Public private partnerships (PPPs) in infrastructure can be a means toenabling the development or improvement of energy, water, transportand telecommunications and information technology through theparticipation of private and government entities. Where governments arefacing aging infrastructure and require more efficient services, apartnership with the private sector can help foster new solutions, includingclean technology.PPPs combine the skills and resources of both the public and privatesectors in new ways through sharing of risks and responsibilities. Thisenables governments to benefit from the expertise of the private sector,and allows them to focus instead on policy, planning and regulation bydelegating day-to-day operations.In order to achieve a successful partnership, a careful analiyis of the long-term development objectives and risk allocation is essential. In addition,the legal framework must adequately support this new model of servicedelivery and be able to monitor and regulate the outputs and servicesprovided. A well-drafted PPP agreement would be informed by both thelaws of the country and international best practices to clearlydelineate risks and responsibilities.The PPP in Infrastructure Resource Center for Contracts, Laws andRegulations (PPPIRC) seeks to give a general introduction to public-privatepartnerships, offer practical tools for the development of the legal enablingenvironment and regulation of PPPs and provide sample and annotatedcontracts from various structures in private sector participation ininfrastructure.
Potential Benefits of Public Private PartnershipsThe financial crisis of 2008-11 has brought about renewed interest in PPPin both developed and developing countries. Facing constraints on publicresources and fiscal space, whilerecognizing the importance of investmentin infrastructure to help their economies grow, governments areincreasingly turning to the private sector as an alternative additionalsource of funding to meet the funding gap. While recent attention has beenfocused on fiscal leveraging of projects, governments look to the privatesector 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 Imposing budgetary certainty by setting present and the future costs of infrastructre projects over time Utilizing PPPs as a way of developing local private sector capabilities through joint ownership 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. 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 Creating diversification in the economy by making the country more competitive in terms of 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 Extracting long-term value-for-money through appropriate risk transfer to the private sector over the life of the project – from design/ construction to operations/ maintenancePotential Risks of Public Private PartnershipsThere are a number of potential risks associated with Public PrivatePartnerships: development, bidding and ongoing costs in PPP projects are likely to be greater than for traditional government procurement processes - the government should therefore determine whether the greater costs involved are justified. A number of the PPP and implementation units around the world have developed methods for analysing these costs and looking at Value for Money, e.g., UK Treasury. For a broader discussion of Value for Money, go to Financing there is a cost attached to debt – While private sector can make it easier to get finance, finance will only be available where the operating cashflows of the project company are expected to provide a return on investment (i.e., the cost has to be borne either by the customers or the government through subsidies, etc.) some projects may be easier to finance than others (if there is proven technology involved and/ or the extent of the private sectors obligations and liability is clearly identifiable), some projects will generate revenue in local currency only (eg water projects) while others (eg ports and airports) will provide currency in dollar or other international currency and so constraints of local finance markets may have less impact 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 theproject viable, if there are signficant land or resettlement issues, etc.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 of existing assets. If they bear theserisks then their price for the service will reflect this. Private firms willalso want to know that the rules of the game are to be respected bygovernment as regards undertakings to increase tariffs/fairregulation, etc. Private sector will also expect a significant level ofcontrol over operations if it is to accept significant risksprivate sector will do what it is paid to do and no more than that –therefore incentives and performance requirements need to beclearly set out in the contract. Focus should be on performancerequirements that are out-put based and relatively easy to monitorgovernment responsibility continues – citizens will continue to holdgovernment accountable for quality of utility services. Governmentwill also need to retain sufficient expertise, whether theimplementing agency and/ or via a regulatory body, to be able tounderstand the PPP arrangements, to carry out its own obligationsunder the PPP agreement and to monitor performance of the privatesector and enforce its obligationsthe private sector is likely to have more expertise and after a shorttime have an advantage in the data relating to the project. It isimportant to ensure that there are clear and detailed reportingrequirements imposed on the private operator to reduce thispotential imbalancea clear legal and regulatory framework is crucial to achieving asustainable solution (for more, go to Legislation and Regulation)given the long-term nature of these projects and the complexityassociated, it is difficult to identify all possible contingencies duringproject development and events and issues may arise that were notanticipated in the documents or by the parties at the time of thecontract. It is more likely than not that the parties will need to
renegotiate the contract to accommodate these contingencies. It is also possible that some of the projects may fail or may be terminated prior to the projected term of the project, for a number of reasons including changes in government policy, failure by the private operator or the government to perform their obligations or indeed due to external circumstances such as force majeure. While some of these issues will be able to be addressed in the PPP agreement, it is likely that some of them will need to be managed during the course of the projectIdentify Form Project Should TakeA host governments objectives in planning an infrastructure project areusually shaped by what is in the public interest; for example, promotinga new highway around its capital to ease traffic congestion or improvingthe quality of drinking water.A host government must consider whether it is best to achieve theseobjectives exclusively through state owned enterprises (throughtraditional government procurement/ public financing/ sector reform)or whether and how to involve the private sector. A number of theWorld Bank toolkits look in detail at the different options available andgive guidance on how a government should choose between thoseoptions—see Further Reading below.This section summarizes the key issues that a host government needs toconsider when choosing a solution to meet its objectives and suggests apossible decision making process. For more detailed analysis, click onthe links listed under Further Reading.back to topIdentify the Business Need
The first step in developing a project is for the responsible governmentagency to identify the need for new public infrastructure orimprovements in existing infrastructure or public service delivery. Aneed for additonal assets or improvements may be identified when, forexample, 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.The government will also need to consider whether any investment thatis required can and should be met through public funds or whether itmight be appropriate to involve the private sector.back to topPossible Reasons for Involving Private SectorAs noted under Benefits and Risks of Public Private Partnerships, thereare a number of reasons for involving the private sector, includingadditional sources of financing and the broader expertise andtechnology that the private sector can bring. However, involvement ofthe private sector is not always appropriate or even a viable option,particularly if the project cannot be well-defined, if the costs of theproject are too high, if the technology that is to be used is unproven or ifthere is too much uncertainty in the enabling environment (legal,financial, political). The Government should carefully appraise theoptions available to it and ensure that there is a clear business case forproceeding with a project via PPP, as discussed below.
Appraise OptionsHaving established a need for improvement in public infrastructureservice or development of new infrastructure, the government agencywill need to identify and appraise the various options available to it tofulfil the need, guided by relevant government policies on infrastructureinvestment and where applicable the governments strategy forinfrastructure and general planning policies. For a summary of the mainrecognized categories of public sector reform/public/private sectorparticipation in infrastructure, click on Agreements.Option appraisal is a preliminary assessment of what is required to meetthe business need (i.e., investment, improved efficiencies, or bettermanagement, etc.) and whether a PPP structure is a suitable and feasibleoption and merits further and more detailed assessment.Option appraisal may be carried out in two steps:Step 1: Identify delivery solutionsThis may include: Non-asset solutions. Needs may be met without creating additional assets, through reconfiguring means of service delivery, developing initiatives to manage demand more effectively, or increasing use of existing assets. It may involve sector reform and restructuring Existing asset solutions. This may involve upgrade or refurbishment to bring the existing infrastructure to the required standard New asset solutions. When the needs can not be met by the above- mentioned two options, new infrastructure may be developed
Step 2: Carry out a preliminary assessment of the available optionsThis typically involves outlining and analyzing the advantages anddisadvantages of each possible form of traditional governmentprocurement and PPP mechanism as described in Agreements. A highlevel assessment is made with regard to the potential for a PPP todeliver improved value for money over the life of the project whencompared with the cost of traditional procurement (often known as the"public sector comparator"). There are a number of mechanisms forassessing Value for Money that have been developed by PPP units andimplementation units around the world. This analysis and theassessment of the public sector comparator is more of an art than ascience and so the principles and guidelines for making theseassessments vary from country to country. Examples of thesemechanisms can be found at Value for Money Mechanisms.The option analysis is not intended to form a final view on the mostappropriate procurement structure. If a PPP option appears to befeasible, a business case can then be developed to further analyze theoption in detail.back to topDevelop a Business CaseHaving appraised the available options and preliminarily decided that aPPP structure is feasible, the responsible government agency will wantto develop a more detailed business case of the project to assess thepotential of PPP to deliver value for money when compared withtraditional procurement. It may be appropriate for the business case tobe referred to a higher level of government for approval. For more onthis, go to Government Institutions for Implementing PPPs andto Further Reading below.
back to topIdentify Institutional Machinery Necessary for ReformAny reform, whether through a contractual solution or through publicsector reform, will require the government to first put in place themachinery to implement the reforms. A number of the issues that mayneed to be addressed are: legal environment—analyzing the existing legal environment to determine whether there are constraints on the various solutions being considered (see the Due Diligence Checklist for legal and institutional enabling environment for PPP, for more on the different issues that will concern investors, go to Legal Framework Assessment). If it is found that legal reform is necessary, then designing enabling legislation to meet the solution and fit the country. It may be appropriate to design a legal solution to fit a project/ a sector or the climate for PPPs in general (for examples of specific concession/PPP laws designed to create the appropriate enabling environment for PPPs, go to PPP Laws/Concession Laws); developing/ reforming institutions to prepare and monitor procurement mechanisms, centralized decision making (consider establishment of a unit responsible for identifying strategic sectors and allocating private capital such as a so-called “PPP Unit”). For more on PPP Units, go to Public Policy for the Private Sector Note on PPP Units; managing and monitoring contingent liabilities borne by government further to private sector investments (whether formal, in the form of risk management units, or otherwise); knowledge sharing/ developing best practice in management of PPPs including standardization of approaches to achieve economies of scale (for example, South Africa). See also Procurement Processes and Standardized Bidding Documents;
determining how to allocate government support – how subsidieswork; possible sources of funding for the project; regulation ofcapital markets and banking sectors to encourage private investmentand management of funds. For information on one source of outputbased aid, go to GPOBA Web site;developing/ reforming institutions to regulate, manage, enforce, andadjust the arrangement over time—the government will need toretain sufficient capacity, or create a specific body entity withsufficient capacity, to regulate and manage the utilities/ privateoperators. (For more, go to Regulation);putting arrangements into legally enforceable form (statute, license,contract);if private sector is to be involved in the solution, selecting the rightoperator in a transparent and competitive process (for more on this,go to Procurement Laws and Procurement Processes andStandardized Bidding Documents). For more, go toLegislation.