Public Private partnership - Printable Version

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Public Private partnership - FDArchitects - 07-24-2016

Public Private Partnership means an arrangement between a government / statutory entity / government owned entity on one side and a private sector entity on the other, for the provision of public assets and/or public services, through investments being made and/or management being undertaken by the private sector entity, for a specified period of time, where there is well defined allocation of risk between the private sector and the public entity and the private entity receives performance linked payments that conform (or are benchmarked) to specified and pre-determined performance standards, measurable by the public entity or its representative.

Essential conditions in the definition are as under:

i.Arrangement with private sector entity: The asset and/or service under the contractual arrangement will be provided by the Private Sector entity to the users. An entity that has a majority non-governmental ownership, i.e., 51 percent or more, is construed as a Private Sector entity1.

ii.Public asset or service for public benefit: The facilities/ services being provided are traditionally provided by the Government, as a sovereign function, to the people. To better reflect this intent, two key concepts are elaborated below:
(a)Public Services are those services that the State is obligated to provide to its citizens or where the State has traditionally provided the services to its citizens.
(b)Public Asset is that asset the use of which is inextricably linked to the delivery of a Public Service, or, those assets that utilize or integrate sovereign assets to deliver Public Services. Ownership by Government need not necessarily imply that it is a PPP.
iii.  Investments being made by and/or management undertaken by the private sector entity:
        The arrangement could provide for financial investment and/or non-financial investment by the private sector; the intent of the         arrangement is to harness the private sector efficiency in the delivery of quality services to the users.
iv.  Operations or management for a specified period:
        The arrangement cannot be in perpetuity. After a pre-determined time period, the arrangement with the private sector entity comes  to a closure.
v.  Risk sharing with the private sector:
        Mere outsourcing contracts are not PPPs.
 
vi. Performance linked payments:
        The central focus is on performance and not merely provision of facility or service.
vii. Conformance to performance standards:
        The focus is on a strong element of service delivery aspect and compliance to pre-determined and measurable standards to be specified by the Sponsoring Authority.

 The above definition puts forth only the essential conditions for an arrangement to be designated as a Public Private Partnerships (PPP). In addition to these, some of the desirable conditions or good practices for a PPP include the following:
a.       Allocation of risks in an optimal manner to the party best suited to manage the risks;
b.      Private sector entity receives cash flows for their investments in and/or management of the PPP either through a performance        linked fee payment structure from the government entity and/or through user charges from the consumers of the service provided;
c.       Generally a long term arrangement between the parties but can be shorter term dependent for instance on the sector or focus of        PPP;
d.      Incentive and penalty based structures in the arrangement so as to ensure that the private sector is benchmarked against service delivery;
e.      Outcomes of the PPP are normally pre-defined as output parameters rather than technical specifications for assets to be built,        though minimum technical specifications might be identified. Such a structure is expected to leave room for innovation and technology        transfer in project execution / implementation by the private sector entity.
The models where ownership of the underlying asset remains with the public entity during the contract period and project is transferred back to the public entity after the termination contract are the preferred forms of Public Private Partnership models. The final decision on the form of PPP is a determinant of the Value for Money analysis.
Some of the commonly adopted forms of PPPs include management contracts,
·         build-operate-transfer (BOT) and its variants,
·         build-lease-transfer (BLT),
·         design-build-operate-transfer (DBFOT),
·         operate-maintain-transfer (OMT), etc.
 
 Government commits to the spirit of partnership amongst all the stakeholders public, private, end users and community. While the current initiatives on having a strong public community private partnerships would continue, with the growing capacity and maturity of the stakeholders concerned under a PPP arrangement, Government would in due course selectively consider newer models of partnerships which would be simpler, flexible and engage increased participation amongst the contracting parties.
 
PPP Models supported by the Government


User-Fee Based BOT models - Medium to large scale PPPs have been awarded mainly in the energy and transport sub-sectors (roads, ports and airports). Although there are variations in approaches, over the years the PPP model has been veering towards competitively bid concessions where costs are recovered mainly through user charges (in some cases partly through VGF from the government).

Annuity Based BOT models In sectors/projects not amenable for sizeable cost recovery through user charges, owing to socio-political-affordability considerations, such as in rural, urban, health and education sectors, the government harnesses private sector efficiencies through contracts based on availability/performance payments. Implementing annuity model will require necessary framework conditions, such as payment guarantee mechanism by means of making available multi-year budgetary support, a dedicated fund, letter of credit etc. Government may consider setting-up a separate window of assistance for encouraging annuity-based PPP projects. A variant of this approach could be to make a larger upfront payment (say 40% of project cost) during the construction period.

Performance Based Management/ Maintenance contracts In an environment of constrained economic resources, PPP that improves efficiency will be all the more relevant. PPP models such as performance based management/maintenance contracts are encouraged. Sectors amenable for such models include water supply, sanitation, solid waste management, road maintenance etc.

Modified Design-Build (Turnkey) Contracts: In traditional Design-Build (DB) contract, private contractor is engaged for a fixed-fee payment on completion. The primary benefits of DB contracts include time and cost savings, efficient risk-sharing and improved quality. Government may consider a Turnkey DB approach with the payments linked to achievement of tangible intermediate construction milestones (instead of lump-sum payment on completion) and short period maintenance / repair responsibilities. Penalties/incentives for delays/early completion and performance guarantee (warranty) from private partner may also be incorporated. Subsequently, as the market sentiment turns around these projects could be offered to private sector through operation-maintenance-tolling concessions.
Unsolicited Bid/ Swiss Challenge Proposals
Unsolicited bids/Swiss Challenge proposals are not preferred by the Government. The discomfort with the use of unsolicited proposals in the public sector is on grounds of lack of transparency, and lack of fair and equal treatment of potential bidders. There are elements of informational asymmetry and bidding asymmetry between an Original Proponent (OP) and its competitors. The bidding asymmetry is due to time and price asymmetries. Since only the OP essentially gets an opportunity to make the BAFO (Best and Final Offer) after one or more rounds of negotiation an opportunity that is denied to its competitors who are not authorized to submit an equal number of negotiated responses. In exceptional circumstances, in sectors not traditionally associated with PPP structures or where procurement of proprietary technology is involved, variants of the approach could be considered for development, with prior approval of the competent authority, provided the VfM analysis establishes such a decision.

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