Public-Private Sector Partnership (PPP)
Public-private partnerships between a government agency and private-sector company can be used to finance, build and operate projects, such as public transportation networks, parks and convention centers. Financing a project through a public-private partnership can allow a project to be completed sooner or make it a possibility in the first place.
Public-private partnerships have contract periods of 25 to 30 years or longer. Financing comes partly from the private sector but requires payments from the public sector and/or users over the project’s lifetime. The private partner participates in designing, completing, implementing and funding the project, while the public partner focuses on defining and monitoring compliance with the objectives. Risks are distributed between the public and private partners according to the ability of each to assess, control and cope with them.
Benefits and Risks of Public-Private Partnerships Private-sector technology and innovation help provide better public services through improved operational efficiency. The public sector provides incentives for the private sector to deliver projects on time and within budget. In addition, creating economic diversification makes the country more competitive in facilitating its infrastructure base and boosting associated construction, equipment, support services and other businesses. Physical infrastructure such as roads or railways involve construction risks. If the product is not delivered on time, exceeds cost estimates or has technical defects, the private partner typically bears the burden.
The private partner faces availability risk if it cannot provide the service promised. For example, the company may not meet safety or other relevant quality standards when running a prison, hospital or school.
Demand risk occurs when there are fewer users than expected for the service or infrastructure, such as toll roads, bridges or tunnels. If the public partner agreed to pay a minimum fee no matter the demand, that partner bears the risk.
It is a non-traditional procurement method of project financing whereby a private or public sector client gives a concession to a private entity to build a facility (and possibly design it as well), own the facility, lease the facility to the client, then at the end of the lease period transfer the ownership of the facility to the client.
As a system of project financing this procurement method has a number of advantages the major one being that the private entity, contracted by the client, has the responsibility to raise the project finance during the construction period. What this does is to remove the burden of raising the finances for the project from the client (i.e. the public enterprise) and places it on the private entity. This way the BOLT developer assumes all the risk, the risk of raising the project financing and the risk during the construction period. Of course such risk is not undertaken for free by the developer but comes at a cost, which is passed onto the client. The operational and maintenance responsibility for the facility is the developer’s, as the facility is owned by them until the lease period ends.
The lease period will see the client who in essence becomes the tenant of the facility, paying the developer a lease (monthly or annually) for the use of the facility at a predetermined rate for a fixed period of time. The lease payment becomes the method of repaying the investment, and ultimately rewarding the developer’s shareholders. At the end of the lease period, ownership of and the responsibility for the facility are transferred to the client from the developer at a previously agreed price.
Build Operate Transfer (BOT)
A Build Operate Transfer (BOT) Project is typically used to develop a discrete asset rather than a whole network and is generally entirely new or greenfield in nature (although refurbishment may be involved). In a BOT Project the project company or operator generally obtains its revenues through a fee charged to the utility/ government rather than tariffs charged to consumers. In common law countries a number of projects are called concessions, such as toll road projects, which are new build and have a number of similarities to BOTs . In a Design-Build-Operate (DBO) Project the public sector owns and finances the construction of new assets. The private sector designs, builds and operates the assets to meet certain agreed outputs. The documentation for a DBO is typically simpler than a BOT or Concession as there are no financing documents and will typically consist of a turnkey construction contract plus an operating contract, or a section added to the turnkey contract covering operations. The Operator is taking no or minimal financing risk on the capital and will typically be paid a sum for the design-build of the plant, payable in instalments on completion of construction milestones, and then an operating fee for the operating period. The operator is responsible for the design and the construction as well as operations and so if parts need to be replaced during the operations period prior to its assumed life span the operator is likely to be responsible for replacement. This section looks in greater detail at Concessions and BOT Projects. It also looks at Off-Take/ Power Purchase Agreements, Input Supply/ Bulk Supply Agreements and Implementation Agreements which are used extensively in relation to BOT Projects involving power plants. This section does not address the complex array of finance documents typically found in a Concession or BOT Project.