Introduction, meaning and types of Public private partnerships in production and provision

1. Public- private partnerships in
production and provision

2. Meaning
 A public–private partnership (PPP, 3P
or P3) is a cooperative arrangement
between two or more public and
private sectors, typically of a long-term
nature.
 PPPs are best seen as a special kind
of contract involved in infrastructure
provision, such as the building and
equipping of schools, hospitals,
transport systems, water and
sewerage systems

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 In a public-private partnership (PPP),
companies and government bodies or
civil society organizations work
together.
 For example, in the area of housing or
infrastructure.
 The partnership may be solely
financial (donations and sponsorship),
but may also involve a more concrete
collaboration.

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 Public-private partnership (PPP) is a
funding model for a public infrastructure
project such as a new
telecommunications system, airport or
power plant. The public partner is
represented by the government at a
local, state and/or national level. The
private partner can be a privately-owned
business, public corporation or
consortium of businesses with a specific
area of expertise.

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 PPP is a broad term that can be applied to
anything from a simple, short term
management contract (with or without
investment requirements) to a long-term
contract that includes funding, planning,
building, operation, maintenance and
divestiture.
 PPP arrangements are useful for large
projects that require highly-skilled workers
and a significant cash outlay to get started.
They are also useful in countries that require
the state to legally own any infrastructure that
serves the public.

6. For Example
 For governments seeking to expand
infrastructure, the public-private
partnership offers an option that lies
somewhere between public procurement
and privatization. Ideally, it brings private
sector competencies, efficiencies, and
capital to improving public assets or
services when governments lack the
upfront cash. Companies agree to take
on risk and management responsibility in
exchange for profits linked to
performance.

7. PPP is based on two main
principles:
 Both parties invest in the project. In a
financial sense (manpower, materials
budget) and in an expertise-related
sense (knowledge, networks).
 The parties contribute to a societal
and often also commercial purpose.

8. Different Models of PPP
 Different models of PPP funding are
characterized by which partner is
responsible for owning and
maintaining assets at different stages
of the project. Examples of PPP
models include:
 Design-Build (DB)
 Operation & Maintenance Contract (O & M)
 Design-Build-Finance-Operate
(DBFO)

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 Build-Own-Operate-Transfer (BOOT)
 Buy-Build-Operate (BBO)
 Build-lease-operate-transfer (BLOT)
 Operation License
 Finance Only

10. 1. Design-Build (DB)
 The private-sector partner designs
and builds the infrastructure to meet
the public-sector partner's
specifications, often for a fixed price.
The private-sector partner assumes all
risk.

11. 2. Operation & Maintenance Contract (O & M)
 The private-sector partner, under
contract, operates a publicly-owned
asset for a specific period of time. The
public partner retains ownership of the
assets.

12. 3. Design-Build-Finance-Operate (DBFO)
 The private-sector partner designs,
finances and constructs a new
infrastructure component and
operates/maintains it under a long-
term lease. The private-sector partner
transfers the infrastructure component
to the public-sector partner when the
lease is up.

13. 4. Build-Own-Operate (BOO)
 The private-sector partner finances,
builds, owns and operates the
infrastructure component in perpetuity.
The public-sector partner's constraints
are stated in the original agreement
and through on-going regulatory
authority.

14. 5. Build-Own-Operate-Transfer (BOOT)
 The private-sector partner is granted
authorization to finance, design, build
and operate an infrastructure
component (and to charge user fees)
for a specific period of time, after
which ownership is transferred back to
the public-sector partner.

15. 6. Buy-Build-Operate (BBO)
 This publicly-owned asset is legally
transferred to a private-sector partner
for a designated period of time.

16. 7. Build-lease-operate-transfer (BLOT)
 The private-sector partner designs,
finances and builds a facility on leased
public land. The private-sector partner
operates the facility for the duration of
the land lease. When the lease
expires, assets are transferred to the
public-sector partner.

17. 8. Operation License
 The private-sector partner is granted a
license or other expression of legal
permission to operate a public service,
usually for a specified term. (This
model is often used in IT projects.)

18. 9. Finance Only
 The private-sector partner, usually a
financial services company, funds the
infrastructure component and charges
the public-sector partner interest for
use of the funds.

19. PPPs Structure :
 These are complex long-term contracts.
 They typically span 15, 20, 25 years, sometimes
more, depending on the nature of the project.
 In that period of time, technology, demographics,
environment, and politics can all change, so
contracts needs to be flexible to adjust to the
project’s life cycle. The art of a PPP resides in
the allocation of risks of the project and in the
definition of the framework, principles, and rules
to deal with change, because it will occur.
 So fundamentally in structuring a PPP contract
we need to articulate a set of incentives and
penalties to potential actions of the parties, so to
ensure the stability and sustainability of the
project.

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 PPPs always take place in the arena of the
political economy because the parties
contracting are not equal.
 One party is a government/public entity, and
the other one is a private entity. Governments
change and so do policies.
 And in countries where the rule of law is not
enough established to maintain the stability of
the contract, investors see a significant
political risk that will need to be mitigated.
 This applies to termination of contracts but
also to payment risks.

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 A main risk is the regulatory one, e.g.,
the commitment of government to
comply with a tariff law.
 Adjustment of tariffs can be highly
political, particularly in electoral years,
and therefore a private project can be
easily politicized.
 Investors seek protection against such
risks through guarantees, sometimes
backed by a multilateral, international
arbitration for dispute resolution and
higher returns on equity.

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 The public party also needs protections
from the private partner. Private
investors typically provide performance
guarantees, sometimes parent
guarantees that can be unlimited or
capped.
 If the company doesn’t deliver the
product or service at the agreed level of
quality or the timing contracted.
 if the building isn’t finished on time, if the
water supply doesn’t meet the specified
safety levels, the government draws on
such guarantees.

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 Proportionality of penalties regarding
the type of non-compliance is
important for the sustainability of the
contract over the long term.
 But contracts should mainly rule by
incentives rather than penalties, giving
both parties every reason to fulfill their
obligations for the entire term of the
contract.

24. Public-Private Partnership
Benefits
 They provide better infrastructure
solutions than an initiative that is
wholly public or wholly private. Each
participant does what it does best.
 They result in faster project
completions and reduced delays on
infrastructure projects by including
time-to-completion as a measure of
performance and therefore of profit.

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 Risks are fully appraised early on to
determine project feasibility. In this
sense, the private partner can serve as a
check against unrealistic government
promises or expectations.
 A public-private partnership's return on
investment, or ROI, might be greater
than projects with traditional, all-private
or all-government fulfillment. Innovative
design and financing approaches
become available when the two entities
work together.

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 The operational and project execution
risks are transferred from the
government to the private participant,
which usually has more experience in
cost containment.
 By increasing the efficiency of the
government's investment, it allows
government funds to be redirected to
other important socioeconomic areas.

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 Public-private partnerships may
include early completion bonuses that
further increase efficiency. They can
sometimes reduce change order
costs as well.
 The greater efficiency of P3s reduces
government budgets and budget
deficits.

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 High-quality standards are better
obtained and maintained throughout
the life cycle of the project.
 Public-private partnerships that reduce
costs potentially can lead to
lower taxes.

29. Public-Private Partnership
Disadvantages
 Every public-private partnership
involves risks for the private participant, who
reasonably expects to be compensated for
accepting those risks. This can increase
government costs.
 When there are only a limited number of
private entities that have the capability to
complete a project, such as with the
development of a jet fighter, the limited
number of private participants that are big
enough to take these tasks on might limit the
competitiveness required for cost-effective
partnering.

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 Profits of the projects can vary
depending on the assumed risk, the
level of competition, and the
complexity and scope of the project.
 If the expertise in the partnership lies
heavily on the private side, the
government is at an inherent
disadvantage. For example, it might
be unable to accurately assess the
proposed costs.