Development of public-private partnership structure
Amitava Basu | Sunday, 29 June 2008
PUBLIC-Private Partnerships (PPPs) have been in existence since long before the Revolutionary War. In 1652, the Water Works Company of Boston was the first private firm in America to provide drinking water to citizens. Today, creative government leaders develop partnerships with private sector investors to provide essential services, to meet environmental compliance requirements, and to improve operations, without having to increase taxes upon their constituencies.
Even in the best of times, governments at all levels are challenged to keep pace with the demands of their constituencies. During periods of slow growth, government revenues are frequently not sufficient to meet spending demands, necessitating painful spending cuts or tax increases. Partnerships can provide a continued or improved level of service, at reduced costs. And equally important, partnerships can also provide the capital needed for construction of major facilities. By developing partnerships with private-sector entities, governments can maintain quality services despite budget limitations. Also, governments realise that the combined capital and intellectual resources of the public and private sectors can result in better, more efficient services.
PPP defined: PPP is a contractual agreement between a public agency (federal, state or local) and a private sector entity. Through this agreement, the skills and assets of each sector (public and private) are shared in delivering a service or facility for the use of the general public. In addition to the sharing of resources, each party shares the risks and rewards potential in the delivery of the service and/or facility.
Structures of PPP: There could be different models of PPP contingent on the nature and complexity of the project concerned, the socio-economic situation, the skill and capability of the public sector agency to manage and regulate the PPP, and the political risks or uncertainties involved. Some of the usual formats of PPP are:
a) Build/Operate/Transfer (BOT) -- The private sector partner builds a facility to the specifications agreed to by the public agency, operates the facility for a specified time period under a contract with the public agency, and then transfers the facility to the agency at the end of the specified period of time. In most cases, the private sector partner also provides some, or all, of the financing for the facility, and, hence, the length of the contract should be sufficient to enable the private sector partner to realise a reasonable return on its investment through user charges.
b) Build/Own/Operate (BOO) -- The contractor constructs and operates a facility without transferring ownership to the public sector. Legal title to the facility remains with the private sector, and there is no obligation for the public sector to purchase the facility.
c) Buy/Build/Operate (BBO) -- BBO is a form of asset sale that includes a rehabilitation or expansion of an existing facility. The government sells the asset to the private sector entity, which then makes the improvements necessary to operate the facility in a profitable manner.
d) Design/Build/Operate (DBO) -- A single contract is awarded for the design, construction, and operation. Title to the facility remains with the public sector unless the project is a design/build/operate/transfer or design/build/own/operate project. This approach creates a single point of responsibility for design and construction and can speed project completion by facilitating the overlap of the design and construction phases of the project. DBO approach maintains the continuity of private sector involvement and can facilitate private-sector financing of public projects supported by user fees generated during the operations phase.
e) Design/Build (DB) -- DB is when the private partner provides both design and construction of a project to the public agency. This type of partnership can reduce time, save money, provide stronger guarantees and allocate additional project risk to the private sector. It also reduces conflict by having a single entity responsible to the public owner for the design and construction. The public sector partner owns the assets and has the responsibility for the operation and maintenance.
f) Developer Finance -- The private sector party finances the construction or expansion of a public facility in exchange for the right to build residential housing, commercial stores, and/or industrial facilities at the site. The private developer contributes capital and may operate the facility under the oversight of the government.
g) Lease/Develop/Operate -- Under this arrangement, the private sector party leases an existing facility from a public agency; invests its own capital to renovate, modernise, and/or expand the facility; and then operates it under a contract with the public sector agency.
Key factors for successful PPP: There is no set formula or an absolute foolproof technique in structuring a successful PPP. However, there are six critical components of any successful PPP, and each of these key elements is involved in varying degrees in developing a PPP model.
Support of political leadership: A successful partnership can result only if there is commitment from "the top". The most senior public officials must be willing to be actively involved in supporting the concept of PPP and taking a leadership role in development of each given partnership. A well-informed political leader can play a critical role in minimising misperceptions about the value to the public of an effectively developed partnership. Equally important, there should be a statutory foundation for the implementation of each partnership.
Stakeholder communication: More people will be affected by PPP than just the public officials and the private sector partner. Affected employees, those public receiving the service, the press, appropriate labour unions and relevant interest groups will all have opinions, and frequently significant misconceptions about a partnership and its value to the public. It is important to communicate openly and candidly with these stakeholders to minimise potential resistance to establishing a partnership.
Selection of right partner: The "lowest bid" is not always the best choice for selecting a partner. The "best value" in a partner is critical in a long-term relationship that is central to a successful partnership. A candidate's experience in the specific area of partnerships being considered is an important factor in identifying the right partner.
Dedicated income stream: While the private sector partner may provide the initial funding for capital investment, there must be a means of repayment of this investment over the long term of the partnership. The income stream can be generated by a variety and combination of sources, such as, fees, tolls, shadow tolls, tax increment financing, or a wide range of additional options, but must be assured for the length of the partnership.
Comprehensive plan: A carefully developed plan will substantially increase the probability of success of the partnership. This plan most often will take the form of an extensive, detailed contract, clearly describing the responsibilities of both the public and private sector partners. In addition to attempting to foresee areas of respective responsibilities, a good plan or contract will include a clearly defined method of dispute resolution because not all contingencies can be foreseen.
Monitoring of partnership: Once a partnership has been established, the public sector must remain actively involved in the project. On-going monitoring of the performance of the partnership is important in assuring its success. This monitoring should be done on a daily, weekly, monthly or quarterly basis for different aspects of each partnership, depending on exigencies of situation, and the frequency is often defined in the business plan and/or contract.
Conclusion: PPP cannot be developed on any standard formula nor can it be copied randomly from other projects or locations. The project context, revenue stream, socio-economic conditions, public sentiments, political situation, and regulatory mechanism are important considerations for crafting effective PPP. In sum, success of PPP lies in determining a comprehensive and integrated vision: developing a workable balance between the roles of the public and private sectors; identifying financing options; ensuring sustained financial support to make the vision a reality; and exploring innovative projects.
The writer is Executive Director, International Consultants and Technocrats Private Limited, New Delhi, India
Even in the best of times, governments at all levels are challenged to keep pace with the demands of their constituencies. During periods of slow growth, government revenues are frequently not sufficient to meet spending demands, necessitating painful spending cuts or tax increases. Partnerships can provide a continued or improved level of service, at reduced costs. And equally important, partnerships can also provide the capital needed for construction of major facilities. By developing partnerships with private-sector entities, governments can maintain quality services despite budget limitations. Also, governments realise that the combined capital and intellectual resources of the public and private sectors can result in better, more efficient services.
PPP defined: PPP is a contractual agreement between a public agency (federal, state or local) and a private sector entity. Through this agreement, the skills and assets of each sector (public and private) are shared in delivering a service or facility for the use of the general public. In addition to the sharing of resources, each party shares the risks and rewards potential in the delivery of the service and/or facility.
Structures of PPP: There could be different models of PPP contingent on the nature and complexity of the project concerned, the socio-economic situation, the skill and capability of the public sector agency to manage and regulate the PPP, and the political risks or uncertainties involved. Some of the usual formats of PPP are:
a) Build/Operate/Transfer (BOT) -- The private sector partner builds a facility to the specifications agreed to by the public agency, operates the facility for a specified time period under a contract with the public agency, and then transfers the facility to the agency at the end of the specified period of time. In most cases, the private sector partner also provides some, or all, of the financing for the facility, and, hence, the length of the contract should be sufficient to enable the private sector partner to realise a reasonable return on its investment through user charges.
b) Build/Own/Operate (BOO) -- The contractor constructs and operates a facility without transferring ownership to the public sector. Legal title to the facility remains with the private sector, and there is no obligation for the public sector to purchase the facility.
c) Buy/Build/Operate (BBO) -- BBO is a form of asset sale that includes a rehabilitation or expansion of an existing facility. The government sells the asset to the private sector entity, which then makes the improvements necessary to operate the facility in a profitable manner.
d) Design/Build/Operate (DBO) -- A single contract is awarded for the design, construction, and operation. Title to the facility remains with the public sector unless the project is a design/build/operate/transfer or design/build/own/operate project. This approach creates a single point of responsibility for design and construction and can speed project completion by facilitating the overlap of the design and construction phases of the project. DBO approach maintains the continuity of private sector involvement and can facilitate private-sector financing of public projects supported by user fees generated during the operations phase.
e) Design/Build (DB) -- DB is when the private partner provides both design and construction of a project to the public agency. This type of partnership can reduce time, save money, provide stronger guarantees and allocate additional project risk to the private sector. It also reduces conflict by having a single entity responsible to the public owner for the design and construction. The public sector partner owns the assets and has the responsibility for the operation and maintenance.
f) Developer Finance -- The private sector party finances the construction or expansion of a public facility in exchange for the right to build residential housing, commercial stores, and/or industrial facilities at the site. The private developer contributes capital and may operate the facility under the oversight of the government.
g) Lease/Develop/Operate -- Under this arrangement, the private sector party leases an existing facility from a public agency; invests its own capital to renovate, modernise, and/or expand the facility; and then operates it under a contract with the public sector agency.
Key factors for successful PPP: There is no set formula or an absolute foolproof technique in structuring a successful PPP. However, there are six critical components of any successful PPP, and each of these key elements is involved in varying degrees in developing a PPP model.
Support of political leadership: A successful partnership can result only if there is commitment from "the top". The most senior public officials must be willing to be actively involved in supporting the concept of PPP and taking a leadership role in development of each given partnership. A well-informed political leader can play a critical role in minimising misperceptions about the value to the public of an effectively developed partnership. Equally important, there should be a statutory foundation for the implementation of each partnership.
Stakeholder communication: More people will be affected by PPP than just the public officials and the private sector partner. Affected employees, those public receiving the service, the press, appropriate labour unions and relevant interest groups will all have opinions, and frequently significant misconceptions about a partnership and its value to the public. It is important to communicate openly and candidly with these stakeholders to minimise potential resistance to establishing a partnership.
Selection of right partner: The "lowest bid" is not always the best choice for selecting a partner. The "best value" in a partner is critical in a long-term relationship that is central to a successful partnership. A candidate's experience in the specific area of partnerships being considered is an important factor in identifying the right partner.
Dedicated income stream: While the private sector partner may provide the initial funding for capital investment, there must be a means of repayment of this investment over the long term of the partnership. The income stream can be generated by a variety and combination of sources, such as, fees, tolls, shadow tolls, tax increment financing, or a wide range of additional options, but must be assured for the length of the partnership.
Comprehensive plan: A carefully developed plan will substantially increase the probability of success of the partnership. This plan most often will take the form of an extensive, detailed contract, clearly describing the responsibilities of both the public and private sector partners. In addition to attempting to foresee areas of respective responsibilities, a good plan or contract will include a clearly defined method of dispute resolution because not all contingencies can be foreseen.
Monitoring of partnership: Once a partnership has been established, the public sector must remain actively involved in the project. On-going monitoring of the performance of the partnership is important in assuring its success. This monitoring should be done on a daily, weekly, monthly or quarterly basis for different aspects of each partnership, depending on exigencies of situation, and the frequency is often defined in the business plan and/or contract.
Conclusion: PPP cannot be developed on any standard formula nor can it be copied randomly from other projects or locations. The project context, revenue stream, socio-economic conditions, public sentiments, political situation, and regulatory mechanism are important considerations for crafting effective PPP. In sum, success of PPP lies in determining a comprehensive and integrated vision: developing a workable balance between the roles of the public and private sectors; identifying financing options; ensuring sustained financial support to make the vision a reality; and exploring innovative projects.
The writer is Executive Director, International Consultants and Technocrats Private Limited, New Delhi, India