Key issues in PPP arrangements

Financing BOT/BOO (Build, Operate and Transfer/Build, Own and Operate)   inevitably involves highly commercial and financial structures. There are many reasons for this. Partly, this is attributable to the many participants involved. Partly, also this complexity stems from the wide range of risks associated with the project, which have to be allocated with great precision. A third factor is the long-term nature of BOT schemes which means that the arrangements must be flexible and responsive to circumstances changing over time. The complexity is also increased by the need to document all agreements among the parties in great details within voluminous documents that are usually all closely interrelated and directly dependent upon one another. There are many important issues that need to be given due attention for a successful BOT programme. The key issues which dominate the considerations of the investors/lenders and influence their decision on undertaking a BOT project are the following:
Political support: Political will and commitment is one of the most fundamental requirements for successful implementation of projects under PPP (Public-Private Partnership). The political authority must lend full and sustained support in this regard. Faith in a stable development policy of this kind must survive in the long term, or the private sector will not commit itself.
Bureaucratic support: The host government must provide powerful bureaucratic support to be able to resolve various regulatory and other issues as they arise. The host government must assign the responsibility to sufficiently trained and experienced personnel who understand the complexities of a BOT scheme and are able to negotiate its terms. They should have sufficient authority to commit their governments or government agencies to the terms of the transaction in a timely manner
Assured supplies: Adequate and assured supply of raw materials/feedstock is one of the vital considerations for the sponsors of PPP projects where such inputs are essential ingredients for the project. For power projects, for example, the sponsor would like to be assured of sufficient and sustained supply of energy like gas, coal, etc. throughout the life of the project. Such supplies have to be assured through long-term contracts with utility companies/departments and the host government has to ensure that the contractual obligations will be fulfilled.
Host government contribution/ participation:  In most BOT/BOO projects, the host government will have to provide some level of logistical support. For example, the government may provide the land on which the project will be built, road, rail or port facilities, transmission lines to take power from a power plant, raw-materials and utilities under long-term supply contracts or even free supplies of energy (e.g. locally mined coal) over the life of the project. The public sector will often need to contribute certain assets to the PPP structure (or the right to use them) to make the project feasible and financeable.
Assured revenues:  Assured revenue is key consideration for the private sector investors and lenders and the finananceability of any project ultimately depends upon the certainty and creditworthiness of its revenue source. For example, in power projects, the revenue source is power tariff paid by the power purchasers; in a road or bridge project, toll collected from the motorists. Whatever may be the nature of the project, revenue to be received by the project company for its services/products will be one of the most important terms to be negotiated.
It is essential for the host government to ensure that the price of the services/products provided by the project company remains within politically acceptable parameters. Affordability of the users of the facility needs also to be taken into account. Since BOT projects are large in nature affecting large number of people and most infrastructure services/products are perceived as basic to the lives of people, politically unacceptable prices for such services/products may have significantly negative political consequences.
Currency convertibility:  In a typical BOT/BOO project, both the lenders and equity investors who have invested in foreign currency will want firm assurances that they will be able to recoup their original investment, together with interest or dividends, in the same or a comparable foreign currency, and that they will be able to do so at a reasonable exchange rate. The host government, therefore, must be prepared to provide some mechanism to assure the foreign investors that they will be authorised to convert local currency earnings into foreign currency, that there will be enough foreign currency available when the time comes for the host country or its banking system to make the conversion and that the rate will not be unduly unfavourable.
Sovereign guarantees:  Although host governments will not generally furnish a sovereign guarantee for loan repayment, they will be expected to provide sovereign guarantee or equivalent assurances for some aspects of the project. For instance, if a government-owned corporation has contracted with the project company or when a government utility enters into a long-term off-take contract or undertakes the long-term supply of fuel or energy to the project, the government itself will often be required to guarantee the utility's performance. Moreover, the basic concession agreement between the host government and the project company will normally contain numerous obligations undertaken by the host government which will be backed by its "full faith and credit".
Protection from competition:  Generally, the host government may be required to provide some assurances as to the competitive environment in which a BOT project will operate. In the case of a toll road project, for instance, the project sponsors would normally want assurances as to any parallel toll or non-toll roads which might be built during the concession period.
Approval, licences: All necessary concessions, permits, licences and authorisations must be obtainable in a timely and non-discriminatory manner and that the private sector sponsors must have confidence in the enforceability of such approvals against the government and the third parties in accordance with their terms and that changes are made, if any, following due process.
Legal environment: The laws and regulations under which the BOT project operates must be ascertainable, predictable, reliable, credible and must be compatible with the project's private nature. The law must be clear as to the right of private parties to own and operate the project and the project assets. Sufficient legislation and regulation should be there to assure protection of private investment. Ideally, a robust system of commercial laws needs to be in place, allowing corporate, commercial and financial activities to thrive. Foreign and capital investment must be protected, commercial contracts must be enforceable. To create effective PPPs, a country needs appropriate legislation, institutional capacity and effective project screening. Legislation should authorise, among other things:
* State and regional agency selection and procurement of projects;
* "Best value" selection;
* "Best project plan" selection;
* Unsolicited proposals, followed by request for competing proposals;
* Pre-qualification of proposer teams;
* Post-selection negotiation;
* Long-term private contracts;
* Flexible agreement terms and conditions; and,
* A range of financing tools.
Institutional capacity: In the absence of any designated authority with defined procedures the potential investors as well as the implementing agencies will not be aware of what to be done, with a proposed PPP infrastructure project. The case becomes bewildering with unsolicited proposals. A focal point/unit with in the government needs to be created which will be required to address the lack of government capacity in private infrastructure promotion and marketing. The focal point/unit may be primarily responsible for:
a. Identifying, in cooperation with implementing agencies, appropriate project candidates and profiles that may be suitable to be pursued on a BOO, BOT or other basis, and structure and prepare the project for bid and tender in order to build an inventory of viable projects.
b. Ensuring that proposed projects meet established socio-economic technical and environmental policy criteria.
c. Ensuring that proposed projects conform to governing legislation and prescribed rules and procedures.
d. Administer, working with the relevant overseeing ministry and key implementing line agencies, the process of project development.
e. Negotiate, with input from relevant overseeing ministry and key implementing agencies, project proposals and provide recommendations on decisions to accept, reject or table projects.
f. Monitoring approved projects.
g. Marketing of PPP projects to investors and financial institutions.
 Equally important is the staffing of the focal point which will be required to plan, market and manage the detailed process of PPP projects. In most countries, consultants were utilised to assist in the stages of project development and program management. Of course, as staff became more and more familiar with the issues in PPP project planning, marketing, management and implementation, the role of foreign adviser was either shifted or phased out over time. The Unit should recruit the best and the brightest. Building institutional capacity to deliver PPPs requires:
* A mechanism to facilitate the public-private partnership;
* Institutional commitments and leadership;
* Dedicated staff with can-do attitude and a willingness to do things differently and,
* Experienced consultant support.
Concession period: The private sector sponsors of PPP projects would look for a concession period long enough to enable them to repay the debt with interest thereon as well as to earn a reasonable dividend for the equity investors. The concession period generally ranges from 20 to 30 years (excluding construction period) in most BOT projects. However, the length of the concession period may vary on case to case basis. Private sector sponsors of the BOT projects would try to negotiate a longer term of concession and the host government needs to grant a reasonable concession period to give sufficient comfort to the private sector investors in undertaking the projects.
The writer is former Secretary, Ministry of Health and Family Welfare, Energy and Mineral Resources Division and                 Ministry of Information.                       [email protected]