PPPs can follow a variety of structures and contractual formats (which are described in chapter 4). However, all PPPs incorporate three key characteristics:
• a contractual agreement defining the roles and responsibilities of the parties,
• sensible risk-sharing among the public and the private sector partners, and
• financial rewards to the private party commensurate with the achievement of prespecified outputs.
PPP is one tool available to decision makers in reforming infrastructure or service delivery. It is most effective when it is accompanied by other reform activities to underpin and reinforce the PPP and to support sustainable improvement. A successful PPP is designed with careful attention to the context or the enabling environment within which the partnership will be implemented. Where the operating environment can be reformed to be more conducive to the goals of PPP, this should be accomplished. Where elements of the operating context cannot be changed, the PPP design must be tailored to accommodate existing conditions.
Thus, in designing a PPP process and selecting a form of PPP, it is important to consider the reform objectives; policy environment; the legal, regulatory, and institutional frameworks; financing requirements and resources of the sector; and the political constraints and stakeholder concerns. PPP will be an effective tool to address some, but probably not all, sector issues.
To be successful, PPPs must be built upon a sector diagnostic that provides a realistic assessment of the current sector constraints. Specifically, the sector diagnostic will cover:
• technical issues;
• legal, regulatory, and policy frameworks;
• institutional and capacity status; and
• commercial, financial, and economic issues.
The sector diagnostic helps the government assess the status quo, identify gaps and weaknesses, and develop a sector reform strategy or road map, outlining the tools and activities required for reform. In many cases, reliable or comprehensive data on performance are not available in every area, such as financial or technical areas. In those cases, it may be more efficient to focus on the collection of limited, but key, indicators which provide an overview of the overall performance of the sector.
The sector diagnostic is likely to be performed with the support of a team of local and/or international engineers, lawyers, economists, financial analysts, and policy and transaction specialists. The diagnostic is critical to getting the transaction structure right, so allowing sufficient time for the process is important. Depending on the complexity of the sector, the availability of data, and the consultant procurement process, the sector diagnostic can take from 1 to 2 years.
A critical part of the diagnostic is a process of stakeholder consultation and identification of a government champion to drive the process into preparation and implementation.
As a result of the sector diagnostic, the government is able to determine to what degree an enabling environment exists for PPP and what activities are required in advance of PPP to create such an environment. The diagnostic is important to: (i) identify the strengths and weaknesses of the sector and the most promising areas for efficiency increases, (ii) regularly gauge and report on the progress of reform, and (iii) tweak the reform program as needed.
The sector diagnostic leads to development of a road map and a sequence of PPP activities as can be seen in Figure 2, which describes the components of the sector diagnostic.