Tuesday, September 24, 2013


PPPs broadly refer to long term, contractual partnerships between the public and private sector agencies, specially targeted towards financing, designing, implementing, and operating infrastructure facilities and services that were traditionally provided by the Government and/or its agencies. These collaborative ventures are built around the expertise and capacity of the project partners and are based on a contractual agreement, which ensures appropriate and mutually agreed allocation of resources, risks, and returns. This approach of developing and operating public utilities and infrastructure by the private sector under terms and conditions agreeable to both the government and the private sector is called PPP.

Types of PPP::

Service Contract : 
  • Under a service contract, the Government (public authority) hires a private      company or entity to carry out one or more specified tasks or services for a period, typically 1–3 years. 
  • The public authority remains the primary provider of the infrastructure service and contracts out only portions of its operation to the private partner. 
  • The private partner must perform the service at the agreed cost and must typically meet performance standards set by the public sector. 
  • The Government pays the private partner a predetermined fee for the service, which may be a one time fee, based on unit cost, or some other basis.

Management Contract : 
  • A management contract expands the services to be contracted out to include some or all of the management and operation of the public service (i.e., utility, hospital, port authority, etc.). 
  • Although ultimate obligation for service provision remains in the public sector, daily management control and authority is assigned to the private partner or contractor. In most cases, the private partner provides working capital but no financing for investment. 
  • The private contractor is paid a predetermined rate for labour and other anticipated operating costs. 
  • Management contract variants include supply and service contract, maintenance management and operational management.

Lease contract : 
  • Under a lease contract, the private partner is responsible for the service in its entirety and undertakes obligations relating to quality and service standards. 
  • Except for new and replacement investments, which remain the responsibility of the public authority, the operator provides the service at his expense and risk. 
  • The duration of the leasing contract is typically for 10 years and may be renewed for up to 20 years. 
  • Responsibility for service provision is transferred from the public sector to the private sector and the financial risk for operation and maintenance is borne entirely by the private sector operator. 
  • In particular, the operator is responsible for losses and for unpaid consumers' debts. 
  • Leases do not involve any sale of assets to the private sector.

Concessions : 
  • A concession makes the private sector operator (concessionaire) responsible for the full delivery of services in a specified area, including operation, maintenance, collection, management, and construction and rehabilitation of the system. 
  • Importantly, the operator is now responsible for all capital investment. Although the private sector operator is responsible for providing the assets, such assets are publicly owned even during the concession period. 
  • The public sector is responsible for establishing performance standards and ensuring that the concessionaire meets them. In essence, the public sector’s role shifts from being the service provider to regulating the price and quality of service. 
  • The concessionaire collects the tariff directly from the system users. 
  • The tariff is typically established by the concession contract, which also includes provisions on how it may be changed over time. 
  • In some cases, the government may choose to provide financing support to help the concessionaire fund its capital expenditures. 
  • The concessionaire is responsible for any capital investments required to build, upgrade, or expand the system, and for financing those investments out of its resources and from the tariffs paid by the system users. 
  • A concession contract is typically valid for 25–30 years so that the operator has sufficient time to recover the capital invested and earn an appropriate return over the life of the concession. 
  • Government may contribute to the capital investment cost by way of subsidy (Viability Gap Funding - VGF) to enhance commercial viability of the concession. 
  • The concessions are effective contracts to provide investment for creation of new facilities or rehabilitation facilities.

Build Operate Transfer (BOT) : 
  • BOT and similar arrangements are a kind of specialized concession in which a private firm or consortium finances and develops a new infrastructure project or a major component according to performance standards set by the government. 
  • Under BOTs, the private partner provides the capital required to Build the new facility, Operate & Maintain (O&M) for the contract period and then return the facility to Government as per agreed terms. 
  • Importantly, the private operator now owns the assets for a period set by contract—sufficient to allow the developer time to recover investment costs through user charges.
BOTs generally require complicated financing packages to achieve the large financing amounts and long repayment periods required. At the end of the contract, the public sector assumes ownership but can opt to assume operating responsibility, contract the operation responsibility to the developer, or award a new contract to a new partner. The main characteristic of BOT and similar arrangements are given below:-

  • Design Build (DB) : Where Private sector designs and constructs at a fixed price and transfers the facility.

  • Build Transfer Operate (BTO) : Where Private sector designs and builds the facility. The transfer to the public owner takes place at the conclusion of construction. Concessionaire is given the right to operate and get the return on investment.

  • Build-Own-Operate (BOO) : A contractual arrangement whereby a Developer is authorized to finance, construct, own, operate and maintain an Infrastructure or Development facility from which the Developer is allowed to recover his total investment by collecting user levies from facility users. Under this Project, the Developer owns the assets of the facility and may choose to assign its operation and maintenance to a facility operator. The Transfer of the facility to the Government, Government Agency or the Local Authority is not envisaged in this structure; however, the Government, may terminate its obligations after specified time period.

  • Design-Build Operate (DBO) : Where the ownership is involved in private hands and a single contract is let out for design construction and operation of the infrastructure project.

  • Design Build Finance Operate (DBFO) With the design–build–finance–operate (DBFO) approach, the responsibilities for designing, building, financing, and operating & maintaining, are bundled together and transferred to private sector partners. DBFO arrangements vary greatly in terms of the degree of financial responsibility that is transferred to the private partner

  • Build- Operate- Transfer (BOT) : Annuity/Shadow User Charge : In this BOT Arrangement, private partner does not collect any charges from the users. His return on total investment is paid to him by public authority through annual payments (annuity) for which he bids. Other option is that the private developer gets paid based on the usage of the created facility.

Joint Venture: 
  • Joint ventures are alternatives to full privatization in which the infrastructure is co-owned and operated by the public sector and private operators. 
  • Under a joint venture, the public and private sector partners can either form a new company (SPV) or assume joint ownership of an existing company through a sale of shares to one or several private investors. 
  • A key requirement of this structure is good corporate governance, in particular the ability of the company to maintain independence from the government, because the government is both part owner and regulator. 
  • From its position as shareholder, however, the government has an interest in the profitability and sustainability of the company and can work to smoothen political hurdles.

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