some form of PPP investmentscale investments in the provision of affordable in the provision of housing and urbanhousing and other basic infrastructure assets.2 infrastructure since the early 1990s. AlthoughA finance model entirely driven by the level and success of PPPs varies sharply,collaboration between the public, private, and particularly in the developing world,3at times nonprofit sectors, PPPs take many their well-documented potential informs (shown below), but generally represent a consistently generating efficiency gainsmore dynamic, long-term agreement between in developed countries like Canada, thevarious parties in which each sector contributes Netherlands and the United Kingdom (UK)and shares some level of risk. cannot be overlooked. In these countries, partnerships have been a significant Broadly speaking, a typical PPP allows a contributor to lowering costs and increasingprivate consortium to assume the financing operating efficiencies for urban developmentrisk and two or more phases of the project’s projects ranging from affordable housing tolife-cycle. This may include the design and water treatment facilities, roads and hospitals.construction phases of the project and the As such, there is a growing body of evidencesubsequent maintenance and operation of the that indicates that PPPs are an importantgovernment facility under a carefully contrived instrument that can be used to help extendlong-term lease. This is in contrast to the private infrastructure assets, along with basic urbansector’s traditional role in urban infrastructure services, to the poorest neighborhoods of somedevelopment where its involvement is limited of the world’s liveliest urban centers.to providing skilled labour under short-termcontracts, with the delivery of the services 3 See OECD (2005:2), ‘Investment for African Development: Making It Happen.’2 For the purposes of this report, basic infrastructure 4 Conference Board of Canada (2010:i), Dispelling therefers to social assets such as affordable housing, Myths: A Pan Canadian Assessment of Public-Privateschools and hospital facilities as well as infrastructure Partnerships for Infrastructure Investment and Deloittedevelopment for basic utilities including water, waste (2006: 21-26), ‘Closing the Infrastructure Gap: Themanagement, sanitation and transport systems. Role of Public-Private Partnerships.’2
  11. 11. Chapter Three THE ADVANTAGES AND DISADVANTAGES OF PPPsChapter 3: THE ADVANTAGES AND DISADVANTAGES OF PPPs The principal reason for adopting a PPP Output-Based Contractsmodel for the provision of housing and urban Public-private partnership projects typicallydevelopment is that, where project suitability adopt an output-focused contract which linksis correctly measured and implemented, this payments to performance. This specifies projectapproach can offer greater value for money results in terms of the quality delivered, ratherwhen compared with traditional procurement. than how assets or services are provided.6While this section highlights this and other Emphasis on outputs also encouragesimportant key advantages associated with this innovation to take place by motivating themodel, it also considers some of the arguments private partner to develop new methods andmade against PPP procurement for wider approaches for project delivery that meetsurban development. requirements at lower costs.Some of the advantages of Risk sharingPPPs can be defined as follows: Public-private partnerships are designed so that risk is transferred between the public andCost Savings private sectors, allocating particular project risk (see figure 1) to the partner best able to Cost savings materialize in several different manage that risk cost-effectively.forms (discussed below) but are mainly dueto the private sector’s role as a mutual partnerin the project. Generally speaking, the private Figure 1: Common Project Risk Sharingpartner’s fundamental drive for economic gain Areas for PPPsyields it an incentive to continually improve itsperformance, thereby cutting overall project Procurementcosts. Design Construction OperationWhole of Life-Cycle Permit and Approval Political Public-private partnerships combine two or Commissioningmore of the project’s phases in a single bundle Technical Policy and Legislativefor the private consortium to deliver over the Financinglong-term. This creates economies of scale by Maintenance and Operationalmotivating the private sector to organize its Devaluation of Currency (applicable to projects financed by international lenders)activities in a way that drives efficiencies andmaximizes returns on investments.5 Source: Canadian Council for Public Private Partnerships5 Conference Board of Canada (2010: 24). 6 Conference Board of Canada (2010: 3). 3
  12. 12. Public-Private Partnerships in Housing and Urban DevelopmentPPPs Deliver On-Time money for other important projects without affecting calculations of the measure of its With financing risk routinely transferred indebtedness.to the private consortium, any delays inmeeting the agreed upon timelines can leadto additional costs for the private partner asit alone carries the debt for a longer period of Some disadvantages of PPPstime. Therefore, the private sector has a direct can be defined as follows:financial interest in ensuring that projects andservices are delivered on-time, if not sooner. Additional Costs Public-private partnerships represent goodEnhancing Public Management opportunities to lower overall project costs. By inviting the private partner in, the public However, when compared with traditionalauthority can transfer risks and responsibilities procurement, the complete PPP process invitesover the day-to-day operations of two or more additional costs that, if not managed properly,phases of the urban infrastructure project to can erode some of the potential economicthe private consortium. This frees the public benefits of this model.sector to focus on other important policy issues One of these potential cost drivers issuch as regulating, performance monitoring identified in the tender process - a competitiveand urban service planning. approach to choosing a project partner unique to the PPP procurement model. PartiesImproved Levels of Service bidding for a project expend considerable skills By bringing together the strengths from and resources in designing and evaluating thethe public and private sectors, PPPs have project prior to implementation. Dependingthe unique ability to share a diverse range of on the number of project bidders, costs canresources, technologies, ideas and skills in a add up as all participating bids tend to becooperative manner that can work to improve factored into the overall cost of the project.how urban infrastructure assets and services Second, the long-term and inclusive natureare delivered to the people. of a PPP contract requires that each partner spend considerable time and resources onIncreased Availability of Infrastructure outside experts to help anticipate and overseeFunds all possible future contingencies. This can be Public-private partnerships free up funding very costly, particularly for a public agencyfor other urban infrastructure projects in two inexperienced with the private sector andways: first, through the potential cost savings requiring additional help to protect the publicinherent in the PPP approach, and second, interest.through access to private financing which Last, while the private financing element ofcommits the government to spread payments the partnership is one of the most importantfor services rendered over a longer period incentive drivers for the private partner, theof time. Seeing that it is the private partner price of financing can result in higher capitalwho typically absorbs the financing risk, the costs ranging between 1 and 3 percent.8public authority is not obliged to record theinvestment upfront as part of its bottom linesurplus or deficit for that fiscal year. Thisallows the transaction to remain ‘off balance 8 PricewaterhouseCoopers (2005:30), ‘Delivering onsheet’, meaning the government can borrow the PPP Promise: A Review of PPP Issues and Activity.’4
  13. 13. Chapter Three THE ADVANTAGES AND DISADVANTAGES OF PPPs Unless cost savings generated by the private Rigidities in Long-Term Contractconsortium outweigh the added cost of private A key concern with the long-term committalloan financing, a PPP project may not deliver nature of PPP procurement is that it limits thecost savings. public sector’s ability to make changes to the contract if unexpected economic or situationalReduced Control of Public Assets challenges arise. In the event that a change is In view of the fact that the private sector required to either the use of an infrastructureabsorbs a significant portion of the project asset, or to the type of urban service offered,risk, important decisions over outcomes PPPs have proven to be inflexible - both inare inadvertently shared with that partner. terms of the time and administrative burdenAccordingly, this can result in the loss of public associated with altering the contract.10control over important decisions concerning arange of public issues, from how basic publicgoods such as housing and clean water shouldbe delivered and priced, through to on-sitelabour issues around job pay and security.Loss of Accountability Partnerships are typically governed bya complex web of contracts which extendresponsibility over the provision of housingand other urban service to a wide range ofpartners. If not clearly defined, contracts canoverlap roles and responsibilities and blur linesof accountability for the public taxpayer.Mitigating Risk The more complex the urban project and themore people involved, the higher and morevaried the risk becomes. Although a carefullystructured PPP manages risk through a well-defined contractual agreement, some risk isunforeseen and therefore difficult to mitigate.In the case of such unexpected risk (or projectfailure), oftentimes it is the public authoritythat is left to not only pay for the failure of therisk, but also the emerging costs.99 Conference Board of Canada (2010: 57). 10 PricewaterhouseCoopers (2005:33). 5
  14. 14. Public-Private Partnerships in Housing and Urban DevelopmentChapter 4: CHALLENGES FOR PPPs IN HOUSING AND URBAN DEVELOPMENTIt is well-documented that globally, both mistrust between the partners. Yet oftentimes,the private and public sectors are embracing governments are finding that aligning goalspartnerships for the provision of housing and and maintaining a healthy level of trust isurban development. However, when applying difficult to achieve and maintain throughoutthe PPP approach to the urban sector to try the project’s entire life-cycle. This is particularlyand meet the needs of the rise in population, the case for subsidy-driven urban projectsgovernments around the world are facing where additional and continuous governmenta range of challenges. While the scale and funding is needed to deliver basic services toscope of these challenges vary depending the poorest segments of a country’s population.on the country’s level of understanding and In this circumstance, reasonable margins ofdevelopment in using the partnership model, profitability for the private partner can be this section provides an overview of some harder to measure and goals can become evenof the most common PPP challenges facing more difficult to join.governments today. Public AcceptabilityDiffering Goals There may be considerable resistance to Ordinarily, the goals of the private sector private sector participation in the provisionfundamentally oppose those of the public of urban development, particularly for moresector: the former focuses on economic gain traditional public urban services such aswhile the latter strives to protect the public affordable housing, water, sanitation and wasteinterest through regulation and minimization management. Oftentimes, these urban servicesof risk. If left unmanaged, these disparate provide basic human needs to the world’sgoals of the two sectors can cause friction and poor who would not otherwise receive them. Therefore, if service is undermined due to a drive for profit, or if there is slow responsiveness to a problem, the result may be a strong public11 In the paper ‘Closing the Infrastructure Gap: resistance to the partnership and a generalThe Role of Public-Private Partnerships’, Deloitte distaste for private sector involvement in theargues that there are three levels, or stages, of PPP urban sector overall. Keeping the public well-‘maturity’ that can be observed across the world.Countries in the first stage include, but are not informed and supportive of the urban projectlimited to, India, China, Russia, South Africa, Poland is an on-going challenge for all governments.and Croatia, and can be observed as having a low The public authority should facilitate earlylevel of understanding and sophistication in applyingthe model to infrastructure development. Countries and constant dialogue with stakeholders insuch as the United States and Canada, in-line with addition to providing widespread informationJapan, Italy, Brazil and the Netherlands, are seen as regarding public issues to allay speculation andhaving moved up the ‘maturity curve’ with a fairunderstanding of the PPP market, but still not yet unfounded concerns where relevant.as sophisticated in the know-how of the process asIreland, Australia and the UK.6
  15. 15. Chapter four CHALLENGES FOR PPPs IN HOUSING AND URBAN DEVELOPMENTCapacity Challenges at the equipped to plan and execute PPP projects, they tend not to be well-briefed on importantLocal Level environmental considerations. Consequently, With more than half of the world’s many urban sector PPPs do not integrate keypopulation living in urban centers, in many principles of sustainable development intocases it will be the local governments who their planning and implementation process.15will feel the most pressure to adopt newpartnership financing models and prudenturban planning strategies. However, it is to be Financing Challenges for PPPsexpected that assuming this new role will be The global financial crisis has drasticallydifficult for many localities that lack the basic changed the financial landscape for urban PPPsnegotiation, finance, contract and other skills all around the world. On one hand, tighterrequired to manage highly complex urban spending reviews have led many governmentsprojects such as PPPs. This is particularly true to adopt PPP models in order to try and easefor local governments in emerging or fragile the immediate effect on growing deficits. Onstates where even the basic laws and regulations the other hand, strict credit conditions haverequired to conduct business with the private made banks and investors increasingly cautioussector are entirely absent, severely lacking, or about taking on additional projects, making itsubject to change.12 more difficult to borrow money. In the current context, many governments are struggling to secure revenue support streams for urban sectorChallenges in Governance for PPPs, some of which are considered high risk.16Sustainable Development Finding innovative ways to attract private It is now globally recognized that finance to housing and urban infrastructure,environmental sustainability is an while ensuring that the financial limitationsimportant factor when considering policy put on projects does not erode governments’options for housing and wider urban leading position in public infrastructure assets,regeneration as urban areas show increasing will be a challenge moving forward.signs of environmental degradation.13 However, in numerous countries, agreat majority of responsibility for theimplementation of PPPs in the urbansector rests with the finance and otherinfrastructure departments or ministries.14 While these departments are perhaps better 15 For further information on how private financing and greening can work together to meet goals12 As cited in Gladys Palmer (2009: 19-20), ‘Public- of sustainable development see, United KingdomPrivate Partnerships: A Literature Review.’ Department of Transport (2003), Green Public-Private13 Environmental sustainability is one of the eight Partnerships Guidance Note.international Millennium Development Goals agreed 16 For further information on how the globalupon by world leaders in 2000. financial crisis has affected credit and other financing UNECE (2008: 8), Guidebook on Promoting Good14 conditions see, Tim Murphy (2009), ‘FinancialGovernance in Public-Private Partnerships. challenges for P3 Projects after the Financial Crisis.’ 7
  16. 16. Public-Private Partnerships in Housing and Urban DevelopmentChapter 5: RELATIONSHIPS WITH LENDERS AND OTHER PARTIES Typically, a PPP involves not just the separate contracts providing additionalrelationship between the public authority and guarantees between the lender and the publicthe private partner responsible for the delivery authority to allow for closer monitoringof the project, but also a consortium of third of construction timelines and budgetaryparty interests such as lenders, equity investors conditions are not uncommon. In the eventand other interests or non-profit groups (see that a private company does not perform thefigure 2), many of whom have a large stake in project agreement obligations, under suchthe successful outcome of the project. contracts, lenders can rectify the problem by going as far as to replace the private partner.19 Arguably, one of the more important Therefore, given the significant sway lendersrelationships that the partnership needs to have in overall contract change and approval, itnurture is with project lenders responsible for is imperative to the success of the partnershipproviding the long-term debt financing for the that a close relationship with these actors beinfrastructure asset. This can account for up forged.to 80 percent of a project’s overall funding.17 A partnership generally seeks project financing The partnership also needs to build goodfrom banks and lenders whose willingness to working relations with equity investorsprovide funding for the project will depend on who make up the remainder of the fundingthe financial viability and predictability of the for the cost of the project. Equity is usuallyasset. As an aside, most lenders will not grant provided by private contractors involved inloans for urban projects that have not carried the project, but can also be made availableout a rigorous assessment of all project risks, through third-party equity investors whoor which are potentially open-ended and not have no other contractual relationship withwell-defined in their objective.18 the partnership. Because the return on equity is received only after the financing debt has Nevertheless, once a loan has been secured, been serviced, equity financing is consideredlenders play a useful role in reviewing and high risk for investors and therefore is one ofoverseeing the overall performance of the urban the most expensive forms of project funding.infrastructure project. Stringent standards on Nevertheless, equity funders play a usefulthe part of the lender usually result in lenders role in securing debt financing from lendersseeking out their own set of technical, legal, that may require some collateral for the loan,and other advisors to monitor the progress as well as providing advice in the event thatof the project. In riskier sectors or projects, problems do arise amongst the other private sector partners.2017 Peter Farlam (2005), ‘Working Together: AssessingPublic-Private Partnerships in Africa.’18 World Bank (2009:25-26), ‘Attracting Investorsto African Public-Private Partnerships: A Project 19 Murphy (2009:16).Preparation Guide.’ 20 The World Bank (2009:27). ‘Attracting Investors...’8
  17. 17. Chapter five RELATIONSHIPS WITH LENDERS AND OTHER PARTIESFigure 2: Generic Relationship Structure for PPPs Stakeholders Government (non-profit and other interests) PPP Agreement Private Party Loan Debt Equity Share-holding (special purpose vehicle) Agreements Construction Operating Contractor ContractorSource: Adapted from the South African National Treasury Furthermore, given the people-centered decision-making process is vitally important.nature of housing and urban sector PPPs, it As a general rule, public interest groups shouldis likely that there will also be a wide array of view the private partner as one producinginterest and non-profit groups who have strong desirable results for the public sector whileopinions on a project’s value to the public. reinforcing financial cost saving goals. IfUnlike other project participants where the financial rewards for the private consortiumrelationship with these parties is generally not are seen as too high or too low, or the projectlegally binding, public resistance to an urban lenders are mainly profit-driven rather thansector partnership can be detrimental to its performance focused, then the legitimacy ofsuccess. As such, maintaining transparent and the partnerships can be undermined for theaccountable communication channels with paying public.interest groups and including them in the 9
  18. 18. Public-Private Partnerships in Housing and Urban DevelopmentChapter 6: KEY PRINCIPLES, INSTRUMENTS AND METHODS Based on best practices and lessons learned, • An urban sector PPP must reflect theall PPPs for housing and urban development needs of the affected community and mustshould be founded on the following key integrate into the project key stakeholderprinciples, methods and instruments (most of priorities.which are discussed at length in later sections • The project must be responsibly managedof this report) in order to raise the likelihood throughout the term of the agreement, withof project success. predictability and priority as determined by the partnership.Key Principles Public-private partnerships should adopt Methods and Instrumentsthe following eight governing principles: Governments should consider the following methods and instruments when applying PPPs:• The public interest is paramount.21• Good practices in accountability and PPP Suitability transparency measures must be maintained throughout the lifecycle of the project. In the initial planning stages of a housing and urban sector project, it is important to realize• A PPP project needs to be carefully planned, that not all urban projects should be obtained well-defined in scope and fundamentally through a partnership model approach. clear in its objectives. Diversity between the urban sectors exists with• The viability of the project needs to each project being characterized by a unique be measured against a criteria set by set of distinct operating requirements, means the initiating partner to assist it in of service delivery, and mode of payment determining its potential suitability for for service. As such, the degree of private PPP procurement. involvement for a proposed project needs to be carefully matched against the goals of the• The selected PPP model must provide affected public and deemed suitable for PPP value for money in terms of cost and time procurement before further consideration is savings with appropriate consideration of given. risk transfer.• The PPP tendering process must be Project Screening Instruments competitive, fair and subject to proper due diligence on the part of the partnership. After the project’s goals have been carefully aligned with public interests, rigorous screening instruments need to be developed to better measure its monetary value against alternative methods of delivery. One of the21 City of Calgary (2008:3), Public-Private Partnerships best means of measuring project suitabilityCalgary Council Policy Framework. is by conducting a Value for Money (VfM)10
  19. 19. Chapter six KEY PRINCIPLES, INSTRUMENTS AND METHODStest. Used widely, the VfM test focuses on PPP Unitsoutputs by identifying risk and appropriately The development of PPP units on the local orallocating it, and by calculating internal costs national level that house the skills required toto governments through the implementation instigate and manage urban sector partnershipsof the Public Sector Comparator (PSC) test. can be used as an effective instrument toDesigned to quantify value, the PSC captures build the expertise of governments, therebythen compares all necessary costs and savings bolstering the development of PPPs inof PPP procurement against the most efficient housing and urban development. For theform of public procurement.22 As one would private partner, the units can provide aexpect, screening instruments need to be fair gateway on the information about partnershipand objective and therefore, responsibility for opportunities, as well as a single point ofdrafting the VfM and the PSC should lie in coordination and decision-making for greaterthe hands of an independent body. transparency and consistency. For the public stakeholders, the units can assume manyApplying Lessons Learned functions including: Facilitate PPP projects, Where a PPP approach to infrastructure share expertise and knowledge and provideand service delivery has been adequately education and skills training on a wide array ofmeasured, a good working method to apply PPP concerns. Ultimately, creating units thatwhen thinking about implementation is keep participants informed and well-trained isthat while standardized PPP processes are part of the responsible management neededimportant, and have served governments well, for effective PPP implementation on the partstark community differences in such factors of the public sector.as population and geographic size, as well asa country’s economic and cultural stability, do Adopting a Holistic Approachexist and need to be considered.23 Applying Taking a holistic approach of the PPPlessons learned from countries with similar project that accurately considers all aspect ofexperiences in a specified sector that may have the project’s implementation phases is a usefulmore advanced knowledge in PPP development method to adopt to help drive down costs andshows due diligence on the part of the public alleviate potential structural problems in theauthority in trying to avoid mistakes. long-term. It may be more cost-friendly, for example, to build an infrastructure asset usingDisciplined Planning materials that are more expensive at the outset A disciplined approach to planning outlining but which prove more reliable and robust for the long-term.24 Furthermore, while mucha sound roadmap for implementation early on focus should be put on the transaction stagein the process is essential. Initial time spent of the project, success of an urban sector PPPfully exploring objectives and core values actually needs to consider the long-term effectsregarding the purpose of the project and how of the project on the wider public communityit intends to benefit the public will avoid and how it connects with other urban sectorsmissteps later in the process. This can also such as roads and hospitals, as well as otherprovide a degree of certainty and reassurance policies and institutions surrounding theto all parties involved. project.22 Canadian Council for Public-Private Partnerships haspublished helpful guidelines for determining how andwhen to employ the PSC, made available at http://strategis.ic.gc.ca/epic/internet/23 Deloitte (2006:6). 24 Conference Board of Canada (2010:25). 11
  20. 20. Public-Private Partnerships in Housing and Urban DevelopmentChapter 7: DIFFERENT APPROACHES AND MODELS OF PPPS Partnerships with the private sector come deal of responsibility over the provision of thein many forms with a wide array of delivery public service to the private partner.frameworks to choose from. In helping toidentify the many arrangements of PPPs, thefollowing section provides a brief assessment Approachesof the varied approaches and type of PPP While it is commonly cited that a ‘true’ formmodels. The choice of model and/or approach of PPP is a collaborative model where both theto PPPs varies depending on the market sector private and public sectors agree to share theand type of project, but is usually structured risks and rewards of a particular project, thereto try and improve efficiency, quality of service are a variety of approaches that illustrate theand price. possible power-sharing and decision-making arrangements. A partnership with the private sector can fall under a consultative approachModels and their Structure whereby the government seeks out expert advice There is a spectrum of organizational models from the private sector or community groups.under which PPPs are typically implemented. There are also contributory arrangementsAs figure 3 below indicates, partnerships can which are identified as ones where the publicrange from being under the direct control sector provides funding to the private partnerof the level of government involved in the that is in turn responsible for carrying outpartnership, to a model that transfers a great the development and management of theFigure 3: The Public-Private Spectrum and Model Definitions The Scale of Public-Private Partnerships: Risk Transfer and Private Sector Involvement Privatization Degree of Private Sector Risk Concession Build-Own-Operate PPP Models Design-Build-Finance-Maintain-Operate Design-Build-Finance-Operate Build-Finance Operation and Maintenance Finance Design-Build Degree of Private Sector Involvement12
  21. 21. Chapter sEVEN DIFFERENT APPROACHES AND MODELS OF PPPS project. Last, under community development Design-Build: The private sector designs and builds infrastructure to meet public sector performance approaches, the private and public sectors specifications, often for a fixed price, so the risk of cost come together in a particular community and overruns is transferred to the private sector. (Many do not jointly contribute their strengths to achieve a consider Design-Build Models to be within the spectrum of PPPs). common goal.25 Finance Only: A private entity, usually a financial There is also a combination of hybrid service industry, funds a project directly or uses various approaches to PPP delivery that have been mechanisms such as long-term lease or bond issues. developed in recent years to address the Operation and Maintenance Contract: A private unique challenges facing local governments operator, under contract, operates a publicly-owned asset around the world. Bundling several small for a specified term. Ownership of the asset remains with scale projects into a contract with one private the public entity. partner is often used in order to attract more Build-Finance: The private sector constructs an asset private sector competitors to the table and and finances the capital cost only during the construction reduce transaction costs. In other cases, a period. joint venture company is set up with the Design-Build-Finance-Operate: The private sector public sector through a competitive process designs, builds and finances an asset and provides hard that includes a bid to carry out the first phase facility management or maintenance services under a long-term agreement. of work. Subsequent phases are commanded by the public sector but carried out by the Design-Build-Finance-Maintain-Operate: The private strategic partner using the first phase as a sector designs, builds and finances an asset, provides benchmark to determine the appropriateness hard and/or soft facility management services as well as operates under a long-term agreement. of future costs. Incremental partnering also allows for the public sector to commission Build-Own-Operate: The private sector finances, builds, work gradually with certain elements of the owns and operates a facility or service in perpetuity. The public constraints are stated in the original agreement project to be stopped or carried out by a and throughout on-going regulatory authority. different partner if deemed unproductive. Lastly, the public and private sectors can build Concession: A private sector concessionaire undertakes investments and operates the facility for a fixed period an alliance model whereby both sectors agree of time after which the ownerships reverts back to the to jointly build, design, finance, maintain and public sector. operate the facility.26Source: Canadian Council for Public-PrivatePartnerships 25 Boase (2000: 78-79) ‘Beyond Government? The Appeal of Public-Private Partnerships.’ 26 Deloitte (2006: 15). 13
  22. 22. Public-Private Partnerships in Housing and Urban DevelopmentChapter 8: GOOD PRACTICES IN LEGAL, REGULATORY AND FINANCE STRUCTURE Given the role that sound legal, regulatory, contracts are stable and enforceable inand financial environments play in attracting courts or through arbitration whereand retaining investment to flow into the appropriate. To the degree that the legalurban sector, it is now widely accepted and judicial environment is not clearlythat their effectiveness is critical to the defined, investors and project participantssustainability and growth of housing and will see the project as unpredictable andurban sector PPPs. While many developed high risk.countries require only incremental change • All laws adopted for PPPs in housingin this regard, very few developing countries and urban development should adhere tohave well-established and sovereign legal, principles of transparency and fairness, asfinance, and regulatory structures.27 well as reflect prudence for the long-term As a result, the objective of this section sustainability of the project.is to identify good legal, regulatory, andfinance frameworks that can help public • In keeping with the public interest,authorities lead the way for successful PPP governments should continue to workimplementation. to identify and remove undesirable legal uncertainties and impediments that limit private sector participation in PPPs.Legal Structure • Concession laws should make clear what level of government has jurisdiction over When determining an appropriate legal the awarding of PPP contracts, whatframework for PPPs, governments should sectors or type of urban infrastructureconsider the following: project may be granted, as well as identify• While differences may exist depending clear conditions for the construction and on the country of implementation, in all subsequent operation of the PPP.29 instances, it has been argued that what • Procurement laws must set out rules of is required are fewer, better and simpler process in advance and apply them equally laws.28 to all qualified applicants and bidders.30• At the most basic level, the legal • Competition laws that reflect equal environment has to minimize the opportunity for all relevant companies in likelihood of corruption and must be the same sector are encouraged. This should sufficiently reliable as to encourage private include respect for specific procedures in participation and investment.• Possible investors and project participants 29 For more information regarding good practices must have confidence that the laws and in concession laws see, UNCITRAL (2004), Model Legislative Provisions on Privately Financed Infrastructure Projects.27 OECD (2005:23). 30 For a detailed guide on PPP procurement laws see,28 UNECE (2008:29). 4ps (2008), Development in Procurement Laws.14
  23. 23. Chapter EIGHT GOOD PRACTICES IN LEGAL, REGULATORY AND FINANCE STRUCTURE awarding the investment contracts in a projects, such responsibility over contract transparent and non-discriminatory way. compliance is best entrusted to an independent• Tax laws can be drafted or amended to regulatory body which upholds the following create an incentive enabling environment characteristics: for PPPs. This can include exemption from • provides assurance that decisions are made municipal and other taxes related to the without interference or influence from construction and maintenance of an urban political or outside interests; infrastructure asset so as to lower the cost for the private sector. • includes clear procedures for the publication and explanation of all decisions;• Labour laws should be in place to alleviate public opposition to PPPs. This can include • upholds key principles of accountability adopting solid stakeholder consultation and transparency, thereby including a well- policies, as well as integrating laws that established system of checks and balances protect workers’ rights for pensions, wages, to ensure it fairly fulfills its own mandate; benefits and collective bargaining. • works to ensure that the tendering process• The law should clarify the roles and is consistently within the overall legal responsibilities of the varying public framework and that the subsequent project agencies of the host country in terms of implementation process is consistent with who will provide financial or economic project goals and priorities as outlined in support to the implementation of privately the planning documents.32 financed projects, as well as which types of Where appropriate, special regulatory support they are authorized to advance.31 procedures should be established for handling• Investment laws should not favor local disputes among the project participants and investors, lenders, or operators over foreign the independent regulatory bodies. ones, and should provide foreign actors equal access to key inputs such as capital, permit and license processing, materials Finance Structure and labour. The PPP finance structure can be highly• To the extent that laws and the judicial complex, but as mentioned, typically, a environment have to be changed to PPP project is made up of two financing accommodate the desired PPP, the components: private debt financing and equity planning stage should reflect a realistic financing. The optimum balance of equity and period for this change. debt is project specific with more weight put on debt financing than on equity financing.33 Within this capital structure, it is recommendedRegulatory Structure that the private partner absorb the entire Similarly, the effectiveness and impact of project’s debt financing risk. This is importantpartnerships also depend on an explicitly because debt financing provides the propersound regulatory environment that provides incentives for the private sector to ensure thateffective oversight, monitoring, and stringent the cost-escalation risk associated with therequirements for audit of performanceoutcomes. For housing and urban sector PPP 32 Institute for Public-Private Partnerships (2009:18), Public-Private Partnerships in E-Government: Knowledge Map.31 UNECE (2008: 29 - 31). 33 Farlam (2005). 15
  24. 24. Public-Private Partnerships in Housing and Urban Developmentdebt is properly managed and performance is One significant effect of the recent globalin-line with project expectations. In the event financial crisis is that credit approval forthat non-performance occurs, the government PPP projects has become even more costlyis not required to pay the annual fee to the and difficult to obtain. As a result, recentprivate consortium. Additionally, and as consideration has been given to replacingdiscussed, the private financing component some of the private financing componentsecures due diligence on the part of lenders with traditional financing whereby the publicwho subsequently monitor the project during provides more upfront funding for the project.all phases of the PPP. Under such a structure, it is argued that the public authority can control incentive drivers While private financing is often cited by setting penalties and large fines for non-as one of the key advantages for adopting compliance. While in theory it may be possiblethe partnership model, it is important to to create an effective incentive frameworkremember that the private sector’s cost of which ensures cost containment and efficiency,capital is always a more expensive alternative in practice, it can be difficult to enforce withoutto traditional public financing of urban higher litigation and administrative costs.35development projects. As a result, from a As such, despite preliminary investigationpublic finance perspective, the higher cost into alternative funding options, the privateassociated with using private capital for urban financing component of PPPs remains ansector PPPs can only be financially justified if integral part of cost-savings for governments.the transfer of risks and the efficiency gainsoutweigh the higher costs of borrowing.3434 Conference Board of Canada (2010:12). 35 Conference Board of Canada (2010:38).16
  25. 25. Chapter NINE PUBLIC-PRIVATE PARTNERSHIP ORGANIZATIONAL AND ADMINISTRATIVE EFFECTIVENESSChapter 9: PUBLIC-PRIVATE PARTNERSHIP ORGANIZATIONAL AND ADMINISTRATIVE EFFECTIVENESS Meeting the needs of growing urban information about the project is instrumentalpopulations through successful planning to effective relationship building and trustand implementation of a PPP approach management. Experience shows that a well-requires measures beyond the establishment structured and comprehensive communicationof appropriate legal, regulatory, and financial plan that includes a strong public consultationstructures. In fact, many partnership problems policy will guide communications activitiesstem from non-technical challenges that across the full range of project participants.arise in the working relationships between If successfully implemented, the plan canthe range of actors involved, such as a lack positively affect the working relationshipof project leadership and insurmountable between all parties.communication issues. This sectionmaintains that successful PPPs show a highlevel of commitment in the following key Clear Roles and Responsibilitiesorganizational and administrative areas: A well-crafted written agreement that formalizes the relationship between all parties, clearly delineates roles and responsibilities forPartner Selection each partner and puts in place a system of Whether initiated by the government or the checks and balances to create co-dependencyprivate partner, well-organized PPPs begin by and transparency substantially increases theidentifying the central problem, then seeking probability of success of the partnership.out the right partners to help solve it. For thepublic authority, choosing the lowest bidderin the tendering process is not always the best Proceduresmethod for partner selection. A candidate Since not all contingencies can be foreseenwith years of experience in the urban area in the planning stages of a partnership, it isbeing considered, along with a shared vision critically important for the partnership thatof the project’s goals, are important factors in both the private and public sectors agree onidentifying the right partner. key management procedures early on in the formation of the relationship. At the most basic level, there need to be clear procedures inBuilding Strong Relationships place for decision-making, solving problems,through Clear Communication managing conflicts, and performance Fundamentally important to the functioning evaluation.of the partnership will be its ability to buildand maintain a deep level of trust among allpartners and stakeholders. Ensuring that each Strong Public Administrationparty is exposed to on-going communication Indeed, asking a private consortium tochannels that relay timely and reliable 17
  26. 26. Public-Private Partnerships in Housing and Urban Developmentdeliver government services places more, not Strong Leadershipless, responsibility in the hands of the publicadministration. As a result, PPPs demand a The presence of strong leadership withinstrong (yet flexible) public administration - the organization is another key element forone that is able to quickly adapt and respond a successful partnership. A strong leader canto a wide array of changing circumstances. ensure clear direction and communication forEnsuring that there is strong in-house expertise all partners involved, hold partners accountable,to administer projects, as well as adequate as well as provide strategic focus and directionpractices for hiring outside experts on technical, to planning. Although the presence of a stronglegal, and financial matters is an asset. This leader is important on all sides, it is imperativerequires managers who are trained and skilled that the leadership does not reflect the narrownot only in managing the complex web of goals of any one partner. Partnerships shouldrelationships, but also skilled in negotiation, be about joint responsibilities, shared problemscontract management, risk analysis and others and solutions, and mutually divided resources,(see figure 4). Furthermore, an institutional risks and rewards.mechanism should be established to coordinatethe activities of the public authoritiesresponsible for issuing approvals, licenses andpermits, or any other authorization requiredfor the implementation of the urban sectorPPP. Without the internal capacity to facilitatethese functions quickly and effectively, risk ofproject failure is increased for the partnership.Figure 4: Required Government In-HouseSkills for Public-Private Partnerships Negotiation Skills Mediation Arbitration Contract Law Project Management Performance Auditing and Quality Control Public Process Private Sector Finance Risk ManagementSource: Ministry of Municipal Affairs, BritishColumbia, Canada.18
  27. 27. Chapter TEN IMPLEMENTING HOUSING AND URBAN SECTOR PPPsChapter 10: IMPLEMENTING HOUSING AND URBAN SECTOR PPPs Once the decision to move forward with Refining the Scope of thethe PPP model for a housing or urbandevelopment project has been made by the Projectpublic authority, and the broader institutional With a team in place, priority shifts toand administrative preliminary work is refining the scope of the project. More diligentunderway, it is important to begin preparing quantification and understanding of thefor PPP procurement and implementation. project’s goals and objectives, its public need,Drawing on the experience from countries at and its risks, along with the sophisticateddifferent stages of market development, this allocation of those risks, better prepares thesection aims to provide some useful insight project for the PPP procurement process. Theinto the key activities and issues that can be public sector should also have established aapplied to increase implementation success. schedule that lists timeframes for the initiation of each phase of the project with established key milestones.Building Capacity The first step in the implementation processis to set clear guidelines that determine which Selecting the Preferredgovernment department or agency will approve Procurement Processthe project’s readiness for the procurement Entering into the procurement phase, somestage. Within that agency, a project team decisions regarding the preferred methodskilled in delivering a PPP should take on the should be made. Generally speaking, thereresponsibility for the planning, procurement, are two main methods of procurement:and negotiation stages of the project, in competitive negotiation37 and pre-addition to establishing a role in performance qualification. The choice of method is based onmonitoring.36 Unless the government is deeply a range of factors, but is mainly distinguishedexperienced in contracting PPPs, it will also be by the level of competition and input requirednecessary to hire a multi-dimensional team of for the project. Whichever method is chosen,advisors skilled in legal, financial, economic, the procurement package must includeand sector specific areas to support the capacity standardized bidding documents, proceduresof the team through the many PPP processes for the announcement and subsequentand procedures. evaluation of private sector bids, and a method for awarding contracts.38 Exposing the project to a fair, open, and transparent procurement 37 Asian Development Bank (n.d.:73), Public-Private36 Ministry of Municipal Affairs (1999:46), Public Partnerships Handbook.Private Partnerships: A Guide for Local Governments. 38 Institute for Public-Private Partnership (2009:17). 19
  28. 28. Public-Private Partnerships in Housing and Urban Developmentprocess is fundamental to the formation of a who can provide the best overall value39 to thestrong building block upon which bidders will project.build their submissions. As mentioned, thereare two primary methods of procurement: It is important that governments take advantage of the early procurement process and use it as an effective two-way communication tool between the public and private biddersCompetitive Negotiations to finalize what needs to be provided. Care When this method of procurement has should be taken to help identify any issuesbeen issued, typically the public partner is either party may have as typically, the termsless interested in new ideas and inputs and of the finalized contract are based on themore focused on cost savings. The public specifications addressed in this stage.sector tends to have a rigidly defined scopeand thus selects a fitting group of bidders toan open negotiation process where typically Finalizing Contract Termspressure is put on them to offer the best price.While this method tends to be quick and less Ideally, the bulk of the contract should beexpensive than pre-qualification, where a sorted out during the bid process; however,“fully competitive” process takes place, it final contract negotiations present themay limit the public sector’s ability to view last opportunity to discuss any final issuesother, potential cost-effective, or design between the two sides. One of the mainenhancing approaches to project delivery. goals of the PPP contract is to appropriately harness the expertise and the efficiency of the private partner without compromising the delivery of service for the public taxpayer.Pre-Qualification To accomplish this, the public agency is This bidding process, usually a two- encouraged to ensure desirable outcomes bystage process which includes a request for putting appropriate control mechanisms inqualifications (RFQ) and a request for place in addition to including highly specificproposals (RFP), is typically adopted by the contract terms and conditions that establishpublic agency to try and harness the innovative duties, proper allocation and management ofexpertise of the private sector with the intention risk, performance targets, rules for changingto help it identify how to best meet project contract conditions and procedures forobjectives. In order to attract international dispute resolution and performance auditing.bidders and increase competition, the public There should also be technical and financialagency publishes and widely disseminates the evaluations that include clear data on the levelRFQ document. The document outlines with of service being provided, specified timeframesspecificity the skills and market knowledge for project mobilization, as well as financialrequired for the project to help limit the formulas with regard to capital expendituresnumber of private parties eligible to participate and revenues.further in the process. Interested candidatesmatch the requested qualifications but onlythe top bidders are invited to respond to theRFP stage, which marks final partner selection.Unlike the competitive negotiations processwhich tends to select a partner based on price,the public sector here aspires to attract bidders 39 Value can come in the form of, for example, modern design techniques, operating efficiencies for service delivery, innovative technologies, and so on.20
  29. 29. Chapter TEN IMPLEMENTING HOUSING AND URBAN SECTOR PPPsStakeholder Engagement of key stakeholder groups and their interests greatly increase the chances of PPP success, Moving forward with the implementation particularly in urban sectors traditionally underprocess, a key consideration the partnership the purview of governments.40 Therefore,must address is the need for on-going as the PPP moves into implementation,communication and engagement with as mentioned, both parties should have astakeholders. The importance of stakeholder comprehensive communication plan thatrelations should not be overlooked and establishes strong ties with interested memberscommunication activities with these groups of the community and includes mechanismsshould not end with contract award. In fact, for dialogue and stakeholder consultation.early identification and on-going involvement 40 Daniele Calabrese (2008:27), ‘Strategic Communications for Private, Public-Private Partnerships, and Private Participation in Infrastructure Projects.’ 21
  30. 30. Public-Private Partnerships in Housing and Urban DevelopmentChapter 11: PATTERNS IN APPLYING THE PPP MODEL TO HOUSING AND URBAN DEVELOPMENT This section describes some global patterns low-income housing projects that depend onin the application of PPPs for the most some form of public subsidy to keep prices atprominent urban infrastructure sectors, affordable levels.including affordable housing, transport, waterservice, schools and hospitals. As will be shown In a number of developing countriesbelow, a substantial increase in the demand for across Asia and Africa, PPPs are beginning tothe PPP approach in both the industrialized emerge as the prominent approach to urbanand developing countries can be tracked, with housing policy. While some success has beenmost private investors tending to favor large, documented in India and Nigeria,43 for thewealthy, or fast growing markets, with some most part housing PPPs in the developingsectors, as well as some forms of PPPs, showing world are relatively sparse, with little empiricalhigher rates of success than others. data made available to show any real trend to successful PPP housing policy.44 Further to the point, a distinction should be made with wealthier countries where affordable housingUrban Housing success has been primarily based on a significant Partnerships have been used with great level of government subsidy used to keepsuccess to construct and maintain low-income housing costs as low as possible. Oftentimes,housing in developed countries such as the such subsidies are a luxury not afforded to theUnited States, Australia, Ireland, and the UK. urban poor in the cash strapped developingFor the most part, the PPP approach to housing world. Nevertheless, to the extent that housingprojects in these countries has included a joint PPP will flourish in poorer countries, their useventure where the private and public sectors is dependent, amongst other things, on thejointly finance, own, and operate a housing economic and political strength and housingproject, and where risk is shared according to tradition of a particular nation.predetermined contractual provisions. Seeingthat under this PPP model the public sectortypically contributes significant funds for theproject, it allows the public authority to retain 42 For instance, financial mechanisms such as taxsignificant control over the planning and credits and housing trust fund have been incorporateddevelopment stages of the partnership while into housing policy in the US and the UK in ordermaking use of the private sector’s resources to secure a constant subsidy stream for low-income housing projects. For a lengthy discussion of theand expertise in construction and design.41 financial tools available to the private sector forIn several of the aforementioned countries, a affordable housing projects see, Michael Lea andrange of financial mechanisms42 aid in reducing James Wallace (1996), Current Practices for Financingoverall housing and debt services costs for the Affordable Housing in the United States.private partner. These are important tools for 43 See Urmi Sengupta (2005), ‘Government Intervention and Public-Private Partnerships in Housing Delivery in Kolkata’ and http://www. tradeinvestnigeria.com/feature_articles/959808.htm41 Deloitte (2006:26). 44 Ibid.22
  31. 31. Chapter ELEVEN PATTERNS IN APPLYING THE PPP MODEL TO HOUSING AND URBAN DEVELOPMENTUrban Transport Table 1: Regional Summary of Private Sec- In urban transport, PPPs have emerged as an tor Investment in Transport from 2000-2008effective tool for the expansion, maintenance,and construction of new roads, railways, Region Number of Projectsairports, seaports and other forms of transport. East Asia and Pacific 137Internationally, the developing regions have Europe and Central Asia 43seen a veritable increase of such arrangements Latin America and the Caribbean 164in the last 10 years (see figure 5). Transport Middle East and North Africa 27is also the largest area of PPP investment in South Asia 154developed countries such as Australia, Spain, Sub-Saharan Africa 55Italy, and the US.45 Long-term concession leasemodels, which allow the public sector to retain Total Transport Projects 580ownership of the asset after the leasing period Source: World Bank PPI Databaseis complete, are by far the most prominentform of PPPs in this sector. Under this PPP * Note that the data compiled includes all formsmodel, the private partner commonly limits of private sector investment. Therefore, it maytransport access to paying customers, ensuring include projects under complete privatization with little or no element of PPP.a revenue stream that can offset all, or someof the cost of provision. Correspondingly, thefinancial viability of urban transport projects of water and wastewater systems in manymakes this sector a more attractive investment developed countries, and a dire need for newoption to the private partner, particularly in investment to keep up with urban populationdeveloped countries where there is a growing growth in the developing economies, manypublic acceptance of tolls, or other user fees governments are moving away from traditionalfor roads and bridges. state management of water service delivery That being said, the sheer scale and long- and towards private sector involvement. Interm nature of some of these projects, Canada, Australia and Ireland, along withcombined with the need for, and dependence a slew of developing regions (see figure 6),on, accurate traffic demand forecasting in this fiscal shortfalls have forced local governmentssector significantly increases the financial risk to adopt PPP structures in an urban sectorabsorbed by the partnership.46 Thus, given traditionally operated solely under the purviewthe highly complex nature of transport PPPs, of the public authority.these arrangements can be particularly risky Although this phenomenon has beenfor developing markets that lack the resources widely tracked, partnerships in the water andand relative expertise on such matters. sanitation sector are perhaps most controversial, particularly in emerging economies. In the last decade, large developmental institutionsUrban Water and Sanitation have been criticized for making developmentManagement infrastructure loans to local governments contingent upon long-term concession Water and sanitation management represents contracts with private companies.47 Whileanother fast growing urban sector for PPPsaround the world. With aging conditions 47 For more information see Food & Water Watch45 Deloitte (2006:19). (2009), Dried up, Sold Out: How the World Bank Push46 Deloitte (2006:20). for Private Water Harms the Poor. 23

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