Frequently Asked Questions
PPPs have been used for delivery of services worldwide in sectors like, power, education, roads, aviation and even in some specific segments of defense services like facility maintenance and simulators procurement/training.
A typical example of a PPP in Nigeria is the contractual agreement between FAAN and Bi-Courtney Aviation Services for the Build Operate and Transfer (BOT) of MMA2 domestic airport terminal in Lagos.
Types of PPPs
There a number of models or types of PPPs; these are primarily distinguished by two factors (1) degree of risk allocation between the public and private sectors and associated investment levels (2) length of the contract period. The main types are:
- Service Contract PPPs
- Management Contract PPPs;
- Lease Contract PPPs;
- Concession Contract PPPs- Often called core PPPs because a substantial amount of risk is fully transferred to the private sector.
- Build–Operate–Transfer (BOT) and similar arrangements PPPs – Often also called core PPPs because a substantial amount of risk is fully transferred to the private sector.
Service Contract PPPs
Under a service contract PPP, the public sector 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 sector 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. Under a service contract PPP, the government pays the private partner a predetermined fee for the service, which may be based on a one-time fee, unit cost, or other basis.
Management Contract PPPs
A management contract expands the services to be contracted out to include some or all of the management and operation of a public sector infrastructure service (i.e., utility, hospital, port facilities etc.). Although ultimate obligation for service provision remains with 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 partner is paid a predetermined rate for labor and other anticipated operating costs. To provide an incentive for performance improvement, the private partner is paid an additional amount for achieving pre specified targets. Alternatively, the management contractor can be paid a share of profits. The public sector retains the obligation for major capital investment, particularly those related to expanding or substantially improving the system.
Lease Contract PPPs
Under a lease contract, the private sector 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 sector. The private operator provides the service at his expense and risk. The duration of the lease contract is typically for or above 10 years and may be renewable. Full responsibility for service provision is transferred from the public sector to the private sector and the financial risk for operations and maintenance is borne entirely by the private sector. The private sector makes lease payments to the public sector as contractually agreed. Furthermore, the private operator is responsible for losses and for unpaid consumers’ debts.
Concession Contract PPPs
A PPP concession contract is one that makes the private sector concessionaire responsible for the full delivery of the specified infrastructure services in a specified area, including operation, maintenance, collection, management, and construction and rehabilitation of the system. Importantly, the private sector is responsible for all capital investment. Although the private sector is responsible for providing the infrastructure asset, such assets are owned by the public sector 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 rare 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. The concessionaire is also responsible for working capital. 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. The public sector may contribute to the capital investment cost if necessary. This can be an investment “subsidy” (ie. viability gap funding) to achieve commercial viability of the concession.
Build Operate Transfer (BOT) and similar arrangements PPPs
BOT and similar arrangements are a kind of specialized concession in which the private sector or private sector consortium finances and develops a new infrastructure project or a major component according to performance standards set by the public sector. There are many variations of BOT-type contracts in the literature and in use. Under BOTs, the private partner provides the capital required to build the new facility. Importantly, the private operator is said “to now own the assets for a period set by the contract” —sufficient time is therefore allowed for the private sector developer to recover investment costs through user charges. The public sector may in some cases agree to purchase a minimum level of output produced by the facility to guarantee the private sector ability to recover its costs during operation. 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 operations responsibility to the developer, or award a new contract to a new partner. The distinction between a BOT-type arrangement and a concession—as the term is used here—is that a concession generally involves extensions to and operation of existing systems, whereas a BOT generally involves large “greenfield” investments requiring substantial outside finance, for both equity and debt.
Privatization refers to the partial or full divestiture of government ownership of an asset. Thereafter asset maintenance and service is determined and provided by the new private owners. No risks and rewards are shared between the public and private sectors in privatization. The new private owners carry risks and rewards conferred by their full or partial ownership of the asset.
- To attract private expertise and or capital investment for infrastructure and service delivery improvements (often to either supplement scarce public resources or release them for other public needs).
- To increase efficiency and use available resources for infrastructure and service delivery more effectively.
- To reform sectors through a reallocation of roles, incentives and improve accountability.
Experience with PPPs worldwide, has shown that if you consider full life cycle cost to deliver, operate and maintain the asset over a long period as most infrastructure services require, a well prepared PPP delivers greater efficiencies, value for money and significantly improved service delivery levels. Only such PPPs are supported by the ICRC.
It provides the legal framework which gives the private sector the confidence to engage with the public sector.
It allows for the continuous monitoring of signed contracts by ICRC to ensure compliance.
- The expectations of the Private investor (Rules, Timelines, Agreements, Investment), the Government (Feasibility, Viability, Value for Money, Compliance), and the Public (Availability, Affordability, Accountability) are optimally managed.
- PPP infrastructure services are delivered in a sustainable manner.
- Lack of an empowered PPP project champion within the public sector.
- Lack of leadership and ownership of the PPP project among the PPP developers either in the public or private sector.
- Lack of a detailed and bankable outline business case or feasibility study carried out by relevant experts.
- Refusal by either the public or private sector to spend time and money preparing the PPP project well.
- Overly ambitious and aggressive PPP project development timeframe.
- Selection of project advisers on the basis of cost only without a detailed consideration of their quality and experience.
- Lack of effective engagement with all relevant stakeholders.
- Information asymmetry between the public and private sector; leading to PPP contract terms that the public sector will in due course find difficult to accept or enforce.
- Poor feasibility analysis, particularly in terms of forecasting demand for the infrastructure service. A number of PPP contracts have also failed because revenues have fallen well short of projections. In some cases this is the result of inadequate feasibility analysis or aggressive bidding.
- Inexperienced or weak private sector sponsor in terms of lack of skills and experience to deliver the infrastructure service. These types of sponsors are often selected as a result of political expediency.
- Inappropriate enabling environment in terms of poor legal and regulatory framework, as well as weak enforcement capacity of the public sector.
- Lack of a proper contract management and monitoring framework by the public sector, from the initial project development and procurement stages through the post financial close phases of construction and operation.
- Political pressure and issues related to the application or increase of tariffs for use of infrastructure services to make them cost reflective. This has been the case for the water and electricity sector projects in many developing countries.
- Macroeconomic shocks such as the world financial crises or foreign exchange fluctuations may reduce the revenues and profitability of a PPP project and lead to its ultimate failure.