Public Private Partnership

The term publicprivate partnership describes a range of possible relationships among public and private entities in the context of infrastructure and other services. Other terms used for this type of activity include private sector participation (PSP and privati!ation. "hile the three terms have often been used interchangeably# there are differences$ PPPs present a frame%or& that %hile engaging the private sector ac&no%ledge and structure the role for government in ensuring that social obligations are met and successful sector reforms and public investments achieved. ' strong PPP allocates the tas&s# obligations# and ris&s among the public and private partners in an optimal %ay. The public partners in a PPP are government entities# including ministries# departments# municipalities# or state(o%ned enterprises. The private partners can be local or international and may include businesses or investors %ith technical or financial expertise relevant to the pro)ect. *ncreasingly# PPPs may also include nongovernment organi!ations (+,Os and-or community(based organi!ations (./Os %ho represent sta&eholders directly affected by the pro)ect. 0ffective PPPs recogni!e that the public and the private sectors each have certain advantages# relative to the other# in performing specific tas&s. The government1s contribution to a PPP may ta&e the form of capital for investment (available through tax revenue # a transfer of assets# or other commitments or in(&ind contributions that support the partnership. The government also provides social responsibility# environmental a%areness# local &no%ledge# and an ability to mobili!e political support. The private sector1s role in the partnership is to ma&e use of its expertise in commerce# management# operations# and innovation to run the business efficiently. The private partner may also contribute investment capital depending on the form of contract. The structure of the partnership should be designed to allocate ris&s to the partners %ho are best able to manage those ris&s and thus minimi!e costs %hile improving performance. PSP is a term often used interchangeably %ith PPPs. 2o%ever# PSP contracts transfer obligations to the private sector rather than emphasi!ing the opportunity for partner( ship. *n the mid to the late 3445s# there %as a slo%do%n in publicprivate contracting in infrastructure sectors# %hich %as largely precipitated by a social bac&lash against the perceived preference for the private sector over the public sector in delivering infrastructure services in developing countries. To some degree# the social bac&lash %as rooted in confusion bet%een PSP and privati!ation. Some PSP schemes %ere overly ambitious and the social agenda %as overloo&ed# leading to legitimate public concerns. The critical analysis of PSP experience has led to the design of a ne% generation of transactions# %hich are no% more commonly &no%n as PPPs. Privati!ation involves the sale of shares or o%nership in a company or the sale of operating assets or services o%ned by the public sector. Privati!ation is most common and more %idely accepted in sectors that are not traditionally considered public services# such as manufacturing# construction# etc. "hen privati!ation occurs in the infrastructure or utilities sectors# it is usually accompanied by sector(specific regulatory arrangements to ta&e account of social and policy concerns related to the sale# and continuing operation of assets used for public services.

Different forms of PPP:

Service Contract: Service contract means a contract that directly engages the time and effort of a contractor %hose primary purpose is to perform an identifiable tas& rather than to furnish an end item of supply. ' service contract may be either a no personal or personal contract. *t can also cover services performed by either professional or nonprofessional personnel %hether on an individual or organi!ational basis. ' service agreement is a type of agreement that falls under the broader realm of contract la%. *t defines the relationship bet%een a customer and a service provider. *n short# a service agreement outlines %hat services are to be provided# %hen they are to be provided# their costs# and the responsibilities of each party involved in the agreement. .ontract la% varies from country to country and region to region. 's such# the exact# legally recogni!ed definition of a service agreement li&e%ise varies. 0ven %ithin a single country# such as the 6nited States# the precise definition changes slightly# depending on if service agreements are determined by common la% or specific statute. *n terms of legal definitions and their differences in regard to a service agreement# the most common difference rests in %hether the agreement is considered enforceable by a court of la%. 6nder common la%# parties are free to agree to their o%n terms %ith regard to a service agreement or other arrangement. The only re7uirements are compensation and mutual assent# %hich is reached through offer and acceptance. 6nder precise contract la%# legally binding agreements must conform to standards and include mutual obligations# include remedies for breach# and adhere to )urisdictional la%. Some of the examples in %hich service contracts are found include the follo%ing$ (3 8aintenance# overhaul# repair# servicing# rehabilitation# salvage# moderni!ation# or modification of supplies# systems# or e7uipment. (9 :outine recurring maintenance of real property. (; 2ouse&eeping and base services. (< 'dvisory and assistance services. (= Operation of ,overnment(o%ned e7uipment# real property# and systems. (> .ommunications services. (? 'rchitect(0ngineering (@ Transportation and related services (4 :esearch and development

Management Contract: ' management contract is an arrangement under %hich operational control of an enterprise is vested by contract in a separate enterprise %hich performs the necessary managerial functions in return for a fee. 8anagement contracts involve not )ust selling a method of doing things (as %ith franchising or licensing but involve actually doing them. ' management contract can involve a %ide range of functions# such as technical operation of a production facility# management of personnel# accounting# mar&eting services and training. 8anagement contracts have been used to a %ide extent in the airline industry# and %hen foreign government action restricts other entry methods. 8anagement contracts are often formed %here there is a lac& of local s&ills to run a pro)ect. *t is an alternative to foreign direct investment as it does not involve as high ris& and can yield higher returns for the company. ' typical management contract may contain a cancellation provision through %hich either party may %ithdra% from the contract# %ith penalties imposed on the party that initiates the cancellation# unless it can sho% that the other party has defaulted on terms that %ere included in the agreement. The cancellation# %hile re7uiring a fee that must be paid to the management company# although it does avoid other problems# can result in a surplus of &ey management personnel and a public relations problem. Traditionally# management contract fees have been specified rates that are set each year. 8ore recently# this arrangement has changed to a graduated fee structure tied to the financial success of a hotel. *n some cases# a maximum cap on the total management fee is negotiated by the o%ners. The management fee can be calculated in different %ays. *f it is based solely on total revenue# the operator can spend money freely# particularly on advertising. *n this case# because the revenues of the property are high# a high fee is achieved# even if the hotel might not sho% a profit. On the other hand# calculation of the fee on the basis of the gross operating profit places pressure on the operator to manage the hotel profitably. "hen results are poor# the management company may find that it is not recovering its costs. ' combination fee based on a combination of total revenue and gross operating profit is typically the most e7uitable arrangement for both the operator and the o%ner. The follo%ing contract is an example of a management agreement bet%een an artist1s personal manager and an artist. Such agreements are al%ays sub)ect to extensive negotiation# %hich may vary# based on individual circumstances applying to both the manager and the artist. Aactors such as pre(existing success on the part of the artist# or other artist management commitments on the part of the manager should help guide negotiations %ith respect to such contract points as percentages and the length of the term. 'l%ays consult a respected music industry attorney before signing a contract This agreement sets forth a broad range of agreed upon parameters related to the structure and details of an artist1s career and the various sources of revenue generated. .hoosing a personal manager is a critical moment in an artist1s career and a document such as this indicates in detail many important financial and informational guidelines that %ill govern the legal aspects of a relationship bet%een an artist and manager. :ead through a document li&e

this personally# even if you have an excellent attorney representing you (%hich you should # and be sure that you are clearly informed and comfortable about the process of being represented by an artist manager as it is %ritten in your agreement.

Lease Contact: ' lease contract is an agreement# usually %ritten# bet%een the o%ner of a property and a renter %ho desires to have temporary possession of the property. 's a minimum# the agreement identifies the parties# the property# the term of the rental# and the amount of rent for the term. *n addition to the basics of a rental (%ho# %hat# %hen# ho% much # a housing rental may go into much more detail on these and other issues. ' contractual agreement by %hich one party conveys an estate in property to another party# for a limited period# sub)ect to various conditions# in exchange for something of value# but still retains o%nership. ' lease is created %hen a property o%ner (the offeror ma&es an offer to another party (the offeree # and the offeree accepts the offer. The offer must authori!e the offeree to possess and use property o%ned by the offeror for a certain period of time %ithout gaining o%nership. ' lease must also contain consideration# %hich means that the offeree must give something of value to the offeror. .onsideration usually consists of money# but other things of value may be given to the offeror. Ainally# the offeror must deliver the property to the offeree or ma&e the property available to the offeree. "hen a lease is formed# the property o%ner is called the lessor# and the user of the property is called the lessee. ,enerally# a lease may be %ritten or oral# but a lease for certain types of property must be in %riting and signed by both parties. Aor example# if a lessee see&s to lease real property (land or buildings for more than one year# the lease must be in %riting. Some leases must be %ritten# signed# and recorded in a registry of deeds. Such leases usually concern real property that %ill be leased for a period of more than three years. Built Operate Transfers (BOT): /uild operate transfer (/OT or build o%n operate transfer (/OOT is a form of pro)ect financing# %herein a private entity receives a concession from the private or public sector to finance# design# construct# and operate a facility stated in the concession contract. This enables the pro)ect proponent to recover its investment# operating and maintenance expenses in the pro)ect. Bue to the long(term nature of the arrangement# the fees are usually raised during the concession period. The rate of increase is often tied to a combination of internal and external variables# allo%ing the proponent to reach a satisfactory internal rate of return for its investment. ' /OT Pro)ect (build operate transfer pro)ect is typically used to develop a discrete asset rather than a %hole net%or& and is generally entirely ne% or ,reenfield in nature (although refurbishment may be involved . *n a /OT Pro)ect the pro)ect company or operator generally obtains its revenues through a fee charged to the utility- government rather than tariffs charged to consumers. ' number of pro)ects are called concessions# such as toll road pro)ects# %hich are ne% build and have a number of similarities to /OTs

Aor example the public administration# delegates to a private sector entity to design and build infrastructure and to operate and maintain these facilities for a certain period. Buring this period the private party has the responsibility to raise the finance for the pro)ect and is entitled to retain all revenues generated by the pro)ect and is the o%ner of the regarded facility. The facility %ill be then transferred to the public administration at the end of the concession# %ithout any remuneration of the private entity involved. Some or even all of the follo%ing different parties could be involved in any /OT pro)ect$

The host government$ +ormally# the government is the initiator of the infrastructure pro)ect and decides if the /OT model is appropriate to meet its needs. *n addition# the political and economic circumstances are main factors for this decision. The government provides normally support for the pro)ect in some form. (provision of the landchanged la%s . The concessionaire$ The pro)ect sponsors %ho act as concessionaire create a special purpose entity %hich is capitali!ed through their financial contributions. Cending ban&s$ 8ost /OT pro)ect are funded to a big extent by commercial debt. The ban& %ill be expected to finance the pro)ect on non(recourse basis meaning that it has recourse to the special purpose entity and all its assets for the repayment of the debt. Other lenders$ The special purpose entity might have other lenders such as national or regional development ban&s

is!s "nvolve# in Public Private Partnership:

There are a number of ris&s associated %ith Public Private Partnerships$ Bevelopment# bidding and ongoing costs in PPP pro)ects are li&ely to be greater than for traditional government procurement processes ( the government should therefore determine %hether the greater costs involved are )ustified. ' number of the PPP and implementation units around the %orld have developed methods for analy!ing these costs and loo&ing at Dalue for 8oney# e.g.# 6E Treasury. Aor a broader discussion of Dalue for 8oney# go to Ainancing There is a cost attached to debt "hile private sector can ma&e it easier to get finance# finance %ill only be available %here the operating cash flo%s of the pro)ect company are expected to provide a return on investment (i.e.# the cost has to be borne either by the customers or the government through subsidies# etc. Some pro)ects may be easier to finance than others (if there is proven technology involved and- or the extent of the private sectors obligations and liability is clearly identifiable # some pro)ects %ill generate revenue in local currency only (e.g. %ater pro)ects %hile others (e.g. ports and airports %ill provide currency in dollar or other international currency and so constraints of local finance mar&ets may have less impact

Some pro)ects may be more politically or socially challenging to introduce and implement than others ( particularly if there is an existing public sector %or&force that

fears being transferred to the private sector# if significant tariff increases are re7uired to ma&e the pro)ect viable# if there are significant land or resettlement issues# etc. There is no unlimited ris& bearing private firms (and their lenders %ill be cautious about accepting ma)or ris&s beyond their control# such as exchange rate ris&s-ris& of existing assets. *f they bear these ris&s then their price for the service %ill reflect this. Private firms %ill also %ant to &no% that the rules of the game are to be respected by government as regards underta&ings to increase tariffs-fair regulation# etc. Private sector %ill also expect a significant level of control over operations if it is to accept significant ris&s Private sector %ill do %hat it is paid to do and no more than that therefore incentives and performance re7uirements need to be clearly set out in the contract. Aocus should be on performance re7uirements that are out(put based and relatively easy to monitor ,overnment responsibility continues citi!ens %ill continue to hold government accountable for 7uality of utility services. ,overnment %ill also need to retain sufficient expertise# %hether the implementing agency and- or via a regulatory body# to be able to understand the PPP arrangements# to carry out its o%n obligations under the PPP agreement and to monitor performance of the private sector and enforce its obligations. The private sector is li&ely to have more expertise and after a short time have an advantage in the data relating to the pro)ect. *t is important to ensure that there are clear and detailed reporting re7uirements imposed on the private operator to reduce this potential imbalance ' clear legal and regulatory frame%or& is crucial to achieving a sustainable solution (for more# go to Cegislation and :egulation ,iven the long(term nature of these pro)ects and the complexity associated# it is difficult to identify all possible contingencies during pro)ect development and events and issues may arise that %ere not anticipated in the documents or by the parties at the time of the contract. *t is more li&ely than not that the parties %ill need to renegotiate the contract to accommodate these contingencies. *t is also possible that some of the pro)ects may fail or may be terminated prior to the pro)ected term of the pro)ect# for a number of reasons including changes in government policy# failure by the private operator or the government to perform their obligations or indeed due to external circumstances such as force ma)eure. "hile some of these issues %ill be able to be addressed in the PPP agreement# it is li&ely that some of them %ill need to be managed during the course of the pro)ect.

is!s mitigation in Public Private Partnership:

0fficient ris& allocation and mitigation are central to bringing infrastructure pro)ects to financial closure and to providing appropriate incentives during construction and operation. Pro)ects may still be financeable if some ris&s are not allocated according to this principle# but costs and ultimate tariffs %ill be higher. Sponsors and lenders expect higher re%ards for assuming higher ris&s. :is& in any transaction cannot be eliminated. *t al%ays exists for both parties to the contract. 2o%ever# ris& can be managed to an acceptable level# using the follo%ing protocol$ $% "#entif& the ris!: "hat events or actions %ould adversely affect the cost# performance# timing or viability of a pro)ectF 0.g. %hat %ould happen to the pro)ect if the inflation rate increased significantlyF '% Determine the severit& of the ris!: "hat is the specific cost# time delay or reduction in performance if this event happensF (% )llocate the ris!: The golden rule of ris& management in contracts is that a ris& should be managed by the party best able to manage that ris&. Shifting ris& to party not able to manage that particular ris& costs more# and creates even more ris& to a pro)ect. *% Mitigate the ris!: Betermine %hat must be done to reduce the li&elihood of an adverse event. 0.g. construct all structures above the 355 year flood elevation to reduce the li&elihood of flood damage. +% Price the ris!: Betermine the cost of addressing the ris&. 0.g. the cost of flood insurance. These steps should occur in a se7uential manner# but because the procurement process is rarely a linear process# pro)ect teams should expect that the ris& management process %ill accordingly be an iterative process of identifying# analy!ing and evaluating ris& as the pro)ect progresses in its development. :is& management is a continuous process and completion of one of the steps should not prevent a pro)ect team from going bac& to apply the same steps in instances %here a ne% issue has arisen or to gain further insight into a particular ris&.

CO,CL-S"O,
It concludes that the more complete transfer of risk that is possible under a PPP, results in better project evaluation and stronger incentives to innovate and minimize whole of life costs. But these advantages must be balanced against the large contract negotiation costs, the inflexibilities of a long-term contract and the reduced competitive pressures on performance after the contract has been entered into compared with a situation where the contract is re-tendered periodicall! over the life of the infrastructure".