An infrastructure project may be carried out through either conventional public financing (a "public infrastructure project") or private financing (a "private infrastructure project"). Public infrastructure projects are typically financed, owned and operated by government agencies. A government agency is responsible for executing and operating a project after its commissioning. Since the Government owns the project, the implementing agency of the concerned ministry acts as the sponsor or developer as well as the operator of the project. The implementation of a public infrastructure project can be represented by the following phases:
(a) The development phase. This involves project identification and its structuring, choice of technology, preparing concept papers, conducting feasibility studies, seeking government and donor financing, and facility construction.
(b) The operational phase. This concerns operating the facility, collection of revenues and timely maintenance of the assets.
It is now widely accepted that a government agency in most countries is unable to efficiently operate an infrastructure facility in the operational phase. There could be many reasons for this inefficiency, including lack of business motivation, low revenue collection arising from high system losses or inability to collect payments from sister government agencies and deterioration of assets due to lack of timely maintenance. However, what is generally not easily perceived is that a government agency may also not be efficient in the role of a project developer during the development phase. Some of the reasons for government being a poor developer are provided below:
(a) Inappropriate project identification;
(b) Lack of experience and low in-house skills in project development;
(c) Lack of commercial focus;
(d) Change in project personnel;
(e) Vested interests;
(f) Undue donor influence;
(g) Slow engagement of consultants.
The poor performance of an operator in the operational phase can be clearly evidenced by operating losses or an unsatisfactory level of service. However, much of the poor performance could be due to faults at the project development stage. Critical activities at the development stage such as estimation of demand, project structuring, choice of technology and financing arrangements could seriously affect the outcome of a project. Poor project development could manifest itself in time overruns (usually referred to as implementation delay) and cost overruns, higher operating cost and lower revenue earnings. The achievement of a project's objectives, therefore, depends greatly on the performance of project development activities.
A private infrastructure project is defined as one in which the development, engineering, financing, procurement, construction and commissioning are carried out through a private sector developer, investor or sponsor (herein called the "outside sponsor"). Such a project is usually project-financed, also called off-balance sheet financing. The project assets and cash flows from it are used for debt financing. This type of financing differs from corporate financing or sovereign financing, which is done on the basis of the borrowers' balance sheet. Project financing usually entails detailed contractual relationships and obligations. In this respect, the examination of the fundamentals of a project under project financing arrangements for a private infrastructure project is far superior when compared with a public sector project.
However, as government restrictions generally apply to entry into the infrastructure sectors, an outside sponsor cannot carry out all the required activities in the project development phase without the approval of the Government. For a public infrastructure project, the participation of an outside sponsor or the private sector requires the government agency to bid out the project. But in order to bid out a project, it has to be developed first. The activities in the development phase relate to project identification and structuring, feasibility study, development of a contractual framework, allocation of risks and negotiation with the outside sponsor, which require specialist skills within the government agency. However, the required skills and capacity to undertake these activities may not always be available to government agencies dealing with infrastructure projects. Many Governments have established a special unit in government that can play the role of the inside sponsor to address the capacity problem of the public sector.
A non-infrastructure project, however, can be taken up by a private sector investor at any time, provided normal government approvals are obtained. There is no contractual link between the government and the private investors. A private investor can undertake a non-infrastructure project in accordance with the market demand and its assessment. As there is no bidding requirement for non-infrastructure projects, an investor can take up a non-infrastructure project, for example a cement factory, at any time.
However, private investors are not "free" to undertake an infrastructure project whenever they want or even when demand for such a facility exists. For example, despite an acute shortage of power in the country, private investors cannot build power plants until the Government requests bids or the market is unbundled. The Government has to bid out infrastructure projects (neglecting unsolicited proposals which are non-transparent). Without the bidding process, private investors cannot come forward. This is the central bottleneck to all private sector investment in infrastructure. Removing this bottleneck could achieve a much greater level of private participation in the infrastructure sector.
There is also a general lack of understanding about the procedural matters in the promotion, selection and approval of private infrastructure projects. In the absence of a special facilitation unit, the procedures followed by agencies are often different, which creates confusion in the minds of investors. Furthermore, planning and implementation of private sector infrastructure projects need to be integrated with the national planning process in order to ensure complementarity between private sector and public sector projects and optimum allocation of resources across all sectors. The need for an inside sponsor or a private sector participation unit arises as a means to accomplish these objectives.