Guidance
on PPP Contractual Provisions
Government
Guarantees for Mobilizing Private Investment in Infrastructure
Kenya PPP
Projects Investor Deck 2022
Government
Support Measures Policy 2018
Public–private partnership
A public–private partnership
(PPP, 3P, or P3)
is a long-term arrangement between a government and private sector
institutions. Typically, it involves private capital financing government
projects and services up-front, and then drawing revenues from taxpayers and/or
users over the course of the PPP contract. Public–private partnerships
have been implemented in multiple countries and are primarily used for
infrastructure projects. They have been employed for building, equipping,
operating and maintaining schools, hospitals, transport systems, and water and
sewerage systems.
Cooperation between private
actors, corporations and governments has existed since the inception of sovereign
states, notably for the purpose of tax collection and colonization. However,
contemporary "public-private partnerships" came into being around the
end of the 20th century. They were associated with neoliberal policies to
increase the private sector's involvement in public administration. Originally,
they were seen by governments around the world as a method of financing new or
refurbished public sector assets outside their balance sheet. At the dawn of
the millennium, this vision of PPPs came under heavy criticism as taxpayers or
users still had to pay for those PPP projects, along with disproportionately
high interest costs.
PPPs continue to be highly
controversial as funding tools, largely over concerns that public return on
investment is lower than returns for the private funder. PPPs are closely
related to concepts such as privatization and the contracting out of government
services. The lack of a shared understanding of what a PPP is and the secrecy
surrounding their financial details makes the process of evaluating whether
PPPs have been successful, complex. PPP advocates highlight the sharing of risk
and the development of innovation, while critics decry their higher costs and
issues of accountability. Evidence of PPP performance in terms of value for
money and efficiency, for example, is mixed and often unavailable.
Definition
There is no consensus about how
to define a PPP. The term can cover hundreds of different types of long-term
contracts with a wide range of risk allocations, funding arrangements, and
transparency requirements. The advancement of PPPs, as a concept and a
practice, is a product of the new public management of the late 20th century,
the rise of neoliberalism, and globalization pressures. Despite there being no
formal consensus regarding a definition, the term has been defined by major
entities.
For example, The OECD formally
defines public-private-partnerships as "long term contractual arrangements
between the government and a private partner whereby the latter delivers and
funds public services using a capital asset, sharing the associated
risks".
According to David L. Weimer
and Aidan R. Vining, "A P3 typically involves a private entity financing,
constructing, or managing a project in return for a promised stream of payments
directly from government or indirectly from users over the projected life of
the project or some other specified period of time".
A 2013 study published in State
and Local Government Review found that definitions of public-private
partnerships vary widely between municipalities: "Many public and private
officials tout public-private partnerships for any number of activities, when
in truth the relationship is contractual, a franchise, or the load shedding of
some previously public service to a private or nonprofit entity." A more
general term for such agreements is "shared service delivery", in
which public-sector entities join together with private firms or non-profit
organizations to provide services to citizens.
Debate on privatization
There is a semantic debate
pertaining to whether public–private partnerships constitute
privatization or not. Some argue that it isn't "privatization"
because the government retains ownership of the facility and/or remains
responsible for public service delivery. Others argue that they exist on a
continuum of privatization; P3s being a more limited form of privatization than
the outright sale of public assets, but more extensive than simply
contracting-out government services.
Because
"privatization" has a negative connotation, supporters of P3s
generally take the position that P3s do not constitute privatization, while P3
opponents argue that they do. The Canadian Union of Public Employees describes
P3s as "privatization by stealth".
Origins
Governments have used such a
mix of public and private endeavors throughout history. Muhammad Ali of Egypt
utilized "concessions" in the early 1800s to obtain public works for
minimal cost while the concessionaires' companies made most of the profits from
projects such as railroads and dams. Much of the early infrastructure of the
United States was built by what can be considered public-private partnerships.
This includes the Philadelphia and Lancaster Turnpike road in Pennsylvania,
which was initiated in 1792, an early steamboat line between New York and New
Jersey in 1808; many of the railroads, including the nation's first railroad,
chartered in New Jersey in 1815; and most of the modern electric grid.[citation
needed] In Newfoundland, Robert Gillespie Reid contracted to operate the
railways for fifty years from 1898, though originally they were to become his
property at the end of the period.
However, the late 20th and
early 21st century saw a clear trend toward governments across the globe making
greater use of various PPP arrangements. Pressure to change the standard model
of public procurement arose initially from concerns about the level of public
debt, which grew rapidly during the macroeconomic dislocation of the 1970s and
1980s. Governments sought to encourage private investment in infrastructure,
initially on the basis of neoliberal ideology and accounting fallacies arising
from the fact that public accounts did not distinguish between recurrent and
capital expenditures.
In 1992, the Conservative
government of John Major in the United Kingdom introduced the Private finance
initiative (PFI), the first systematic program aimed at encouraging
public-private partnerships. The 1992 program focused on reducing the
public-sector borrowing requirement, although, as already noted, the effect on
public accounts was largely illusory. Initially, the private sector was
unenthusiastic about PFI, and the public sector was opposed to its
implementation. In 1993, the Chancellor of the Exchequer described its progress
as "disappointingly slow". To help promote and implement the policy,
Major created institutions staffed with people linked with the City of London,
accountancy and consultancy firms who had a vested interest in the success of
PFI.
During his first term in
office, Tony Blair made public-private partnerships the norm for government
procurement projects in the United Kingdom. Around the same time, PPPs were
being initiated haphazardly in various OECD countries. The first governments to
implement them were ideologically neoliberal and short on revenues: they were
thus politically and fiscally inclined to try out alternative forms of public
procurement. These early PPP projects were usually pitched by wealthy and
politically-connected business magnates. This explains why each countries
experimenting with PPPs started in different sectors. At that time, PPPs were
seen as a radical reform of government service provision.
In 1997, the new british
government of Tony Blair's Labour Party expanded the PFI but sought to shift
the emphasis to the achievement of "value for money", mainly through
an appropriate allocation of risk. Blair created Partnerships UK (PUK), a new
semi-independent organization to replace the previous pro-PPP government
institutions. Its mandate was to promote and implement PFI. PUK was central in
making PPPs the "new normal" for public infrastructure procurements
in the country. Multiple countries subsequently created similar PPP units based
on PUK's model.
While initiated in first world
countries, PPPs immediately received significant attention in developing
countries. This is because the PPP model promised to bring new sources of
funding for infrastructure projects, which could translate into jobs and
economic growth. However, the lack of investor rights guarantees, commercial
confidentiality laws, and dedicated state spending on public infrastructure in
these countries made the implementation of public–private partnership in
transition economies difficult. PPPs in the countries usually can't rely on
stable revenues from user fees either. The World Bank's Public-Private
Infrastructure Advisory Forum attempts to mitigate these challenges.
Funding
A defining aspect of many
infrastructure P3s is that most of the up-front financing is made through the
private sector. The way this financing is done differs significantly by
country. For P3s in the UK, bonds are used rather than bank loans. In Canada,
P3 projects usually use loans that must be repaid within five years, and the
projects are refinanced at a later date. In some types of public-private
partnership, the cost of using the service is borne exclusively by the users of
the service—for example, by toll road users. In other types (notably the
PFI), capital investment is made by the private sector on the basis of a
contract with the government to provide agreed-on services, and the cost of
providing the services is borne wholly or in part by the government.
Special purpose vehicle
Typically, a private-sector
consortium forms a special company called a special-purpose vehicle (SPV) to
develop, build, maintain, and operate the asset for the contracted period. In
cases where the government has invested in the project, it is typically (but
not always) allotted an equity share in the SPV. The consortium is usually made
up of a building contractor, a maintenance company, and one or more equity
investors. The two former are typically equity holders in the project, who make
decisions but are only repaid when the debts are paid, while the latter is the
project's creditor (debt holder).
It is the SPV that signs the
contract with the government and with subcontractors to build the facility and
then maintain it. A typical PPP example would be a hospital building financed
and constructed by a private developer and then leased to the hospital
authority. The private developer then acts as landlord, providing housekeeping
and other non-medical services, while the hospital itself provides medical
services.
The SPV links the firms
responsible of the building phase and the operating phase together. Hence there
is a strong incentives in the building stage to make investments with regard to
the operating stage. These investments can be desirable but may also be
undesirable (e.g., when the investments not only reduce operating costs but
also reduce service quality).
Financial partners
Public infrastructure is a
relatively low-risk, high-reward investment, and combining it with complex
arrangements and contracts that guarantee and secure the cash flows make PPP
projects prime candidates for project financing. The equity investors in SPVs
are usually institutional investors such as pension funds, life insurance
companies, sovereign wealth and superannuation funds, and banks. Major P3
investors include AustralianSuper, OMERS and Dutch state-owned bank ABN AMRO,
which funded the majority of P3 projects in Australia. Wall Street firms have
increased their interest in PPP since the 2008 financial crisis.
Government
Government sometimes make in
kind contributions to a PPP, notably with the transfer of existing assets. In
projects that are aimed at creating public goods, like in the infrastructure
sector, the government may provide a capital subsidy in the form of a one-time
grant so as to make the project economically viable. In other cases, the
government may support the project by providing revenue subsidies, including
tax breaks or by guaranteed annual revenues for a fixed period.
Profits
Private monopolies created by
PPPs can generate a rent-seeking behavior, which leads to spiraling costs for
users and/or taxpayers in the operation phase of the project.
Some public-private
partnerships, when the development of new technologies is involved, include
profit-sharing agreements. This generally involves splitting revenues between
the inventor and the public once a technology is commercialized. Profit-sharing
agreements may stand over a fixed period of time or in perpetuity.
P3 justifications
Using PPPs have been justified
in various ways over time. Advocates generally argue that PPPs enable the
public sector to harness the expertise and efficiencies that the private sector
can bring to the delivery of certain facilities and services traditionally
procured and delivered by the public sector. On the other hand, critics suggest
that PPPs are part of an ideological program that seeks to privatize public
services for the profits of private entities.
Off-balance-sheet accounting
PPPs are often structured so
that borrowing for the project does not appear on the balance sheet of the
public-sector body seeking to make a capital investment. Rather, the borrowing
is incurred by the private-sector vehicle implementing the project, with or
without an explicit backup guarantee of the loan by the public body. On PPP
projects where the cost of using the service is intended to be borne
exclusively by the end-user, or through a lease billed to the government every
year during the operation phase of the project, the PPP is, from the public
sector's perspective, an "off-balance sheet" method of financing the
delivery of new or refurbished public-sector assets.
This justification was
particularly important during the 1990s, but has been exposed as an accounting
trick designed to make the government of the day appear more fiscally
responsible, while offloading the costs of their projects to service users or
future governments. In Canada, many auditor generals have condemned this
practice, and forced governments to include PPP projects "on-balance
sheet".
On PPP projects where the
public sector intends to compensate the private sector through availability
payments once the facility is established or renewed, the financing is, from
the public sector's perspective, "on-balance sheet". According to PPP
advocates, the public sector will regularly benefit from significantly deferred
cash flows. This viewpoint has been contested through research that shows that
a majority of PPP projects ultimately cost significantly more than traditional
public ones.
In the European Union, the fact
that PPP debt is not recorded as debt and remains largely
"off-balance-sheet" has become a major concern. Indeed, keeping the
PPP project and its contingent liabilities "off balance sheet" means
that the true cost of the project is hidden. According to the International
Monetary Fund, economic ownership of the asset should determine whether to
record PPP-related assets and liabilities in the government's or the private
corporation's balance sheet is not straightforward.
Project costs
A discredited 2001 report by
PricewaterhouseCoopers predicted that building the Abbotsford Regional Hospital
& Cancer Centre through a PPP would lead to cost savings of 1% at best.
This option was selected, and then the projected construction costs increased
by 68% over the course of PPP contract negotiations that lasted two years.
The effectiveness of PPPs as
cost-saving venture has been refuted by numerous studies. Research has showed
that on average, governments pay more for PPPs projects than for traditional
publicly financed projects. The higher cost of P3s is attributed to these
systemic factors:
The private sector's higher
cost of capital: governments can typically borrow capital at an interest rate
lower than any private company ever could. This is because governments have the
power of taxation, which guarantees that they will be able to repay their
debts. Since lending to governments almost always come at a lower risk than
lending to private entities, governments get better credit and cheaper
financing costs for building large infrastructure projects than private
finance.
Transaction costs: P3 contracts
are much more complex and extensive than contracts made in traditional publicly
financed projects. The negotiation of these contracts require the presence of
lawyers on all sides of the table and can take months or even years to
finalize. Barrie Mckenna reports that "transaction costs for lawyers and
consultants [in P3s] add about 3 percent to the final bill."
Operating profits: Private
companies that engage in P3s expect a return on investment after the completion
of the project. By financing PPPs, they partner engages in low-risk
speculation. Over the course of the contract, the private partner can charge
the end-users and/or the government for more money than the cost of the initial
investment.
Sometimes, private partners
manage to overcome these costs and provide a project cheaper for taxpayers.
This can be done by cutting corners, designing the project so as to be more
profitable in the operational phase, charging user fees, and/or monetizing
aspects of the projects not covered by the contract. For P3 schools in Nova
Scotia, this latter aspect has included restricting the use of schools' fields
and interior walls, and charging after-hours facility access to community
groups at 10 times the rate of non-P3 schools.
In Ontario, a 2012 review of 28
projects showed that the costs were on average 16% lower for traditional
publicly procured projects than for PPPs. A 2014 report by the Auditor General
of Ontario said that the province overpaid by $8 billion through PPPs.
Value for money
In response to these negative
findings about the costs and quality of P3 projects, proponents developed
formal procedures for the assessment of PPPs which focused heavily on value for
money. Heather Whiteside defines P3 "Value for money" as:
Not to be confused with lower
overall project costs, value for money is a concept used to evaluate P3
private-partner bids against a hypothetical public sector comparator designed
to approximate the costs of a fully public option (in terms of design,
construction, financing, and operations). P3 value for money calculations
consider a range of costs, the exact nature of which has changed over time and
varies by jurisdiction. One thing that does remain consistent, however, is the
favoring of "risk transfer" to the private partner, to the detriment
of the public sector comparator.
Value for money assessment
procedures were incorporated into the PFI and its Australian and Canadian
counterparts beginning in the late 1990s and early 2000s. A 2012 study showed
that value-for-money frameworks were still inadequate as an effective method of
evaluating PPP proposals. The problem is that it is unclear what the catchy
term "value-for-money" means in the technical details relating to
their practical implementation. A Scottish auditor once qualified this use of
the term as "technocratic mumbo-jumbo".
Project promoters often
contract a PPP unit or one of the Big Four accounting firms to conduct the
value for money assessments. Because these firms also offer PPP consultancy
services, they have a vested interest in recommending the PPP option over the
traditional public procurement method. The lack of transparency surrounding
individual PPP projects makes it difficult to draft independent value-for-money
assessments.
A number of Australian studies
of early initiatives to promote private investment in infrastructure concluded
that in most cases, the schemes being proposed were inferior to the standard
model of public procurement based on competitively tendered construction of
publicly owned assets. In 2009, the New Zealand Treasury, in response to
inquiries by the new National Party government, released a report on PPP
schemes that concluded that "there is little reliable empirical evidence
about the costs and benefits of PPPs" and that there "are other ways
of obtaining private sector finance", as well as that "the advantages
of PPPs must be weighed against the contractual complexities and rigidities
they entail".
In the United Kingdom, many
private finance initiative programs ran dramatically over budget and have not
provided value for money for the taxpayer, with some projects costing more to
cancel than to complete. An in-depth study conducted by the National Audit
Office of the United Kingdom concluded that the private finance initiative
model had proved to be more expensive and less efficient in supporting
hospitals, schools, and other public infrastructure than public financing. A
treasury select committee stated that 'PFI was no more efficient than other
forms of borrowing and it was "illusory" that it shielded the
taxpayer from risk'.
Transfer of risk
One of the main rationales for
P3s is that they provide for a transfer of risk: the Private partner assumes
the risks in case of cost overruns or project failures. Methods for assessing
value-for-money rely heavily on risk transfers to show the superiority of P3s.
However, P3s do not inherently reduce risk, they simply reassign who is
responsible, and the Private sector assumes that risk at a cost for the
taxpayer. If the value of the risk transfer is appraised too high, then the
government is overpaying for P3 projects.
Incidentally, a 2018 UK
Parliament report underlines that some private investors have made large
returns from PPP deals, suggesting that departments are overpaying for
transferring the risks of projects to the private sector, one of the Treasury's
stated benefits of PPP.
The maintenance of the new
National Physical Laboratory building was transferred back to the British
Department of Trade and Industry in 2004 after the private sector partners
involved in the PFI contract made losses of over £100m.
Supporters of P3s claim that
risk is successfully transferred from public to private sectors as a result of
P3, and that the private sector is better at risk management. As an example of
successful risk transfer, they cite the case of the National Physical
Laboratory. This deal ultimately caused the collapse of the building contractor
Laser (a joint venture between Serco and John Laing) when the cost of the
complex scientific laboratory, which was ultimately built, was very much larger
than estimated.
On the other hand, Allyson
Pollock argues that in many PFI projects risks are not in fact transferred to
the private sector and, based on the research findings of Pollock and others,
George Monbiot argues that the calculation of risk in PFI projects is highly
subjective, and is skewed to favor the private sector:
When private companies take on
a PFI project, they are deemed to acquire risks the state would otherwise have
carried. These risks carry a price, which proves to be remarkably responsive to
the outcome you want. A paper in the British Medical Journal shows that before
risk was costed, the hospital schemes it studied would have been built much
more cheaply with public funds. After the risk was costed, they all tipped the
other way; in several cases by less than 0.1%.
Following an incident in the
Royal Infirmary of Edinburgh where surgeons were forced to continue a heart
operation in the dark following a power cut caused by PFI operating company
Consort, Dave Watson from Unison criticized the way the PFI contract operates:
It's a costly and inefficient
way of delivering services. It's meant to mean a transfer of risk, but when
things go wrong the risk stays with the public sector and, at the end of the
day, the public because the companies expect to get paid. The health board
should now be seeking an exit from this failed arrangement with Consort and at
the very least be looking to bring facilities management back in-house.
Furthermore, assessments ignore
the practices of risk transfers to contractors under traditional procurement
methods. As for the idea that the private sector is inherently better at
managing risk, there has been no comprehensive study comparing risk management
by the public sector and by P3s. Auditor Generals of Quebec, Ontario and New
Brunswick have publicly questioned P3 rationales based on a transfer of risk,
the latter stating he was "unable to develop any substantive evidence
supporting risk transfer decisions". Furthermore, many PPP concessions
proved to be unstable and required to be renegotiated to favor the contractor.
Accountability and transparency
One of the main criticisms of public-private
partnerships is the lack of accountability and transparency associated with
these projects. Part of the reason why evidence of PPP performance is often
unavailable is that most financial details of P3s are under the veil of
commercial confidentiality provisions, and unavailable to researchers and the
public. Around the world, opponents of P3s have launched judicial procedures to
access greater P3 project documentation than the limited "bottom
line" sheets available on the project's websites. When they are
successful, the documents they receive are often heavily redacted.
A 2007 survey of U.S. city
managers revealed that communities often fail to sufficiently monitor PPPs:
"For instance, in 2002, only 47.3% of managers involved with private firms
as delivery partners reported that they evaluate that service delivery. By
2007, that was down to 45.4%. Performance monitoring is a general concern from
these surveys and in the scholarly criticisms of these arrangements."
Sectors
Water services
After a wave of privatization
of many water services in the 1990s, mostly in developing countries,
experiences show that global water corporations have not brought the promised
improvements in public water utilities. Instead of lower prices, large volumes of
investment, and improvements in the connection of the poor to water and
sanitation, water tariffs have increased out of reach of poor households. Water
multinationals are withdrawing from developing countries, and the World Bank is
reluctant to provide support.
The privatization of the water
services of the city of Paris proved to be unwanted, and at the end of 2009 the
city did not renew its contract with two of the French water corporations, Suez
and Veolia. After a year of being controlled by the public, it is projected
that the water tariff will be cut by between 5% and 10%.
In the 2010s, as wastewater
treatment plants across North America came of age and needed to be replaced,
multiple cities decided to fund the renewal of their water infrastructure through
a public-private partnership. Among those cities were Brandenburg, Kentucky,
which was the "first local government in Kentucky to execute a
public-private partnership under legislation passed in 2016", and Regina,
Saskatchewan, which held a referendum on the plant's funding model. The P3
option won out."
Transportation
The main toll plaza of the
Dulles Toll Road concession in Virginia, whose price is periodically
increasing. Another major sector for P3s is transportation. The P3
Transportation sector can be broadly split into five sectors: airports, ports,
roads, railways and urban passenger transport (which includes bus, light rail
and heavy rail systems).
Many P3s in the United States
have been toll road concessions. Transportation projects have accounted for 1/5
of all P3 projects in Canada. Major transportation P3 projects have included
the Confederation Bridge linking Prince Edward Island and New Brunswick, the
Pocahontas Parkway in Virginia, and the London Underground PPP.
Health services
For more than two decades,
public-private partnerships have been used to finance health infrastructure. In
Canada, they comprise 1/3 of all P3 projects nationwide. Governments have
looked to the PPP model in an attempt to solve larger problems in health care
delivery. However, some health-care-related PPPs have been shown to cost
significantly more money to develop and maintain than those developed through
traditional public procurement.
A health services PPP can be described
as a long-term contract (typically 15–30 years) between a public-sector
authority and one or more private-sector companies operating as a legal entity.
In theory, the agreements entails that the government provides purchasing power
and outlines goals for an optimal health system. It then contracts a private
enterprise to design, build, maintain, and/or manage the delivery of
agreed-upon services over the term of the contract. Finally, the private sector
receives payment for its services and assumes additional risk while benefitting
from returns on its investments during the operational phase.
A criticism of P3s for
Hospitals in Canada is that they result in an "internal bifurcation of
authority". This occurs when the facility is operated and maintained by
the private sector while the care services are delivered by the public sector.
In those cases, the nursing staff cannot request their colleagues from the
maintenance staff to clean something (urine, blood, etc.) or to hang workplace
safety signs, even if they are standing next to each other, without the
approval of the private managers.
In the UK, P3s were used to
build hospitals for the National Health Service. In 2017 there were 127 PFI
schemes in the English NHS. The contracts vary greatly in size. Most include
the cost of running services such as facilities management, hospital portering
and patient food, and these amount to around 40% of the cost. Total repayments
will cost around £2.1 billion in 2017 and will reach a peak in 2029. This
is around 2% of the NHS budget.
Forestry sector
PPP options in the forest
sector can include joint forest management projects between government
agencies, various investors and NGOs. USAID promotes the use of P3s to assist
the exploitation of certified timber and non-timber products in Third World
countries by foreign companies. They claim forestry PPPs are an agent of nature
conservation and the sustainable harvesting of commercialized forest products,
notwithstanding the fact that it was competition from foreign companies that
forced local producers to engage in unsustainable harvesting practices in the
first place. Many forestry sector partnerships with NGOs are nothing more than
greenwashing operations.
A form of PPP labelled
“lease with the transfer of ownership” can be used to reforest
erosion-prone and agricultural land (for example, a private partner leases a
certain land plot on the basis of a lease agreement, after which a certain part
or all of the plot can gradually shift to private ownership based on agreed
terms). The forest is thus privatized under the guise of a program whose stated
goal is to reduce greenhouse gas emissions.
Institutional support
Aside from the support of
national governments and financial firms, PPPs are promoted by the following
institutions:
PPP units
Public-private partnership
units are organizations responsible for promoting, facilitating, and assessing
P3s in their territory. They can be government agencies, or semi-independent
organizations created with full or part government support. Governments tend to
create these units as a response to criticisms of the implementation of P3
projects in their country prior to the creation of the P3 unit. In 2009, 50% of
OECD countries had created a centralized PPP unit, and many more of these
institutions exist in other countries.
Accounting firms
The "big four"
accounting firms of PricewaterhouseCoopers, Deloitte, Ernst & Young, and
KPMG have been involved in the public-private partnership model from its
inception. Advisors from these companies have been tapped to develop PPP
policies and procedures in multiple countries. These companies then went on to
evaluate those procedures, appraise individual projects, and act as a
consultants for private and public partners in PPP contract negotiations.
Accounting firms sometimes even have an equity stake in projects that they
appraise the value for money. Due to these conflict of interests, multiple
authors have argues that the “big four”’s public project
appraisals are biased towards the PPP funding option against the traditional
procurement model.
International institutions
The World Bank works to promote
Public-private partnerships in countries where it operates. The United Nations'
Sustainable Development Goal 17 target 17.17 is formulated as: "Encourage
effective partnerships: Encourage and promote effective public, public-private
and civil society partnerships, building on the experience and resourcing
strategies of partnerships." The success of this target is measured by the
amount in United States dollars committed to public-private partnerships for
infrastructure worldwide.
United States foreign policy
The American government seeks
to promote public-private partnerships around the globe to meet its various
foreign policy goals. USAID promoted PPPs with Global Development Alliances and
through the Development Credit Authority, which was merged into the Overseas
Private Investment Corporation in 2019. The State department also promotes PPPs
through its Office of Global Partnerships.
Delivery models
There are many types and
delivery models of PPPs, the following is a non-exhaustive list of some of the designs:
Operation and maintenance
contract (O & M)
A private economic agent, under
a government contract, operates a publicly-owned asset for a specific period of
time. Formal, ownership of the asset remains with the public entity. In terms
of private-sector risk and involvement, this model is on the lower end of the
spectrum for both involvement and risk.
Build–finance (BF)
The private actor builds the
asset and finances the cost during the construction period, afterwards the
responsibility is handed over to the public entity. In terms of private-sector
risk and involvement, this model is again on the lower end of the spectrum for
both measures.
Build–operate–transfer
(BOT)
Build–operate–transfer
represents a complete integration of the project delivery: the same contract
governs the design, construction, operations, maintenance, and financing of the
project. After some concessionary period, the facility is transferred back to
the owner.
Build–own–operate–transfer
(BOOT)
A BOOT structure differs from
BOT in that the private entity owns the works. During the concession period,
the private company owns and operates the facility with the prime goal to
recover the costs of investment and maintenance while trying to achieve a higher
margin on the project. BOOT has been used in projects like highways, roads mass
transit, railway transport and power generation.
Build–own–operate
(BOO)
In a BOO project ownership of
the project remains usually with the project company, such as a mobile phone
network. Therefore, the private company gets the benefits of any residual value
of the project. This framework is used when the physical life of the project
coincides with the concession period. A BOO scheme involves large amounts of
finance and long payback period. Some examples of BOO projects come from the
water treatment plants.
Build–lease–transfer
(BLT)
Under BLT, a private entity
builds a complete project and leases it to the government. In this way the
control over the project is transferred from the project owner to a lessee. In
other words, the ownership remains by the shareholders but operation purposes
are leased. After the expiry of the leasing the ownership of the asset and the
operational responsibility is transferred to the government at a previously
agreed price.
Design–build–finance–maintain
(DBFM)
"The private sector
designs, builds and finances an asset and provides hard facility management or
maintenance services under a long-term agreement." The owner (usually the
public sector) operates the facility. This model is in the middle of the
spectrum for private sector risk and involvement.
Design–build–finance–maintain–operate
(DBFMO)
Design–build–finance–operate
is a project delivery method very similar to BOOT except that there is no
actual ownership transfer. Moreover, the contractor assumes the risk of
financing until the end of the contract period. The owner then assumes the
responsibility for maintenance and operation. This model is extensively used in
specific infrastructure projects such as toll roads. The private construction
company is responsible for the design and construction of a piece of
infrastructure for the government, which is the true owner. Moreover, the
private entity has the responsibility to raise finance during the construction
and the exploitation period. Usually, the public sector begins payments to the
private sector for use of the asset post-construction. This is the most
commonly used model in the EU according to the European Court of Auditors.
Design–build–operate–transfer
(DBOT)
This funding option is common
when the client has no knowledge of what the project entails. Hence they
contracts the project to a company to design, build, operate, and then transfer
it. Examples of such projects are refinery constructions.
Design–construct–manage–finance
(DCMF)
A private entity is entrusted
to design, construct, manage, and finance a facility, based on the
specifications of the government. Project cash flows result from the
government's payment for the rent of the facility. Some examples of the DCMF
model are prisons or public hospitals.
Concession
A concession is a grant of rights,
land or property by a government, local authority, corporation, individual or
other legal entity. Public services such as water supply may be operated as a
concession. In the case of a public service concession, a private company
enters into an agreement with the government to have the exclusive right to
operate, maintain and carry out investment in a public utility (such as a water
privatization) for a given number of years.
While long-term infrastructure
projects compose the bulk of P3s worldwide, other types of Public–private
partnerships exist to suit different purposes and actors.
Asset monetization
A form of P3 that became
prevalent in American cities during the 21st century are asset monetization
arrangements. They concerns a city's revenue-generating assets (parking lots,
garage and meters, public lights, toll roads, etc.) and transforms them into
financial assets that the city can lease to a private corporation in exchange
for covering operation and maintenance. These deals are usually done during
periods of financial distress for the city, and the immediate revenues
municipalities receive is used to pay down the debt or to fill budget holes.
The 2014 Detroit bankruptcy deal included many asset monetization arrangements.
Global public–private
partnership
Global public–private
partnership (GPPP) is a governance mechanism to foster public-private
partnership (PPP) cooperation between an international intergovernmental
organisation like the United Nations and private companies. Existing GPPPs
strive, among other things, to increase affordable access to non-generic
essential drugs and vaccines in developing countries, and to promote
handwashing with soap to reduce diarrhoea.
Market-led proposal
Market-led proposals (MLP) are
P3s proposed by the private sector. MLP policies encourage private sector firms
to make unsolicited P3 infrastructure project proposals to the government,
instead of putting the onus on the state to propose each projects. During the
2010s, MLP policies were implemented in most Australian states and territories.
Amy Sarcevic from Informa Australia notes that "to date, market-led
proposals have had a relatively high failure rate".
Public–private–community
partnerships
Public–private
partnerships with non-profits and private partners, sometimes called
Public–private–community partnerships (PPCPs), are a modified
version of the PPP model designed for the needs of Third world countries. They
were notably proposed by the Asian Development Bank as early as 1991 as an
"institutional reform ... to facilitate the participation of individuals,
CBOs [community based organizations], other NGOs and the private sector"
so that they become "actively involved in planning and management".
Social impact bond
Social impact bonds (also called
pay for success bonds) are "a public-private partnership which funds
effective social services through a performance-based contract", according
to Social Finance's definition. They operate over a fixed period of time, but
they do not offer a fixed rate of return. Generally, repayment to investors is
contingent upon a specified social outcome being achieved. A similar system,
development impact bonds, is being implemented in developing countries.
For more details on this, email
us: funding@alkebulanreserve.com and fund@alkebulanreserve.com
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