Developing a viable PPP framework
Tuesday, 9 February 2010
Fida Hassan Rana
PUBLIC Private Partnerships (PPPs) have emerged as one of the widely applied approaches for delivering infrastructure projects in many countries. PPP, as broadly defined, is a cooperation between public and private sectors by way of sharing resources, risks, responsibilities and rewards for delivering projects, mainly in the infrastructure sector. PPP has now become an acceptable and tested method for medium to large-scale infrastructure projects. PPP projects yield benefits by way of alleviating public sector financial burden to fund large-scale infrastructure costs; improving governance and management of projects; increasing value for money and better risk allocation among different stakeholders.
A purely public finance approach to implement infrastructure projects has many limitations such as slow decision-making, inefficient project management, poor operating performance, etc. On the other hand, a purely private finance approach may also cause problems such as over pricing, unequal service distribution amongst the poor and rich, lack of social and environmental considerations etc. Instead, by blending strengths of both public and private sectors, PPP modes of implementing infrastructure projects avoid many of these deficiencies. Projects implemented under PPP can increase the value for money spent for infrastructure services by providing efficient, lower-cost, and reliable services.
Government of Bangladesh has already implemented a number of PPP projects, specially in the power sector. The recent mega PPP project initiative -- elevated expressway in Dhaka, has created much enthusiasm. Though not the maiden PPP project in the country, the expressway project warrants for much attention, considering the quantum of investment required. In the backdrop of dismal road infrastructure of Dhaka, it is a timely move by the policy makers.
However, it is important to underline the fact that for successful PPP projects to implement and function, both public and private sectors have to work in a 'win-win' environment and should assume full roles and responsibilities in their respective positions. In some cases, contrary to the popular belief, government has a bigger role to play for making PPP projects successful. Experiences with PPP projects have not always been pleasant and there are numerous examples to substantiate this. Many PPP projects in other countries are either held up or terminated due to reasons such as wide gaps between public and private sector expectations, lack of government commitment, lengthy decision making process, poorly defined sector policies, inadequate regulatory frameworks, poor transparency -- just to name a few.
Thai experience: Bangkok Elevated Transport System (BETS) in Thailand is one such example and offers a good case study for the proposed Dhaka elevated expressway. BETS was conceived as a BOT-type PPP project -- a 60 km elevated rail system and a road through the heart of the capital of Thailand. Hopewell, the concessionaire, was granted the right to collect tolls for 30 years and to develop 900,000 square meter of land along the proposed route. This project was ultimately terminated by Thai government. Sudden changes requested by the government and the lack of governmental assistance in resolving the conflicts with a nearby competitive toll way were some of the causes identified as project failure.
The key roles government should play are to create favourable investment environment under which private sector can benefit from adequate legal and regulatory frameworks, coordinated and supportive regime and suitable concession. A well-structured regulatory framework not only increases the willingness of the private sector to participate in infrastructure development, but also increases benefits to the government by ensuring efficient operation of projects. Sound legal framework is also helpful to avoid potential corruption in the PPP implementation process.
In the 1990s, Bangladesh successfully implemented a number of PPP-styled power projects. Unfortunately, subsequent similar power projects were bogged down due to rather opaque investor selection process. Many power projects were tendered for several times, and it cost a lot to the country in terms of shattered confidence amongst the international investors. As was evidenced, later invitation for bids received lacklustre response from private sector entrepreneurs.
Creating congenial environment: A stable and congenial investment environment is of paramount importance for smooth implementation of PPP projects. For a transparent procurement regime, the government should standardise its PPP procurement process, provide general and/or industry-specific PPP guidelines, and standardised tender documents and model contracts for a range of infrastructure sectors. Such measures can significantly reduce not only the tendering costs to the private sector, but also the tender evaluation costs to the public sector. Furthermore, the negotiation time can also be shortened.
Creating a centre of excellence to deal with various counterparties during PPP project implementation has been proved to be useful in Bangladesh and elsewhere. In the 1990s, the government set up Power Cell to deal with implementation of IPP projects in the country. The Power Cell provided valuable service by becoming a single-point expert service provider to the government in selecting, negotiating and implementing PPP projects.
As the government has now put greater emphasis on PPP projects, setting up a PPP cell will help speedy implementation of these projects. It will also serve as a hub of expertise within government. Accumulated knowledge from dealing with multiple PPP projects will help the government to avoid hiring costly international consultants in future.
One of the important contributions a PPP cell can make is helping selection of suitable concessionaire as the success of a PPP project depends largely on the selection of the most capable concessionaire. Such selection process requires a well-structured tendering process, an appropriate concessionaire evaluation method, and a set of well defined evaluation criteria. Because of its importance, much attention has been devoted to improving the tendering process and developing techniques and criteria for selecting a suitable concessionaire.
Donor agencies are particularly cautious about a transparent procurement and selection method. Unfortunately, the procurement process in Bangladesh, especially in the power sector, has been questioned for its opaqueness and some projects have not seen donor fund due to opaque procurement process.
From the point of view of investors and lenders, financial viability of a PPP project depends on a number of factors, specially market demand and tariff structure. Here also, the need for government support is much sought after. Several types of government supports are can make infrastructure projects financially viable. For example, to secure minimum guaranteed revenue from the government is a way for majority of infrastructure projects to mitigate market demand risk. The government can also provide support in the form of the guaranteed minimum revenue, repaying the investors and lenders in the event of project termination due to situation outside control etc.
In addition to support through a fixed revenue stream, different types of other financial supports from the government can also increase financial return of a project, which in turn enhance the attractiveness of PPP projects. Direct financial supports may include investment of capital, free use of project sites and facilities, and tax incentives. Financial support can also be indirect, for example, a loan repayment guarantee by the central government, which assures that lenders will be fully repaid by the government if the project fails. Other government supports include foreign exchange rate protection and early completion incentives, etc. An appropriate level of government support can improve the financial viability and enhance the attractiveness of a PPP project.
Overall, the potential risks of any PPP project needs to be identified thoroughly in order to properly allocate those risks to right parties, and needless to say government is one of the most important parties to bear significant risk components in the PPP business. PPPs are not devices for governments to develop infrastructure projects by transferring all the risks to the private sector. Rather, it requires a clear consideration of all risks and how these risks are allocated between the public and private sectors.
(The writer is a Dubai-based specialist in PPP project finance. fida2000bd@yahoo.com)
PUBLIC Private Partnerships (PPPs) have emerged as one of the widely applied approaches for delivering infrastructure projects in many countries. PPP, as broadly defined, is a cooperation between public and private sectors by way of sharing resources, risks, responsibilities and rewards for delivering projects, mainly in the infrastructure sector. PPP has now become an acceptable and tested method for medium to large-scale infrastructure projects. PPP projects yield benefits by way of alleviating public sector financial burden to fund large-scale infrastructure costs; improving governance and management of projects; increasing value for money and better risk allocation among different stakeholders.
A purely public finance approach to implement infrastructure projects has many limitations such as slow decision-making, inefficient project management, poor operating performance, etc. On the other hand, a purely private finance approach may also cause problems such as over pricing, unequal service distribution amongst the poor and rich, lack of social and environmental considerations etc. Instead, by blending strengths of both public and private sectors, PPP modes of implementing infrastructure projects avoid many of these deficiencies. Projects implemented under PPP can increase the value for money spent for infrastructure services by providing efficient, lower-cost, and reliable services.
Government of Bangladesh has already implemented a number of PPP projects, specially in the power sector. The recent mega PPP project initiative -- elevated expressway in Dhaka, has created much enthusiasm. Though not the maiden PPP project in the country, the expressway project warrants for much attention, considering the quantum of investment required. In the backdrop of dismal road infrastructure of Dhaka, it is a timely move by the policy makers.
However, it is important to underline the fact that for successful PPP projects to implement and function, both public and private sectors have to work in a 'win-win' environment and should assume full roles and responsibilities in their respective positions. In some cases, contrary to the popular belief, government has a bigger role to play for making PPP projects successful. Experiences with PPP projects have not always been pleasant and there are numerous examples to substantiate this. Many PPP projects in other countries are either held up or terminated due to reasons such as wide gaps between public and private sector expectations, lack of government commitment, lengthy decision making process, poorly defined sector policies, inadequate regulatory frameworks, poor transparency -- just to name a few.
Thai experience: Bangkok Elevated Transport System (BETS) in Thailand is one such example and offers a good case study for the proposed Dhaka elevated expressway. BETS was conceived as a BOT-type PPP project -- a 60 km elevated rail system and a road through the heart of the capital of Thailand. Hopewell, the concessionaire, was granted the right to collect tolls for 30 years and to develop 900,000 square meter of land along the proposed route. This project was ultimately terminated by Thai government. Sudden changes requested by the government and the lack of governmental assistance in resolving the conflicts with a nearby competitive toll way were some of the causes identified as project failure.
The key roles government should play are to create favourable investment environment under which private sector can benefit from adequate legal and regulatory frameworks, coordinated and supportive regime and suitable concession. A well-structured regulatory framework not only increases the willingness of the private sector to participate in infrastructure development, but also increases benefits to the government by ensuring efficient operation of projects. Sound legal framework is also helpful to avoid potential corruption in the PPP implementation process.
In the 1990s, Bangladesh successfully implemented a number of PPP-styled power projects. Unfortunately, subsequent similar power projects were bogged down due to rather opaque investor selection process. Many power projects were tendered for several times, and it cost a lot to the country in terms of shattered confidence amongst the international investors. As was evidenced, later invitation for bids received lacklustre response from private sector entrepreneurs.
Creating congenial environment: A stable and congenial investment environment is of paramount importance for smooth implementation of PPP projects. For a transparent procurement regime, the government should standardise its PPP procurement process, provide general and/or industry-specific PPP guidelines, and standardised tender documents and model contracts for a range of infrastructure sectors. Such measures can significantly reduce not only the tendering costs to the private sector, but also the tender evaluation costs to the public sector. Furthermore, the negotiation time can also be shortened.
Creating a centre of excellence to deal with various counterparties during PPP project implementation has been proved to be useful in Bangladesh and elsewhere. In the 1990s, the government set up Power Cell to deal with implementation of IPP projects in the country. The Power Cell provided valuable service by becoming a single-point expert service provider to the government in selecting, negotiating and implementing PPP projects.
As the government has now put greater emphasis on PPP projects, setting up a PPP cell will help speedy implementation of these projects. It will also serve as a hub of expertise within government. Accumulated knowledge from dealing with multiple PPP projects will help the government to avoid hiring costly international consultants in future.
One of the important contributions a PPP cell can make is helping selection of suitable concessionaire as the success of a PPP project depends largely on the selection of the most capable concessionaire. Such selection process requires a well-structured tendering process, an appropriate concessionaire evaluation method, and a set of well defined evaluation criteria. Because of its importance, much attention has been devoted to improving the tendering process and developing techniques and criteria for selecting a suitable concessionaire.
Donor agencies are particularly cautious about a transparent procurement and selection method. Unfortunately, the procurement process in Bangladesh, especially in the power sector, has been questioned for its opaqueness and some projects have not seen donor fund due to opaque procurement process.
From the point of view of investors and lenders, financial viability of a PPP project depends on a number of factors, specially market demand and tariff structure. Here also, the need for government support is much sought after. Several types of government supports are can make infrastructure projects financially viable. For example, to secure minimum guaranteed revenue from the government is a way for majority of infrastructure projects to mitigate market demand risk. The government can also provide support in the form of the guaranteed minimum revenue, repaying the investors and lenders in the event of project termination due to situation outside control etc.
In addition to support through a fixed revenue stream, different types of other financial supports from the government can also increase financial return of a project, which in turn enhance the attractiveness of PPP projects. Direct financial supports may include investment of capital, free use of project sites and facilities, and tax incentives. Financial support can also be indirect, for example, a loan repayment guarantee by the central government, which assures that lenders will be fully repaid by the government if the project fails. Other government supports include foreign exchange rate protection and early completion incentives, etc. An appropriate level of government support can improve the financial viability and enhance the attractiveness of a PPP project.
Overall, the potential risks of any PPP project needs to be identified thoroughly in order to properly allocate those risks to right parties, and needless to say government is one of the most important parties to bear significant risk components in the PPP business. PPPs are not devices for governments to develop infrastructure projects by transferring all the risks to the private sector. Rather, it requires a clear consideration of all risks and how these risks are allocated between the public and private sectors.
(The writer is a Dubai-based specialist in PPP project finance. fida2000bd@yahoo.com)