What are PPPs?
A Public-Private Partnership as defined by the National Council for Public Private Partnerships is a “contractual agreement between a public agency (federal, state or local) and a private sector entity. Through this agreement, the skills and assets of each sector (public and private) are shared in delivering a service or facility for the use of the general public. In addition to the sharing of resources, each party shares in the risks and rewards potential in the delivery of the service and/or facility”.  In effect, the key defining elements of a PPP is the focus on service delivery and a real partnership that involves the sharing of risks and rewards.

PPPs have been used for delivery of services worldwide in sectors like, power, education, roads, aviation and even in some specific segments of defence 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.

What PPPs are not

  1. PPP is not privatization or disinvestment
  2. PPP is not about borrowing money from the private sector
  3. PPP is more about creating a structure
    • In which greater value for money is achieved for services,
    • Through private sector innovation and management skills
    • Delivering significant improvement in service efficiency levels
  4. This means that the public sector
    • No longer builds roads, it purchases kilometres of maintained highway
    • No longer builds prisons, it buys custodial services
    • No longer operates ports but provides port services through world class operators
    • No longer builds power plants but purchases power

Seven essential conditions that define PPPs
7-PPP-Conditions

  1. Arrangement between public and private.

  2. Provision of service for public benefit by private partner.

  3. Investments in and /or management of public assets by the private partner.

  4. Time period for a specified period.

  5. Risk sharing optimally between contracting parties

  6. Standards focus on quality of service/performance (ie output requirements).

  7. Payments linked to performance.

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.

Why PPPs?
There are three main reasons that motivate governments to enter into PPPs for infrastructure and service:

  • 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

Key benefits of PPP

  1. Rigorous project preparation – since the focus shifts to developing bankable projects
  2. Delivery of a whole life solution – going beyond asset creation and including Operation and Maintenance (O&M)
  3. Focus shifts to service delivery – construction responsibility is integrated with O&M obligations and together with appropriate quality monitoring and service delivery-linked payments such an arrangement could enhance the levels of service  delivery
  4. It is possible to adopt a programmatic approach to infrastructure development and service delivery – various time bound projects can be integrated under a programme and have a time-bound implementation plan
  5. Can lead to better overall management of public services – transparency in selection and ongoing implementation

Key principles of PPPs

  • Value for Money

Ensure project appraisals take into account not only cost but also risks and service quality

  • Public interest

Adequate and prior consultation with end-users and other stakeholders of an infrastructure project as standard.

  • Output requirements

Concept of “verifiable service standards” to be used as basis for output or performance based specifications.

  • Transparency

Very high world class standards of public and corporate governance to enhance credibility and transparency.

  • Risk allocation

Risks allocated to the party best able to manage them.

  • Competition

Ensure business activities are subject to competition and appropriate commercial pressures, dismantling unnecessary barriers to entry, and implementing and enforcing adequate competition.

  • Capacity to deliver

Ensure authorities responsible for privately operated infrastructure have the capacity to manage the commercial processes involved and to partner on equal basis with their private sector counterparts.

PPP lifecycle
PPP transaction activities are captured in the four stages of a PPP project lifecycle. The four stages are as follows;

Stage 1: Project Development and Appraisal

  • Project Identification and Preparation
  • Options Appraisal and Cost benefit analysis
  • Prioritization of economically worthwhile projects
  • Securing Project approval

Stage 2: Project Procurement

  • Preparation of tender documentation
  • Tendering prequalification and full tender
  • Tender evaluation
  • Selection of preferred bidder

Stage 3: Project Implementation

  • Award of contract
  • Implementation of project
  • Monitoring compliance with contractual requirements

Stage 4: Project Maturity

  • Commissioning, completion, and handover
  • Monitoring and maintenance of completed project
  • Formal post-project evaluation

National PPP processes
A SOLICITED PPP Procurement over Federal Government Infrastructure would follow the following steps:

  1. PPP Project Identification Phase
  • Relevant Ministry, Department or Agency (MDA) will prioritize its projects and identify those to be developed through PPP. MDA would then prepare and submit a Project Concept Note to the Commission for assessment.
  • If the Commission’s assessment finds the project eligible for delivery through PPP, the Commission will advise MDA to begin Project Development. The MDA will constitute a Ministerial Project Steering Committee and a Project Delivery Team for the Project.
  • The Commission will annually develop an eligible pipeline of PPP projects for Approval by the Federal Executive Council (FEC)
  1. PPP Project Development and Preparation Phase
  • Where MDA has no internal capacity to prepare an Outline Business Case[1] (OBC) for the project, the MDA shall engage a Transaction Adviser (TA) through a competitive bidding process as required under the Public Procurement Act of 2007, to produce the OBC. The TA will also guide the MDA through the entire transaction until an agreement is signed between parties.
  • The MDA would thereafter forward the OBC to the Commission for review. The Commission would issue an OBC Certificate of Compliance to the MDA or decline issuance and advise the MDA with reasons.
  • The Commission would consult the Federal Ministry of Finance (FMoF) in order to identify and appropriately handle any risk and contingent liabilities issues that may arise from the project.
  1. PPP Procurement Phase
  • If the project is approved by FEC, the MDA would commence a procurement process leading to the emergence of a preferred PPP Project Proponent.
  • Negotiations would thereafter ensue, leading to the conclusion of a Full Business Case (FBC)[2] to be submitted to the Commission for review. The Commission would thereafter issue an FBC Certificate of Compliance to the MDA or decline issuance and advise the MDA with reasons.
  • The MDA would submit the FBC along with the Commission’s Certificate of Compliance to FEC for Approval. If FEC approves the FBC, the PPP contract between the MDA and the preferred PPP Project Proponent will be signed after which the Commission will thereafter take custody of the contract as required under the Section 20 of the Infrastructure Concession Regulatory Commission (Establishment Etc) Act 2005 (The Act).
  1. PPP Implementation Phase
  • Eventually, for the project to take off, the preferred PPP Project Proponent must achieve Financial Close.[3]
  • The MDA is required under Section 12 of the Act to supervise the project diligently. On the other hand the Commission and the MDA are required, under Section 10 of the Act, to conduct regular joint Inspections of the Project until the end of the contract.

[1] Outline Business Case. A document that aims to establish the need for the project and to outline parameters and scope, including cost and bankability demonstration.

[2] Full Business Case:  A document prepared by the MDA’s TA prior to financial close and award of contract which provides all the information needed to support a decision to award a contract and commit actual funding, as well as provide a basis for the necessary project management, monitoring evaluation and benefits realization.

[3] Financial Close: The time when the financial documentation and covenants have been executed with lenders to the project, and condition precedent have been satisfied or waived . it is now permissible to draw money for project execution.

PPP Process Delivery Mechanism
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Pre-requisites for a project to be considered and undertaken on a PPP basis:

  • The public entity should have the enabling authority to transfer its responsibility – enabling legislative & policy framework OR an administrative order to that effect.

There should be a significant transfer of responsibility to the private entity – usually including financial investment obligations.

  • Engagement with a Private Partner should bring in Value for Money.

Payment to the private entity for services based on achievement of pre-specified levels and standards of performance – directly by users (tolls/user fees) or paid by the public entity (annuities for instance).

  • The instrument of transfer is the Contract or Concession Agreement

The nature of the relationship should be long-term in order to derive maximum benefits.

PPP versus Traditional/Public Procurement
Traditional Procurement

Traditional/Conventional procurement model is when the government generally funds 100 per cent. This traditional approach involves extensive design work before the project is procured and there is limited project-related risk transferred to a private contractor.

PPP Procurement

PPP model may be most appropriate for capital projects with significant ongoing maintenance requirements. For these projects, the contracting entity can offer project management skills, innovative design and risk management expertise that can bring substantial benefits. Properly implemented, a P3 helps to ensure that desired service levels are maintained, that new services start on time, facilities are completed on budget, and that the assets built are of sufficient quality that will be maintained to a contracted quality over their service life. PPPs ensure that contractors are bound into long-term operational contracts and carry the responsibility for the quality of the work they do[1]. (See table below)

Characteristic Public procurement PPP
Focus Procuring Assets Procuring Services
Project management Public sector is responsible for all project management roles Private sector manages overall project – design, construction, operations and maintenance. Focus on project life cycle expected to bring efficiency.
Service Delivery Public sector directly responsible for service delivery to users Private sector directly responsible for service delivery to users
Financing Public sector responsible for financing the project. Thus financing impacted by budgetary allocations and then actual disbursements Private sector may contribute finance through debt and equity issuances
Risk Sharing Public sector bears all project risks. Risk sharing limited to the extent of warranties. Risks allocated to parties which can manage them most efficiently
Contractual Arrangement Short term, generally segregated contracts for asset creation (BOQ based) and maintenance. Long term contracts- Public sector/users pay for services linked to performance.

[1] “Review of Operational PFI and PPP Projects”. 4Ps (now Local Partnerships), HM Treasury, UK, 2005

http://www.localpartnerships.org.uk/UserFiles/File/Publications/review_of%20_operational_PFI_PPP_schemes.pdf

PPP versus Privatization
Privatization and PPPs are both forms of private sector participation in infrastructure service delivery. However, in PPPs the public sector retains underlying ownership of the asset and accountability for service delivery, while physical asset provision and service delivery is provided by the private sector in line with the PPP contract agreement. Risks and rewards in a PPP are allocated and shared in line with the PPP contract between the public and private sectors.

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.

Why do some PPP contracts fail?
PPP contracts have failed for a number of reasons. Some of the most common reasons for their failure are:

  • 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.

Common mistakes to avoid when developing PPPs are:

  • 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.

Common Myths on PPPs

PPPs: Common Myths/Concerns
Myths Clarity
1 Profit  motive of private sector is incompatible with the service motive of public sector No. The key is to harness private sector’s profit motive, by incentivizing them to provide better quality service and earn reasonable return.
2 PPPs increase user tariffs Not Necessarily. When appropriate safeguards like effective regulation and/or adequate competition are in place.However in sectors where existing tariffs are inadequate to cover costs of specified level of service tariffs may initially require some upward adjustment. Over time efficiency gains expected to rationalize tariffs.
3 Money for PPPs comes from private sector “pockets” Initially, YES.  But private sector would make those investments provided they can recover those investments either from users or the government with reasonable return.
4 Once a private sector partner is brought in, there is little or no role for the public sector No. Public sector’s role changes from direct involvement in construction and service provision, to ensuring that the PPP delivers value for money for the government and better services for users.