What is Public Private Partnership?
A Public-Private Partnership (PPP) is a form of public procurement that involves a contractual agreement between a public sector entity (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 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.
What is the difference between 'Privatization' and 'PPP '?
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.
Is the PPP approach not more complex, more time-consuming and thus more expensive in comparison to the traditional procurement method?
Yes. The PPP approach is often more complex, expensive and time consuming compared to traditional budgetary procurement. However, service delivery by traditional procurement has not met government and public expectations. 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.
What is the estimated time frame for a PPP Project?
The time frame for PPPs depends on the type and size of infrastructure under consideration. Service or Management contract PPPs focus on improving service delivery with limited investment and risk transfer to the private sector and can be delivered in 3 months to a year. While economic and social infrastructure PPPs like airports/roads delivery require significant studies, financing, risk transfer to the private sector and often also involve significant sector reforms by the public sector, can take between one to seven years from conception, through development to implementation and service delivery commencement.
What does the ICRC Act aim to achieve and to what extent has this been realized?
The ICRC Act gives Ministries, Departments and Agencies (MDAs) of Government the legal authority to enter into concession agreements with the private sector.
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.
Does the name of the Act not appear to restrict ICRC's dealings to Concessions only?
The work of the ICRC is focused on concessions, and there are several definitions of the word “concession” in the PPP environment. However, for clarity, Section 36 (Interpretation) of the ICRC Act 2005, defines the meaning of concession thus;“a contractual arrangement whereby the project proponent or contractor undertakes the construction, including financing of any infrastructure, facility and the operation and maintenance thereof and shall include the supply of any equipment and machinery for any infrastructure and the provision of any services” This is indeed a classic and generic definition of PPPs covering many contractual forms.
What are the structures put in place to uphold a PPP contract through changing regimes / governments?
The ICRC ACT section 11 upholds contract sanctity and protects PPP contracts from arbitrary cancellation.
How does the ICRC guideline interact with the Public Procurement Act as regards procurements?
The National Policy on Public-Private Partnerships (N4P) stipulates four main stages of PPP project cycle: Development, Procurement, Implementation, and Maturity. The procurement stage is made up of five sub-stages; Preparation, Expression of Interest, Bidding, Final Business Case, and Contract Closure. Section 4 of the ICRC Act also specifically outlines the bidding process for PPP procurement. However, for the processes of Bid Submission, Bid Opening, and Bid Evaluation, the ICRC applies the Bureau for Public Procurement set procedures.
What is an Unsolicited Bid?
Is a proposal by a project proponent or prospective PPP partner or contractor which is not in response to an advertised REQUEST by a public sector procuring Authority
How will the Commission deal with pre-ICRC PPP-like arrangements entered into by the Nigerian government which terms/tenures are still current?
The ICRC Act was passed into Law by parliament in 2005, and there were PPP contracts entered into by the Federal Government, before 2005. However, in line with section 33 of the ICRC Act, the President of the Federal Republic of Nigeria, in 2009, directed the ICRC to take custody of pre-ICRC Act PPP agreements, and ensure compliance with the conditions of such agreements. These projects are referred to as “Legacy Projects” and the ICRC regulates the relations between the private and public partners involved in these PPP contracts in terms of contract and performance monitoring and dispute resolution.
What is ICRC's role on PPP Projects?
ICRC regulates the PPP procurement process to ensure it meets the standards set by the National Policy on Public-Private Partnership (N4P). Post PPP contract award, ICRC takes over the contracts and monitors the agreements to ensure compliance and acts as ombudsmen in the event of a dispute.
What kind of projects does ICRC get involved with?
ICRC is involved with all major economic and social infrastructure asset classes such as roads, rail, housing, ports etc.
At what stage of a transaction does the Commission come in?
ICRC is to be contacted at the inception of any project to ensure that the proper business case has been done and the procurement process is in line with the National Policy on Public-Private Partnership (NP4).
What are the lessons learnt from such projects?
Preparation! Preparation!! Preparation!!! Optimum resources and time should be put into developing economically and financially viable PPP feasibility studies called Outline Business Cases (OBC) in our National PPP policy framework, before inviting the private sector to bid for asset and service provision. Thereafter sufficient time and resources should be investing by the public sector on preparing good PPP contract agreements and then on good contract management over the PPP contract lifecycle.
What is an Outline Business Case?
Outline Business Case-(OBC) is the feasibility study deliverable from the project development phase of the PPP cycle that identifies the asset/service need via a detailed needs analysis and global options analysis for delivering the needed asset/service via various ways including PPP procurement.The OBC normally demonstrates the financial and economic viability of the preferred option for asset/service delivery via PPP procurement and its potential to attract private sector investors via appropriate financial and economic indices like return on investment (RoI) etc.
What is a Full Business Case?
Full Business Case-(FBC) is the deliverable from the procurement phase of the PPP cycle. The Full Business Case contains a detailed recommendation/justification of the preferred PPP partner or bidder from a competitive process usually managed by a qualified consultant or transaction adviser. The Full Business Case is usually approved by the Federal Executive Council (FEC) after which a formal PPP contract can be signed by the private and public sectors.
How does ICRC deliver value?
Apart from its core function of ensuring that PPP contracts are implemented as signed, the ICRC also ensures that;
- 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.
What are the most common mistakes to avoid when considering and developing PPP contracts for infrastructure service delivery?
PPP project development in line with the National PPP policy can often be a complex, expensive and time-consuming process. Every effort must be made to make the process as efficient as possible. Some 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 detailed consideration of their quality and experience.
- Lack of effective engagement with all relevant stakeholders.
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 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.
What is commercial close?
Commercial close is the point at which the commercial documentation has been executed with the public authority but before conditions precedent have been satisfied or waived between the financial lenders and the preferred bidder; this takes place before financial close.
This is the point at which the Public Sector authority signs the PPP Contract with the Preferred PPP Project Proponent, prior to the finalization of financial commitments between the Preferred PPP Project Proponent and its financial lenders.
What is financial close?
Financial Close is the time when the financial documentation and covenants have been executed with lenders to the project, and conditions precedent have been satisfied or waived. It is now permissible to draw money for project execution.
Does the Concessionaire have to be changed at the expiry of a PPP contract?
It depends on the provisions of the contract that governs the transaction. Sometimes, the private partner may be given a renewal depending on performance, and sometimes, there may be a requirement for re-bidding of the process and in some other situations, there may be transfer of asset to the public sector.
What is an SPV?
SPV means Special Purpose Vehicle and is the collaboration of several independent firms that come together to register a purpose-specific company i.e. a project-specific consortium. The companies involved enter into a contractual agreement that specifies their roles and obligations in executing the goals ahead of them. SPVs are also called Single Purpose Vehicles.
What is the meaning of bankable?
The term ‘bankable’ refers to a project or proposal being able to generate revenues sufficient to repay debt and satisfy the investor’s financial expectations.
What are output specifications?
Output specifications are the specific performance levels that the public agency expects the private investor to deliver in the course of the PPP contract.
On the government side, who acts as the Guarantor of PPP Projects? Is it the line Ministry or Parastatal under whom the project is domiciled?
Legally, the project is owned by the government, however, the body to act as a guarantor depends on who initiated the project in the first place. Parastatals are likely to provide the drive behind the projects but the Parastatals require the supervising Minister, being a member of the Federal Executive Council (FEC), to present the project for approval by FEC, prior to Commercial Close.