WHAT IS PUBLIC- PRIVATE PARTNERSHIP?

Public-Private Partnerships (PPPs) aim at financing, designing, implementing and operating public sector facilities and services. Their key characteristics include: (a) Long-term (sometimes up to 30 years) service provisions; (b) The transfer of risk to the private sector; and (c) Different forms of long-term contracts drawn up between legal entities and public authorities. They refer to innovative methods used by the public sector to contract with the private sector, who bring their capital and their ability to deliver projects on time and to budget, while the public sector retains the responsibility to provide these services to the public in a way that benefits the public and delivers economic development and an improvement in the quality of life.

WHAT ARE DIFFERENT TYPES ?

There are various types of PPPs, established for different reasons, across a wide range of market segments, reflecting the different needs of governments for infrastructure services. Although the types vary, two broad categories of PPPs can be identified: the institutionalized kind that refers to all forms of joint ventures between public and private stakeholders; and contractual PPPs. With a strong upsurge recently of the contractual type consisting of the concession model where the user pays Concessions, which have the longest history of public-private financing, are most associated with PPPs. By bringing private sector management, private funding and private sector know- how into the public sector, concessions have become the most established form of this kind of financing. They are contractual arrangements whereby a facility is given by the public to the private sector, which then operates the PPP for a certain period of time. Oftentimes, this also means building and designing the facility as well. The normal terminology for these contracts describes more or less the functions they cover. Contracts that concern the largest number of functions are "Concession" and "Design, Build, Finance and Operate" contracts, since they cover all the above-mentioned elements: namely finance, design, construction, management and maintenance. They are often financed by user fees (e.g. for drinking water, gas and electricity, public transport etc. but not for social PPPs e.g. health, prisons, courts, education, and urban roads, as well as defence). And the Private Finance Initiative (PFI) Model where the -public sector pays Under PFI schemes, privately financed contracts for public facilities and public works cover the same elements but in general are paid, for practical reasons, by a public authority and not by private users (public lighting, hospitals, schools, roads with shadow tolls, i.e., payments based on traffic volume, paid by the government in lieu of tolls). The capital element of the funding enabling the local authority to pay the private sector for these projects is given by central government in the form of what are known as PFI "credits". PFI is not just a different way of borrowing money; the loans are paid back over the period of the PFI scheme by the service provider who is at risk if the service is not delivered to standard throughout. The local authority then procures a partner to carry out the scheme and transfers detailed control and in theory the risk, in the project to the partner. The cost of this borrowing as a result is higher than normal government borrowing (but cheaper when better management of risks and efficiency of service delivery is taken into account). Currently, it does not always appear as borrowing in public accounts; although how it appears in public accounts may be changing as well.

... Based around different types of contract and risk transfer. There are a range of PPP models that allocate responsibilities and risks between the public and private partners in different ways. The following terms are commonly used to describe typical partnership agreements: Buy-Build-Operate (BBO): Transfer of a public asset to a private or quasi-public entity usually under contract that the assets are to be upgraded and operated for a specified period of time. Public control is exercised through the contract at the time of transfer. Build-Own-Operate (BOO): The private sector finances, builds, owns and operates a facility or service in perpetuity. The public constraints are stated in the original agreement and through on-going regulatory authority. Build-Own-Operate-Transfer (BOOT): A private entity receives a franchise to finance, design, build and operate a facility (and to charge user fees) for a specified period, after which ownership is transferred back to the public sector. Build-Operate-Transfer (BOT): The private sector designs, finances and constructs a new facility under a long-term Concession contract, and operates the facility during the term of the Concession after which ownership is transferred back to the public sector if not already transferred upon completion of the facility. In fact, such a form covers BOOT and BLOT with the sole difference being the ownership of the facility. Build-Lease-Operate-Transfer (BLOT): A private entity receives a franchise to finance, design, build and operate a leased facility (and to charge user fees) for the lease period, against payment of a rent. Design-Build-Finance-Operate (DBFO): The private sector designs, finances and constructs a new facility under a long-term lease, and operates the facility during the term of the lease. The private partner transfers the new facility to the public sector at the end of the lease term. Finance Only: A private entity, usually a financial services company, funds a project directly or uses various mechanisms such as a long-term lease or bond issue. Operation & Maintenance Contract (O & M): A private operator, under contract, operates a publicly owned asset for a specified term. Ownership of the asset remains with the public entity. (Many do not consider O&M's to be within the spectrum of PPPs and consider such contracts as service contracts.) Design-Build (DB): The private sector designs and builds infrastructure to meet public sector performance specifications, often for a fixed price, turnkey basis, so the risk of cost overruns is transferred to the private sector. (Many do not consider DB's to be within the spectrum of PPPs and consider such contracts as public works contracts.) Operation License: A private operator receives a license or rights to operate a public service, usually for a specified term. This is often used in IT projects. PPPs should not be confused with privatization PPPs are not privatization. Under PPPs, accountability for delivery of the public service is retained by the public sector whereas under a privatization, accountability moves across to the private sector (the public sector might retain some regulatory price control). Under PPPs, there is no transfer of ownership and the public sector remains accountable.

...Nor public procurement. PPPs differ also from public procurement. Public procurement refers to the purchase, lease, rental or hire of a good or service by a state, regional or local authority. Procurement is chosen because of the simplicity of goods or services desired, the possibility to choose from numerous providers, and the wish to contain costs. PPPs are more complex, frequently larger in financing requirements, and are longterm as opposed to one-off relationships. PPPs frequently provide the developer with the right to operate over an extended term, to charge fees to users and to assume key responsibilities e.g. design, construction, finance, technical and commercial operation, maintenance, etc. However, PPPs are related to traditional public procurements in that PPP providers are often selected on the basis of public procurement procedures. PPPs have emerged as an important tool to bridge the infrastructure deficit Many citizens around the world and especially in transition economies face an infrastructure deficit, as evidenced by congested roads, poorly-maintained transit systems and recreational facilities, deteriorated schools, hospitals, and water and water treatment systems, and other infrastructure assets which are either non existent or in urgent need of repair. These problems in turn impose huge costs on societies, from lessened productivity and reduced competitiveness, to an increased number of accidents, health problems and lower life expectancy. Many governments have come to realize that the tax base alone cannot fund the huge needs for infrastructure. In some countries there is an acute need to rehabilitate existing infrastructure that was built decades ago. Furthermore, there is a critical challenge to find the funding for so called greenfield projects specifically the huge social projects required from rapidly growing economies and ageing populations. PPPs are one option to meet this challenge. Which can provide a number of specific benefits to the public Better value: The decision by government to pursue PPP delivery is often based on analysis to determine that the PPP approach will deliver value to the public through one or more of the following:

(a) Lower cost; (b) Higher levels of service; and (c) Reduced risk Access to capital: PPPs allow governments to access alternative private sources of capital, allowing important and urgent projects to proceed when otherwise they may not be possible. Certainty of outcomes: Certainty of outcomes are increased both in terms of on time delivery of projects (the private partner is strongly motivated to complete the project as early as possible to control its costs and so that the payment stream can commence) and in terms of on-budget delivery of projects (the payment scheduled is fixed before construction commences, protecting the public from exposure to cost overruns). Off balance sheet borrowing: Debt financing that is not shown on the face of the balance sheet is called off balance sheet financing. Off balance sheet financing allows a country to borrow without affecting calculations of measures of its indebtedness. Innovation: By combining the unique motivations and skills of both the public and private sectors and through a competitive process for contract award, there is a high potential for innovative approaches to public infrastructure delivery with PPPs. PPPs offer new financing models The private sector brings financing to PPPs, which provides specialized financing that is different from both public finance and corporate finance. As noted above, PPPs are often funded through government budgets but may also be partially or completely funded by the users of the service (e.g. toll road). Project finance is for the most part the means by which PPPs are funded. The objective of using project financing to raise capital is to create a structure that is bankable (of interest to investors) and to limit the stakeholders risk by diverting risks to parties that can better manage them. Project finance is based on the following characteristics: (a) Stand-alone project: the funding raised is for only one project; (b) Special purpose Project Company as the borrower: an independent legal vehicle (Project Company) is created to raise the funds required for the project; (c) High ratio of debt to equity (Gearing or leverage): the newly created project company usually has the minimum equity required to issue debt for a reasonable cost, with equity generally averaging between 10 to 30 per cent of the total capital required for infrastructure projects; (d) Lending based on project specific cash flow not corporate balance sheet: the project company borrows funds from lenders. The lenders look to the projected future revenue stream generated by the project and the project companys assets to repay all loans; and (e) Financial guarantees: the government does not provide a financial guarantee to lenders. Developers may provide guarantees often limited to their equity contributions. The private financier receives its payment from the income generated from the project or from the government. The growth of PPPs in countries occurs in distinct phases As seen in the table below, countries tend to go through a number of distinct phases before a PPP programme becomes fully operational. Most countries are at a first stage where the development of actual projects is still numerically small. Only at the third phase, where relatively few countries are

currently situated, does the programme become significant. At this stage countries will have developed the required institutions, e.g. the PPP unit, the capital markets as well as the know-how and expertise and can therefore turn their attention to more sophisticated projects and financial arrangements. Three stages of PPPs development Stage One Define policy framework Test legal viability Identify project pipeline Develop foundation concepts (PSCs etc) Apply lessons from earliest deals to other sectors Start to build marketplace Stage Two Introduce legislative reform Publish policy and practice guidelines Establish dedicated PPP units Refine PPP delivery models Continue to foster marketplace Expand project pipeline and extend to new sectors Leverage new sources of funds Stage Three Fully defined, comprehensive system established Legal impediments removed PPP models refined and reproduced Sophisticated risk allocation Committed deal flow Long-term political consensus Use of full-range of funding sources Thriving infrastructure investment market involving pension funds and private equity funds Well-trained civil service utilises PPP experiences

One of the purposes of this diagram is to demonstrate that countries need to move up the maturity curve gradually and resist the temptation to take on projects in areas where they are not ready. While PPPs hold benefits, they also present formidable challenges, and there is a risk that too fast a turnover of assets to the private partner, without the public sector providing the necessary scrutiny, may put in jeopardy the delivery of essential services to the general public. Indeed, governments should be wary of a headlong dash into projects without full knowledge of what has worked and what has not, which puts themselves at risk of repeating earlier mistakes in other countries.

 And presents institutional challenges The diagram also shows that the vast majority of governments are still at early stages in PPPs where their use is infrequent and uncommon. Indeed moving up the maturity curve is not automatic and PPPs have proved difficult to implement in many countries. The main reason for this is the need to develop institutions, processes, and procedures to deliver PPP projects. The lack of well performing institutions in many countries is reflected in several things such as the protracted length of negotiations between public and private partners, the slowness of reaching closure, the lack of flexibility in risksharing, and the cancellation of many projects with all the resultant waste. Institutional certainty moreover is critically important in success, as private investors will readily shy away from an opportunity where they are asked to take on a project that contains unforeseen risks. These institutions consist of two types: the formal, meaning the legal and regulatory frameworks and policy coherence, the enabling institutions for PPPs, such as PPP units, and the informal, such as the forums where public and private sectors meet to smooth over the misunderstandings and frictions that can arise on specific projects. The challenge in PPPs then is developing the institutions, procedures and processes for effective PPP delivery. This can be defined as building governance. If governments are to move up the maturity curve they will have to devote considerable effort to improving governance. Along with building public sector expertise. The challenge is not just to create new institutions but also to develop the public expertise to administer projects. PPPs demand a strong public sector, which is able to adopt a new role with new abilities. In particular, strong PPP systems require managers who are not only skilled in making partnerships and managing networks of different partners, but also skilled in negotiation, contract management and risk analysis. Indeed, asking private partners to deliver government services places more, not less, responsibility on public officials.

PRINCIPLES OF GOOD GOVERNANCE IN PPPs

Good governance matters Governance matters in PPPs if governments are to climb the maturity curve. This process requires putting into place the enabling institutions, procedures and processes surrounding PPPs in order to fully benefit from PPPs. This means also helping governments to play a critical role in the process and involving citizens as well as other stakeholders. Many governments, regional, international organisations and NGOs now recognize the importance of governance for economic development. Even while it is not an easy concept to define. Governance refers to the processes in government actions and how things are done, not just what is done. It covers the quality of institutions and their effectiveness in translating policy into successful implementation. Institutions are in general understood to be the bodies setting formal rules (property rights, rule of law etc.) while taking into account informal constraints (beliefs, traditions and social norms) that shape human interactions. Good governance involves some key principles Good governance is open to much interpretation but overall six core principles have become widely accepted: (a) Participation: the degree of involvement of all stakeholders;

(b) Decency: the degree to which the formation and stewardship of the rules is undertaken without harming or causing grievance to people; (c) Transparency: the degree of clarity and openness with which decisions are made; (d) Accountability: the extent to which political actors are responsible to society for what they say and do; (f) Efficiency: the extent to which limited human and financial resources are applied without waste, delay or corruption or without prejudicing future generations. That are played out in different arenas There 1. 2. 3. 4. 5. 6. 7. are also a number of governance arenas where these issues play out: Government: executive stewardship of the system as a whole; Public administration: where policies are implemented; Judiciary: where disputes are settled; Economic society: refers to state-market, public and private sectors; Political society: where societal interests are aggregated; Civil society: where citizens become aware of and address political issues; and Sustainable development: where environmental concerns are included.