Involving the private sector in building infrastructures

The supply of infrastructure such as roads, bridges, ports, power plants and other public utilities has traditionally been the responsibility of the governments, both in capitalist and socialist economies. While the private sector is often subcontracted to carry out the construction of the infrastructure facility, governments virtually have borne all project costs and risks. For governments to maintain adequate investments in infrastructure, which is very capital-intensive, an enormous burden is placed on public finances. The emphasis on infrastructure investment has been a major cause of burgeoning government budget deficits and foreign debt and cut-backs to 'softer' sectors such as health, education and social welfare.
In recent years, the overwhelming need for investment in infrastructure has confronted governments in developed and developing economies alike. New roads are needed, new telecommunications systems, new energy and natural resource projects, new water and waste treatment facilities etc. are there on the government's priorities. Apart from green field projects, existing infrastructure needs to be overhauled and updated. Power supply systems need to be refined, rail networks upgraded, ports and airports re-developed. All these call for massive commitments of both finance and resources, of money, skills, technology, ideas and enterprise.
In many cases, the need is urgent. Yet, the reality is that today, the governments in most countries do not have the resources needed to meet these demands in full. Most of the governments now have difficulty in allocating adequate resources for the development of infrastructure and a huge gap exists between infrastructure demand and available public sector financing resources. Additionally, poor performance of the public sector in supplying infrastructure services has compelled many countries to look for alternative ways to develop infrastructure.
Since 1980s in particular, the implementation of infrastructure projects throughout the world has increasingly involved the private sector. Many of the infrastructure projects are large in size and complexity and require massive funding. To attract this huge amount of financing, governments are increasingly using alternative sources of project financing in order to reduce public borrowing and direct expenditure. What we are now seeing today are the public and private sector working together with the aim of sharing the risks and rewards of infrastructure development and the concept of the public-private partnership has developed. It is now generally agreed that under appropriate circumstances and with adequate support and control, the private sector can very successfully finance, develop, manage and operate infrastructure that would traditionally have been solely within the domain of the public sector. Indeed, this is why more and more governments are accepting the idea that private participation in major infrastructure projects is an effective and politically acceptable method to satisfy major transportation, power and other infrastructure requirements.
The economic growth and the plans for further expansion of the economy are creating a demand for infrastructure in all sectors which outstrips available resources. Power brown-outs or black-outs, traffic congestion in major cities, limited road access to business centres and cities, inadequate rail services, long waiting time at ports, shortages of irrigation, drinking and industrial water all bear witness to the inadequacies of existing infrastructure facilities and the need for further investment. Fortunately, there are available today technical, managerial and financial alternatives designed to alleviate this critical bottleneck in infrastructure development initiatives.
One such alternative is the implementation of Public-Private Partnerships (PPP) in infrastructure development. PPP model is being used to implement the infrastructure projects ostensibly as a strategy for increasing efficiency, reducing the drain on state revenue and supporting private sector development.
For a successful PPP programme the government must demonstrate its commitment to market-based economic growth and reform and put in place the necessary policy and institutional procedures that supports partnerships between the public and the private sectors. Transparency in the whole process is critical for creating confidence in the programme, specially to the private sector investors and financial institutions outside the country. Alongside the demonstrated commitment of the government to providing support to the private sector, there should be a demonstrated commitment of the government to respect commercial agreements, adjudicate disputes without prejudice and serve as a long term reliable institutional and administrative partner with the private sector. For a successful PPP approach, certain conditions have to be met:
a. Government and private enterprises work together on basis of clear contractual agreements.
b. Distinct regulations are laid down concerning the responsibilities of the parties regarding costs and risks.
c. Every party keeps its own identity and responsibility.
WHAT PPP REALLY MEANS: The term Public-Private Partnership (PPP) has no precise meaning. It is used to describe many forms of arrangements between the public and private sectors for providing public services. In essence, by PPP we mean a form of collaboration or joint endeavour between the public and private sectors for the purpose of implementing a major project, where by the resources, strengths and capabilities of each are brought together It is a contractual agreement between public and private sector partners, which envisages more private sector involvement than is traditional. The agreements generally involve a government entity entering into contract with a private company to renovate/rehabilitate, build/ construct, operate, maintain, and/or manage a public service facility or system. The responsibility of the government is to devise and structure a kind of private sector participation which will protect the public interest while reaping the benefits of private investment. PPP provides such a structure and refers to a form of collaboration or joint endeavour between the public and private sectors for the purpose of financing, developing, constructing, maintaining and operating an infrastructure project. PPP is documented by a series of interrelated agreements between the public (usually a government agency or entity) and private sector participants which will define their respective rights and responsibilities
In practice, PPP structures usually involve the transfer of much of the responsibility for financing, designing, constructing and operating the project and most of the risks associated with these activities to the private sector (usually a consortium of corporate sponsor and their lenders and investors) whilst allowing certain (often residual) responsibilities and risks to be retained by the public sector. These public sector responsibilities may include the provision of certain assets (such as land), subsidies (where the project is not economically self standing), political risk guarantees and perhaps - where users are not being charged directly by the private sector for the service in question- a revenue stream. But the aim is to achieve a suitable balance. Both sectors, in other words, will continue to have certain defined functions in relation to the project throughout its life. Each is left to shoulder the risks and responsibilities it is best suited to manage.
The range of structures and concepts which involve the sharing of risks and responsibilities between public and private sector generally include the following:
n Contracting out or management contracts: Where the private sector is contracted to provide services or to manage a facility on behalf of the public sector for a given period and for an agreed contract price, without the private sector being required to assume any financing or revenue risk.
 n Joint Ventures: Where the public and private sectors assume joint responsibility for the financing and implementation of the public service facility. Under the joint venture arrangement, the public and the private sectors jointly finance, own and operate a facility.
 n Leasing: Where all or a substantial part of the risks associated with funding, developing and operating the facilities are assumed by the private sector, with the public sector entity taking the facilities on lease. The private sector receives lease payments from the public sector for the use of the facility.
 n Build, Operate and Transfer (BOT) projects: This is a project delivery method typically involving the design, construction, finance, and operation of a facility whereby the private sector company acquires ownership of the facility until the end of the contract term, at which time ownership of the facility is returned to the original public sector sponsor. While PPP structures can take many different forms, the BOT model is the most familiar model of large infrastructure project finance which is applied when the government seeks to eventually acquire, by transfer, a facility that has been developed, built and operated for a fixed term by the private sector.
Typically, a private sector consortium forms a special company called a "special purpose vehicle" (SPV) to develop, construct, maintain and operate the asset for the contracted period. The sponsoring consortium usually comprises a major engineering and construction firm, one or more equipment suppliers, a maintenance company and some times, lenders. It is the SPV-the project company that signs the contract with the government entity and with subcontractors to build the facility and then maintain it. The government, sometimes, in the infrastructure projects may also provide a capital subsidy in the form of a one- time grant so as to make it more attractive to the private sector investors. In some other cases ,the government may support the project by granting revenue subsidies including tax breaks or by providing guaranteed annual revenues for a fixed period.
The project company, under BOT approach, raises the bulk of financing for the project from commercial lenders (usually backed by export credit guarantee agencies) and from bilateral and multilateral financial institutions. Generally, one or several commercial banks will organize the loan facility as the arrangers. The loan will often then be syndicated in order to allow a number of lenders to participate in the credit facility and to distribute the risk among a greater number of lenders. The credit agreement signed between the project company and the lenders will be a key document in the BOT project because it may impose detailed requirements to be incorporated the concession, construction and other agreements. Pledges of project assets as well as sponsor and other guarantees will be put in place as security for the loan.
The writer is a former Secretary, Ministry of Health and Family Welfare, Energy and Mineral Resources Division and Ministry of Information. [email protected]