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.
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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.
