substantial role in PFI projects, either as the main purchaser of services
or as an essential enabler of the project. It differs from contracting out
in that the private sector provides the capital asset as well as the
services. The PFI differs from other PPPs in that the private sector
contractor also arranges finance for the project.
Under the most common form of PFI, the private sector designs, builds,
finances and operates (DBFO) facilities based on ‘output’ specifications
decided by public sector managers and their departments.1 Such
projects need to achieve a genuine transfer of risk to the private sector
contractor to secure value for money in the use of public resources
before they will be agreed. The private sector already builds most public
facilities but the PFI also enables the design, financing and operation of
public services to be carried out by the private sector. Under the PFI, the
public sector does not own an asset, such as a hospital or school but
pays the PFI contractor a stream of committed revenue payments for the
use of the facilities over the contract period. Once the contract has
expired, ownership of the asset either remains with the private sector
contractor, or is returned to the public sector, depending on the terms of
the original contract.
National Council for PPPs in USA defines PPPs as similar to UK
counterpart. In terms of contractual arrangements between a public
sector and private sector agency and for a profit concern. The objective
of PPP is to utilize the economics of private sector more efficiently and
effectively the service or infrastructure. U.S. DOT has defined , public
private partnership as a contractual agreement between a public
agency( federal, state or local) and a private sector entity. Through this
4
agreement, the skills and assets of each sector(public or private ) are
shared in delivering a service or facility for the use of the general public.
In addition to sharing of resources, each party shares in the risks and
rewards potential in the delivery of the service and /or facility.
The Canadian Council for PPPs (1998) defines a PPP as a cooperative
venture between public and private sectors built on the expertise of each
partner that best needs clearly defined public needs through
appropriate allocation of resources, risks and rewards. The Council does
not consider contracting out arrangement as a true PPP.
UNPPUE defines PPP as informal dialogues between government officials
and local community based organization to long term concession
agreements with private business and not privatization.
There’s no consensus about the concept of PPPs as being very
ambiguous. Some argue that PPPs includes a wide range of cooperation
between private and public sectors.
PPPs include a wide range of cooperation between public and private
sector. Bennet and Krebbs (1991) partnerships are part of economic
development. Colin argues that they are part of municipal development.
The inclusion of PPP in Local Economic Development programme was
initiated in 1980s by UK and Germany with a focus on specific sectors
or social groups at national level.
PPPs is regarded as a successor to privatization ( Middleton 2000).
Moore and Pierre (1998) Faulkhner (1997) and Colin (1998) claim that
PPPs should be regarded as a viable alternative to privatization and
socialization because they provide the opportunity to alter the
institutional milieu without loss of Municipal influence.
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Sindane (2000) argues in favor of PPP as compared to contractual
arrangements where a private party takes on the responsibility of
Government Departments such arrangements are different from selling
off of state assets or complete transfer of responsibility of relevant
services. spillers (2000) similarly suggests that PPPs offer advantages
over privatization and concession schemes.
A partnership involves two or more actors atleast one of which is public
and another private business sector such as in the context of a BOT
project (Tiong 1992) and Joint Venture Company (Eckel and vining
1985).Councils of government in US usually involve a no : of local
governments cooperating to provide some common services (Peter 1998).
Several practitioners (Tarantello amd Seymons, 1998) suggest that
partnerships between Non Profit organizations and local governments
should be counted as PPPs. In some instances, the Public sector has to
set up a special agency capable of entering into partnership before
collaboration becomes possible ( Grimsey and Graham, 1997, NHS,
1999).
There are numerous single one off relationship transactions between
public and private sectors. However, if one agency should return to
some supplier to purchase goods and services year after year, this does
not constitute a partnership (Peter 1998). In a PPP there is continuity
relationship the parameters of which are negotiated among the members
from the outset.(Middleton 2000) or a process in which such a
partnership is created (Moorie and Pierre, 1998).
Finally a partnership involves that there’s some shared responsibility for
outcome or activities ( Collin 1998, HM Treasury, 2000). This differs
from other relationships between the public and private sectors in which
the public sector retains control over policy decisions after receiving the
advice of the organsations in the Private sector. In contrasts, actual
partnership produce mutual shared responsibility which can make
account for the decisions difficult to ascertain. The south African
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government has accepted some of the ideas in that it excludes an
agreement between an institution and private party where the latter
performs an institutional function without accepting the significant
risks from thr PPP status and defines it as a borrowing transaction
(Government Gazzette, 2000).
A Public Private Partnership has no single well-accepted and agreed
definition. Typically, a PPP refers to
‘An arrangement (or a mechanism) through which a private sector
organization provides a project or a service, which traditionally is
provided by the public sector. Under this arrangement a government body
(Central Government, State Government, Municipal body or other
government organization including public sector undertaking) enters into
contractual arrangement with private sector organization (often
representing a group / consortium of private sector companies) for
infrastructure development and management over a pre-defined
period of time.’
The contractual arrangement defines responsibilities and duties of
both sides as well as framework for sharing different types of risks
involved. Typically, the PPP contractual arrangement is a long term one
(might cover the expected life of the asset involved) and engages the
private sector across the full spectrum of the infrastructure’s delivery –
planning, design, finance, construction, operation and maintenance.
Defining public private partnerships:
A public private partnership (PPP) is a type of long-term collaboration
between a public authority and the private sector (and increasingly in
the UK, the third sector). It creates a new approach to managing risk in
the delivery of assets and services by combining the complementary
skills and expertise of each partner in the interests of improving services
to the public and delivering value for money for the taxpayer.
PPPs offer value for money, service improvements and a better chance of
delivering projects on time and on budget. They are not new, but recent
years have seen dramatic increases in the number of governments
moving forward with PPPs, and the forms of PPP in use across the globe.
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The salient features of any PPP arrangement are
1. Contractual arrangement: Bring the public and private sector together
to create better value for money for the taxpayers through
Use of the management skills and financial strength of the private
sector.Conductive legislative and policy measures of the public sector
2. Substantial risk transfer to the private sector: Engage the private
sector through a transparent process and oversee the PPP according to
accepted performance norms.
3. Financial rewards based on performance: The government pays the
private sector for the services it renders that is based on the actual
performance as against the targets.
¾ What is Public Private Partnership (PPP) is a partnership
between the public and private sector for the purpose of
delivering a project or service traditionally provided by the
public sector. Public Private Partnership recognises that both
the public sector and the private sector have certain
advantages relative to the other in the performance of specific
tasks. By allowing each sector to do what it does best, public
services and infrastructure can be provided in the most
economically efficient manner.
PPPs enable the Government to tap into disciplines, incentives,
skill and expertise which private sector firms have developed in
the course of their normal everyday business.The Role of the
Government becomes that of a facilitator while the private
sector bring in more advanced techonology, managerial
expertise,innovation, skilled manpower, better utilisation of
available resources.
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Why are PPPs required?
The impetus for PPP arose initially from fiscal difficulties and
widespread disenchantment with the performance of state-owned
utilities. Presently, in addition to these reasons, other driving forces are
the massive infrastructure investment requirements to cope with
population growth and increasing global need to reduce barriers to
economic growth. As mentioned in the above paragraph, PPPs are
beginning to come into prominence for various reasons. The following
table highlights the reasons, for the tilt towards PPP, from the
perspective of the private sector and the public sector.
Reasons for PPPs:-
Public sector Private sector
On one hand, there is a large
requirement of funds for
creating and providing
infrastructure; on the other
hand several public sector
companies and government
departments (e.g. state
electricity boards) have
accumulated heavy losses. The
governments at both centre
and states also face budgetary
constraints in funding
infrastructure projects.
Private sector capacity:
This sector
has the appetite to take
the risk, if
the returns are
commensurate with
the risk.
Accumulation of backlog: The
growth in demand for
these services necessitates
additional physical
infrastructure, which the
government is unable to
provide at the same rate and
hence its role is changing
from a ‘Provider of
infrastructure services’ to a
‘Manager’ under PPP.
Access to latest
technology: With the
sector being more
proactive and
spread beyond national
boundaries,
access to updated
information adds
further edge
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Inefficiency in the provision of
infrastructure:
Internal - Insufficient
maintenance,
Unresponsiveness to users,
Technical inefficiencies,
Lack of managerial and
financial autonomy
External - Misallocated
investment, Absence of
competition
Access to financial
markets: New
financial instruments
and
mechanism (such as
credit
enhancing mechanisms)
and other
regulatory changes are
aiding in
raising long-term
finance.
Why are so many Countries Embarking
on PPP Programmes?
• Improved value-for-money procurement of public services
(bet ter art ic u lat ion of pub l ic serv ic e requ ir ements, greater
discipline about changes to requirements).
• Provides radical opportunity to reform/modernisat ion of public
services (change labour practice, champion the consumer and
place distance between the government and the producer of a
public service).
• Introduces contestability and choice in delivery of public
services.
• Antidote to short-termism in both public and private sectors.
• Improved transparency of costs of public services delivery.
• Overcome capital budget constraints to accelerate the pace of
change in pub l ic s e rv ices .
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PPPs - Macro-Economic Context
• Mounting demands on scarce public resources
• Tight fiscal policies
• Capital intensive infrastructure improvements needed
• History of construction cost and time overruns
• Need for enterprises/infrastructure to be modernised in
partnership where:
–Public sector
• Defines serv ices required and quality
• Frees up resources for front line services
– Private sector
• Innovates
• Takes and manages risk
PPP Principles
1. Risks are identified and placed with the private sector party, which is
best able to manage:
Since the private sector designs, constructs, maintains and operates the
facility, it also assumes the risk to deliver the specified output.
Identification and allocation of different types of risks occurs during the
feasibility study and are clearly specified in the procurement / bid
documents, so that the private sector can take into account these risks
in its bid.
2. Returns paid only according to performance: A PPP contract specifies
the performance parameters and payment is made subject to achieving
the specified service levels.
3. Service output is specified by the Government:The specifications for
service outputs are based on the feasibility study and the government
body entering into a PPP arrangement clearly defines the expected
outputs.
a. E.g. In case of purchase of power, the government specifies the
amount of electricity needed at a particular time of the day, which is
substantially different from specifying the details of thermal power plant
to be constructed.
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4. The private sector provides design, build, etc. capabilities: Once the
government specifies the desired service levels, then the details are left
to the private sector to provide an
Politica l
Object ives
• Investme nt
Priorit ies/ Sector
• Role of r eform
• Communicat ions
Strat egy
Politica l
Object ives
• Investme nt
Priorit ies/ Sector
• Role of r eform
• Communicat ions
Strat egy
Ins tit uti o ns
and Markets
• Public sector
capacity
• Investme nt
pipeli ne
• Private sector
capacity
Ins tit uti o ns
and Markets
• Public sector
capacity
• Investme nt
pipeli ne
• Private sector
capacity
Policy
Framewor k
• Legislation (vires)
• Ex pe ndit ur e
accounting
• Eval uatio n (Gr ee n
Book )
• Project Definition &
Justificati on (OBC )
t• VfM audi
Policy
Framewor k
• Legislation (vires)
• Ex pe ndit ur e
accounting
• Eval uatio n (Gr ee n
Book )
• VfM audit
Procurement
Process
• Project
Ma na geme nt
• Competition
Strat eg y
• Bidd ing costs &
Timet able
• Financial
modelli ng
• Project Definition &
Justificati on (OBC )
Procurement
Process
• Project
Ma na geme nt
• Competition
Strat eg y
• Bidd ing costs &
Timet able
• Financial
modelli ng
Contract
Format ion &
managem ent
• Sta ndar disati o n
• Risk transfer
• Out p ut
Specificati on
• Payment
Mecha nism
• Refinancing
• Contract
Ma na geme nt
Contract
Format ion &
managem ent
• Sta ndar disati o n
• Risk transfer
• Out p ut
Specificati on
• Payment
Mecha nism
• Refinancing
• Contract
Ma na geme nt
Delivering a PPP Programme –
Environmental Essentials
Types of PPPs
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What type of PPPs exist?
When considering PPPs it is important to recognise that there are
different names and versions understood by governments around the
world. Projects that are considered forms of PPP in some countries
would not be thought of as such in others. For example, views of what a
PPP is in the UK can vary from the definition of a PPP in France.
It is also important to recognise that different governments and sectors
will have different experiences with PPPs; and while the Private Finance
Initiative (PFI) is one of the most common forms of PPP among national
and regional governments, partnerships are not exclusively based on the
PFI model.
The PFI is a system for providing capital assets for the provision of
public services. In the UK, this model is used for a large number of
infrastructure projects, and provides strong incentives to deliver on time
and on budget, while enabling governments to spread the cost of the
investment over a 2 to 0-year period.2 Typically, the private sector
designs, builds and maintains infrastructure and other capital assets
and then operates those assets to sell services to the public sector. In
most cases, the capital assets are accounted for on the balance sheet of
the private sector operator.
Such differences in definition and understanding can make accessing
the international experience difficult: in the UK, the PFI is simply one
type of PPP, while in some countries and regions, the PFI is the only
model and therefore the terms PPP and the PFI are synonymous.
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Furthermore, governments will use PPPs in different sectors. In
Australia, PPPs are used heavily in toll roads, whereas in the UK they
are hardly used for this purpose. In the UK there are new models being
developed: alliancing and incremental partnering for example. There are
also more specific joint venture models in healthcare and education
called Local Improvement Finance Trusts and Local Education
Partnerships.
In UK the PPPs bring public and private sectors together ina
long term partnership for mutual benefit.The PPP cover a
wide range of different types of partnership, including
ξ the introduction of full or part private sector ownership
into state owned businesses.
ξ arrangements where the public sector contracts to
purchase quality services on a long term basis so as to
take advantage of private sector management skills
incentivised by having private finance at risk. This
includes concessions and franchises where a private
sector takes on the responsibility for providing a public
service including maintaining , enhancing or
construcitng the necessary infrastructure.
ξ Selling government services into wider markets and
other partnerships arrangements where private sector
expertise and finance are used to exploit commercial
potential of government assets
It must be noted that there are wide-ranging definitions of PPPs across
the world and as already discussed the understanding of these terms
can vary considerably. However, it is possible to identify three broad
frameworks in which these types lie. These include:
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