Public-Private Partnership

Public-Private Partnership (PPP) can be broadly defined as a contractual agreement between the Government and a private firm targeted towards financing, designing, implementing and operating infrastructure facilities and services that were traditionally provided by the public sector. It embodies optimal risk allocation between the parties – minimizing cost while realizing project developmental objectives. Thus, the project is to be structured in such a way that the private sector gets a reasonable rate of return on its investment.

PPP offers monetary and non-monetary advantages for the public sector. It addresses the limited funding resources for local infrastructure or development projects of the public sector thereby allowing the allocation of public funds for other local priorities. It is a mechanism to distribute project risks to both public and private sector. PPP is geared for both sectors to gain improved efficiency and project implementation processes in delivering services to the public. Most importantly, PPP emphasizes Value for Money – focusing on reduced costs, better risk allocation, faster implementation, improved services and possible generation of additional revenue.

 

Elements of Public-Private Partnership

  1. Strategic mode of procurement
  2. A contractual agreement between the public sector and the private sector
  3. Shared risks and resources
  4. Value for Money
  5. Outcome orientation
  6. Acceleration of infrastructure provision and faster implementation

 

General Forms of PPP

Generally, there are two common forms of PPP structure: availability and concession-based PPPs. The two forms could be distinguished from each other based on what the public or private parties assume within the partnership, e.g. rights, obligations, and risks.

  1. Availability PPP
  2. Concession PPP

A form of PPP wherein the public authority contracts with a private sector entity to provide a public good, service or product at a constant capacity to the implementing agency (IA) for a given fee (capacity fee) and a separate charge for usage of the public good, product or service (usage fee). Fees or tariffs are regulated by contract to provide for recovery of debt service, fixed costs of operation and a return on equity.

 

A form of PPP wherein the government grants the private sector the right to build, operate and charge public users of the public good, infrastructure or service, a fee or tariff which is regulated by public regulators and the concession contract. Tariffs are structured to provide for recovery of debt service, fixed costs of operation, and return on equity.

 

PPP Contractual Arrangements

There are various PPP contractual arrangements reflecting how risks are shared and the roles between the government and the private proponent. Build-operate-and-transfer (BOT) projects and its other variants can be structured as either a concession or availability agreement.

 

Partnership between the government and private sector for infrastructure and development projects can be made possible through a broad spectrum of modalities. The following are the contractual arrangements which may be undertaken

 

  1. Build-and-transfer (BT)
  2. Build-lease-and-transfer (BLT)
  3. Build-operate-and-transfer (BOT)
  4. Build-own-and-operate (BOO)
  5. Build-transfer-and-operate (BTO)
  6. Contract-add-and-operate (CAO)
  7. Develop-operate-and-transfer (DOT)
  8. Rehabilitate-operate-and-transfer (ROT)
  9. Rehabilitate-own-and-operate (ROO)

 

Advantages of PPP

In general, governments tap public-private partnership (PPP) for the following reasons:

  1. National Budget and official development of assistance are limited and are subject to government prioritization. Private sector funding, on the other hand, is readily available. It may be tapped to  funds and the government budget to implement critical government projects.
  2. In the case of big ticket infrastructure projects, PPPs utilize the financial capital of the private sector. Through it, project construction and service delivery is accelerated.
  3. PPPs make projects affordable.
  4. Government spending will be less if the project is undertaken as a PPP, since the private sector funds their share of the project (including operation and maintenance) during the duration of the concession. PPP projects consider the whole of life costing approach (whole lifecycle costing) which ultimately lowers capital and operating costs.
  5. All PPP projects undergo a competitive, transparent bidding. PPP project proponents usually provide the most cost-effective capital goods necessary for the project.
  6. PPPs deliver value for money.
  7. Value for money (VfM) is achieved when the government obtains the maximum benefit from the goods and services it both acquires and provides. It is the best available outcome after taking into account all the benefits, costs, and risks over the entire project life, which may not necessarily be the lowest cost or price.
  8. For the PPP for School Infrastructure Project (PSIP) Phase 1, the PPP scheme was identified as the most optimal financing option available for the government to address the current classroom backlog in the country. Under this scheme, the government will be able to deliver the needed classrooms in the shortest time possible.
  9. In PPPs, each risk is allocated to the party who can best manage or absorb it.

    10. In PPPs, risks are assumed by the party that is best able to manage and assume the   

        consequences of the risk involved.

   11. PPPs enable the government to take on fewer risks due to shared risk allocation. Generally, the        private sector takes on the project’s life cycle cost risk, while the government assumes site  

      risks, legislative and government policy risks, among others.

12. PPPs force the public sector to focus on outputs and benefits from the start.

13. Project preparation activities are more rigorous in public-private partnerships. This ensures 

     that the project is highly bankable and can stand public scrutiny. Better project preparation and

     execution will result in adherence to project design within the agreed timelines.

14. In PPPs, the government focuses on providing quality infrastructure and services by setting each

     project’s minimum performance standards and specifications .

15. With PPPs, the quality of service has to be maintained for the entire duration of the cooperation

     period.

16. In PPPs, project execution will be more rigorous as project ownership belongs to the project 

     proponents. The public sector only pays when services are delivered satisfactorily.

17. During the implementation stage, an independent consultant is hired to ensure that both public 

     and private parties adhere to the terms of the contract/ concession agreement.

18. PPPs encourage innovation.

19. PPPs maximize the use of private sector skills. It utilizes higher levels of private sector efficiency,

     specialization, and technology.

 

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