INTRODUCTION

Governments worldwide have increasingly turned to the private sector to provide infrastructure services in energy and power, communication, transport and water sectors that were once delivered by the public sector. There are several reasons for this growing involvement of the private sector which include:

Why PPPs in infrastructure development

• Increased efficiency in project delivery and operation

• Availability of additional resources to meet the increasing needs of investment in infrastructure services

• Access to advanced technology

• Sustainable development in infrastructure facilities and services.

More recently, and as in other sectors of the economy, the policy shift towards a market economy has also led to a growing interest in public-private partnerships (PPPs) in infrastructure development.

Private participation in infrastructure is not new, however (see box 1). PPPs1 in their present forms may be viewed as a relatively new addition to an ever-evolving relationship between the public and private sectors. In recent years, more and more countries have come up with their own brand of PPP models and administrative arrangements for project implementation in line with their legal, social and administrative systems and which can help achieve political objectives of governments.

PPPs are not new

In a public and private partnership arrangement, each partner, usually through legally binding contract(s) or some other mechanism, agrees to share responsibilities related to implementation and/or operation and management of a project. This collaboration or partnership is built on the expertise of each partner that meets clearly defined public needs through the appropriate allocation of:2

Definition of PPP

• Resources

• Risks

• Rewards, and

• Responsibilities

What are shared between government and the private sector

The allocations of these elements and other aspects of PPP projects such as, details of implementation, termination, obligations, dispute resolution and payment arrangements are negotiated between the parties involved and are documented in written contract agreement(s) signed by them.

How the responsibilities and obligations documented

Box 1: Private participation in infrastructure is not new

The history of private sector participation in infrastructure development is quite old. Private sector participation in the transport sector, for example, dates back to seventeenth century canal and road concessions in Europe and the United States of America. Private companies built the American railways in the nineteenth century. Many early public transport systems in European and American cities were also developed by the private sector under various municipal charter or franchise arrangements with revenues coming from fares and land development.

The situation in many countries in Asia was not very different either. For example, railways in the Indian subcontinent were first introduced in 1853 through private initiatives. The Great Indian Peninsula Railway Company introduced the first railways in India near Mumbai with British capital and organization. Subsequently, other companies built railways in other parts mainly radiating inward from the three major port cities of Mumbai (Bombay), Chennai (Madras) and Kolkata (Calcutta). The then Government in India encouraged the setting up of railways by private investors under a scheme that guaranteed an annual return of 5 per cent. The Government also authorised the companies to acquire necessary land with compensation for the construction of the railway lines and railway establishments. Once completed, the company was passed under government ownership, but the operation remained under the control of the company that built them. This was essentially the build-transfer-operate PPP model of the present times. Most of the early municipal water and power supply systems in the Indian subcontinent were also built and operated by private operators under various agreements with the government.

Source:

http://en.wikipedia.org/wiki/History_ of rail transport in India
http://banglapedia.search.com.bd/HT/E 0007.htm and various other sources.

PPPs have become attractive to governments as an off-budget mechanism for infrastructure development as this arrangement may not require any immediate cash spending. The public sector’s other main advantages include the relief from the burden of the costs of design and construction, the transfer of certain risks to the private sector and the promise of better project design, construction and operation. The private sector considers an optimal whole life cycle costing for the project, which allows the government to get better value for money from the project. This is not possible in a conventional procurement as in such a case the design, construction, maintenance and operations are undertaken usually by different agencies.

Advantages of PPPs to government

There are significant differences between a conventional construction procurement project and a PPP project that need to be clearly understood. The main differences include:

• A PPP project is different from a conventional construction project and should not be developed and managed like a construction project.

• A PPP project is viable essentially when a robust business model3 can be developed.

Difference between PPPs and conventional projects

• The focus of a PPP project should not be on delivering a particular class/type of assets but on delivering specified services at defined levels.

• The risk allocation between the government and the private sector provider is much more complex than that in conventional construction procurement. Both parties should clearly understand the various risks involved and agree to an allocation of risks between them.

• A PPP contract generally has a much longer tenure than a construction contract. Problems may arise over the long contract tenure. Managing the relationship between the private provider and the contracting government agency over this long contract tenure is vital for the success of the PPP project.

• Government has no concern in PPPs. The truth is whether or not government has any direct participation in a PPP project, it always has a stake in it (see section IIIB).

• PPP is privatization. Privatization in the sense of full transfer of ownership is only one of the many models and is not commonly applied.

Misconception about PPPs

• Public sector has no control over the project. The truth, government always retains various forms of control through regulatory, legal and other measures.

• PPP projects are large. PPP projects do not always have to be large.

• PPP projects cannot be implemented by local bodies. In many countries local bodies have the legal authority to implement PPP projects and they have implemented such projects (in the Philippines, for example).

• PPPs are panacea to infrastructure development. Meeting all infrastructure needs through the PPP mechanism may not be feasible as they have many limitations (see below).

• PPP projects are less expensive. It may not be true if the higher cost of borrowed finance cannot be offset through efficiency gains (see Section III C).

• The poor do not benefit from PPPs. Depending on project, the poor may or may not directly benefit but much depends on the project design itself (see Section III D).

• Governments can always finance at a lower cost. In such a case, governments may not consider to implement the project through the PPP modality.

Higher growth of national economies in recent years have led to unprecedented demand for infrastructure services in producing goods and services and in maintaining supply and distribution chains efficient, reliable and cost-effective. PPPs have become important to meet the growing demand for infrastructure services in view of the fact that available funding from traditional sources in most countries falls far short of the financing needs of their infrastructure sectors.4 However, availability of private funding or interest of the private sector should not be the sole criterion in considering a PPP project. There are additional costs of private financing. See further discussion in Section IIIC and Chapter IV on this matter.

Also, there are underlying fiscal costs and contingent liabilities of PPPs on government that may arise in the medium and long term. Besides, there are many important economic, social, political, legal, and administrative aspects, which need to be carefully assessed before approval of PPPs are given by government. PPPs have various limitations that should also be taken into account while consideration of this modality is made. The major limitations include:

• Not all projects are possible (for various reasons: political, legal, commercial viability, etc.).

Limitations of PPPs

• The private sector may not take interest in a project due to perceived high risks or may lack the capacity to implement the project.

• A PPP project may be more costly unless additional costs (due to higher transaction and financing costs) are off-set by efficiency gains.

• Change of ownership of an infrastructure asset to the private sector may not be sufficient to improve its economic performance unless other necessary conditions are met. These conditions may include appropriate sector and market reform, and change in operational and management practices of infrastructure operation.

• Often, the success of PPPs depends on regulatory efficiency.

Nevertheless, considering the advantages of PPPs, governments in most countries consider them as an attractive off-budget mechanism for delivering infrastructure services and have promoted PPPs as a part of their overall strategy. For this purpose, many countries have created a PPP enabling environment through the establishment of necessary legal and regulatory regimes, initiated sector reforms, streamlined administrative procedures, and have formulated policies to promote PPPs. As a result, new highways, rail systems, port and airport facilities, power plants and gas pipelines, telecommunication systems, and water and sewerage systems are increasingly being built and/or the existing ones being improved or upgraded following various models of public-private partnerships.5 The value of such projects may range from few hundred thousand US dollars to several billion US dollars and are being implemented at all levels of government - national, provincial and local.

What governments have done to promote PPPs

PPP projects have the following important characteristics:

+ Better project structure and design (through feedbacks from potential/interested private providers at the project development and procurement stages).

+ Allows better screening of projects. A bad project is a bad project no matter whether it is implemented by the public or the private sector.

+ Better choice of technology based on life-cycle costing.

+ Better service delivery, especially if performance based payment is considered.

+ Better chances of completion on time and within the budget.

- Risk of default.

- Project risks can easily turn into government risks if policy to providing project support is not carefully crafted.

- Various liabilities on governments (direct and indirect).

- A long-term contract management system needs to be in place.

- An administrative mechanism and special skills in government are required to develop and implement PPP projects.

Telecommunications and energy have led the growth of private sector activity in infrastructure sectors, followed by the transport and water sectors. Globally, private sector participation in infrastructure development grew dramatically between 1990 and 1997. This trend of rapid growth, however, gradually declined from its peak level following the 1997 Asian financial crisis. After sluggish private sector participation for several years there has been an apparent resurgence since 2005.

Now almost all developing countries in Asia and the Pacific region have some PPPs in infrastructure development. Most of the new projects, however, are concentrated in China, India, Indonesia, Malaysia, Republic of Korea, Russian Federation, the Philippines, Thailand and Turkey.

While there has been considerable progress in the above-mentioned countries, progress in most other countries in Asia and the Pacific region has been slower than expected. The main reasons for slow progress in PPP development include:

• Lack of clear understanding about private sector requirements and capacity constraints in the public sector,

• Uncertainties in the administrative and approval processes, and

• Unfavourable policy, legal and regulatory environment.

Reasons for lack of progress in many countries

As a consequence, despite the existence of a large number of potential projects, significant numbers of project deals were not being made in most countries.

This primer provides an overall picture of the PPP development process from different perspectives. It considers PPPs in terms of what they can offer and what the limitations are, and the type of expert knowledge that is required to successfully develop and implement PPP projects. Discussion is made on various aspects of PPP development including the major issues from the perspectives of institutional arrangements, operational arrangement of partnerships, government involvement, financing matters, regulatory governance, contractual matters, and social concerns. In order to have a better appreciation of PPPs, it also considers short case studies from different sectors involving various forms of partnerships.

SUMMARY OF THE MAIN POINTS…

• PPPs refer to long term partnering relationship between the public and private sector to deliver infrastructure services.

• PPPs are not of any recent origin. In many countries, PPPs in infrastructure development originated more than 150 years ago.

• Governments worldwide have increasingly turned to PPPs. The main reasons include availability of additional resources and increased efficiency in project delivery and operation through PPPs.

• A PPP project differs from a conventional construction project in many ways: the focus of PPP is on delivering services and not on procurement of assets; the risk allocation is more complex; and managing the relationship between the public the private sector partners is critical to the success of the project.

• In a partnership each partner has some responsibility and obligations. The government while considering a PPP project need to have a clear understanding of the underlying fiscal costs and contingent liabilities, and other responsibilities.

• The PPP mechanism may not be suitable for all projects as it has many limitations, and are subject to social, political, legal and other constraints.

• The main reasons for slow progress in PPP development in most countries include: capacity constraints in the public sector, uncertainties in the administrative and approval processes, and unfavourable policy, legal and regulatory environment.