What is PPP?
Public-Private Partnership (PPP) refers to an arrangement between a government, statutory entity, or government-owned entity on one side, and a private sector entity on the other, for the provision of public assets and/or public services through investments made and/or management undertaken by the private sector entity for a specified period of time. There is a well-defined allocation of risk between the private sector and the public entity, and the chosen private entity, based on open competitive bidding, receives performance-linked payments that conform to or are benchmarked against specified and predetermined performance standards, measurable by the public entity or its representative.
How do PPPs work?
The private sector assumes responsibility for all or many phases of a project’s life cycle, making it the majority bearer of risk. The private sector partner is fully accountable for the project’s success and has an incentive to achieve the most effective outcome over its lifespan. Issues related to poor design, construction, and inadequate maintenance become the responsibility of the private sector. The private sector partner is judged and compensated purely based on performance, ensuring financial incentives for on-time and within-budget project completion. Additionally, the private sector partner must raise significant financing for the asset’s construction. Lenders and equity participants provide a level of due diligence and oversight that brings discipline to the process. The government specifies its requirements in terms of services provided and leaves as much scope as possible for the private sector partner to propose the best solution.
- What are the benefits of PPPs?
- PPPs introduce private sector financing, technology, and innovation, and provide better public services through improved efficiency.
- PPPs create budgetary certainty by setting the present and future costs of projects.
- PPPs help develop local private sector capabilities through joint ventures with large international firms, as well as subcontracting opportunities for local firms in various support functions.
- PPPs are a method of gradually exposing government services to increasing levels of private sector participation in a responsible manner.
- PPPs can result in a more efficient use of limited public sector resources.
- Because many projects rely on upfront capital from the private sector, they can proceed at times when public capital may be constrained, either by public spending limits or budget cycles.
- By allocating the responsibility for design and construction to the private sector, there is a stronger incentive for the private sector to deliver projects within shorter timeframes.
- Risk is allocated to the party best able to manage it at the least cost.
- Private sector partners are sometimes capable of generating additional revenue from third parties, offsetting costs for the public sector.
- Public sector officials are free to focus on service planning and performance monitoring instead of the day-to-day management of public services. This allows the public sector to maintain a long-term perspective in planning and budget-setting.
- The government can require that essential social protections be incorporated into a project. These can take the form of quality standards, such as the frequency of services to be provided, and safety criteria. It can also specify that projects be tailored to the specific needs of local communities.
What are the disadvantages of PPPs?
- Sometimes, individual PPP projects require a longer preparation time, such as a PPP initial MOU, PPP Facility Agreement, approval by lawyers, registration, insurance of the project, and funds arrangement/allocation. These processes may take many months, depending on the size of the project and the quality standards.
- In most cases, the PPP facilitator covers all necessary expenses from their own budget, but if the project owner fails to fulfill the requirements or conditions of the contract, the facilitator faces a huge loss of time and money as a result.
- Sometimes, the PPP facilitator starts the project, but due to new government policies, the project declines, causing the private party to face a significant loss.
- Some projects may be more politically or socially challenging to introduce and implement than others. The private sector is averse to excessive risk and is cautious about accepting risks beyond their control. Acceptance of risks will be reflected in prices, and private sector partners may also demand a significant level of control over operations in exchange for accepting high risks.
- While the private sector partner is responsible for construction and, in some cases, for service delivery, citizens will still hold the government accountable for quality and cost.
- PPPs are often long-term and complex, making it difficult to foresee all possible contingencies at the signing of a contract. Contracts may need to be renegotiated over time, and the government must be prepared for this contingency.
What are types of PPP Contracts and Agreements?
Public-private partnerships (PPPs) can take a wide range of forms, varying in the degree of purpose, involvement of the private entity, legal structure, and risk-sharing. A PPP is generally memorialized in a contract or agreement to outline the responsibilities of each party and clearly allocate risk. The broad contractual forms, as covered by existing policy, include:
- Non-recourse project funding,
- Non-interest-bearing investment in commercial projects,
- Infrastructure development,
- Government social project funding against a ‘ sovereign guarantee, ‘
- Government mega project funding against bank securities,
- Service contracts,
- Management contracts,
- Leasing contracts ,
- Concession contracts,
- Build, operate, transfer (BOT),
- Build, own, operate, transfer (BOOT),
- Build, own, operate (BOO) ,
- Engineering procurement, construction, and finance (EPCF) ,
- Bank instruments trade services,
- Bank securities sale, purchase, and utilization,
- Project funding, financing, and investment,
- Project funding against bank guarantees services ,
- Subsidy services in strategic goods ,
- Support in import and export and general trading,
- Urban development contracts,
- Agriculture and water management.
DBFOT/BOT:
The most common form of PPP used is one where the private sector operator designs, builds, finances, owns, and manages the facility, operating it commercially for the concession period, after which the facility is transferred to the authority. In this case , legal ownership of the asset vests with the public sector when the concession period ends. The most common form of a BOT project is a toll road project.
Operations & Maintenance (Service contract):
The government bids out the right to deliver a specific service or assigns part of the undertaking to the private sector for the operations and maintenance of the assets. Such contracts are normally of a shorter duration than concession contracts.
Lease, Develop, Operate, and Maintain (a variation of BOT):
Assets are leased to the private sector under specific terms to operate and maintain the assets for the term of the concession period.
What is the difference between outsourcing, privatization, and PPPs?
Unlike outsourcing, a PPP assigns the private sector partner substantial risk, the responsibility for financing a project’s capital and operating costs, and managing its operations over a specific period. Privatization means the divestiture of government ownership in a company’s or service’s property and functions-including all the associated assets and liabilities.
What does the VGF scheme mean in PPP?
Viability Gap Funding or Grant refers to a one-time or deferred grant provided under this scheme with the objective of making a project commercially viable.
What are the eligibility criteria for receiving support under the VGF scheme?
To be eligible for funding under the VGF scheme , a PPP project should meet the following criteria: The project should be implemented (i.e., developed, financed, constructed, maintained, and operated) for the project term by a private sector company selected by the government or a statutory entity through a process of open competitive bidding; provided that in the case of railway projects that are not amenable to operation by a private sector company , the Empowered Committee may relax this eligibility criterion.
The PPP Project should be from one of the following sectors.
- Roads and bridges, railways, seaports, airports, inland waterways.
- Urban transport, water supply, sewerage, solid waste management and other physical infrastructure in urban areas.
- Infrastructure projects in Special Economic Zones and internal infrastructure in National Investment and Manufacturing Zones.
- International convention centers and other tourism infrastructure projects.
- Capital investment in the creation of modern storage capacity including cold chains and post-harvest storage.
- Education, health and skill development, without annuity provision.
- Oil/Gas/Liquefied Natural Gas (LNG) storage facility (includes city gas distribution network);
- Oil and Gas pipelines (includes city gas distribution network);
- Irrigation (dams, channels, embankments, etc.);
- Telecommunication (Fixed Network) (includes optic fiber/wire/cable networks which provide broadband/internet);
- Telecommunication towers.
- Terminal markets.
- Common infrastructure in agriculture markets; and
- Soil testing laboratories.
Why should the government engage with the private sector?
Public-private partnerships are more effective. Innovative government leaders recognize that collaborating with private contractors can enhance operations and services without raising taxes. Private companies have access to better rates and the latest technologies and possess the expertise to effectively comply with environmental regulations while skillfully managing government projects. Public-private partnerships result in improved operations and services for taxpayers at no additional cost.
Don’t private companies cut corners to boost profits?
Governments are increasingly partnering with private contractors so their constituents can benefit from high-quality services without experiencing tax increases . Private-sector partners are more capable of practicing cost efficiencies to minimize expenditures while exploiting additional revenue streams than government entities alone. Private companies can deliver better services for less.
Aren’t private companies less accountable to the public than governments?
The opposite is true. Private companies involved in public-private partnerships are significantly more accountable because they answer not only to the governments that hire them but also to various regulators, the Securities and Exchange Commission, Congressional oversight committees, and more. Additionally, their actions are scrutinized by the media. Private companies work diligently to ensure that the public is satisfied with their services and, as a result, are often much more accountable than governments acting independently.
Isn’t there a risk of corruption when private companies are involved in providing public services?
The only way private companies can achieve long-term success in partnering with governments is to insist on quality, value, and dependability in the services they provide. Private companies are held to very high standards when complying with regulatory requirements, so regulatory bodies tend to enforce regulations more strictly with private contractors than they do with government agencies. With this increased oversight, both private companies and government officials are scrutinized and held accountable, which minimizes opportunities for corruption.
What is “traditional” procurement as opposed to a PPP?
In traditional procurement, the government provides detailed specifications and tenders its project to a contractor. The government prepares detailed specifications that describe the needed service. The specifications are then published to obtain the most competitively priced tender.
Once the contract is awarded, the government closely supervises the work carried out by the contractor to ensure compliance. In this way, the government takes responsibility for the design and planning of the project, all legal issues, and any unforeseen costs or emergencies. The government is responsible for the contractor exceeding the budget or making construction errors and has very little control over the timeframe of completion.
When the asset or service becomes operational, the government is responsible for performance. The private sector partner is responsible only for delivering the service according to the contract.
In a PPP, the government outlines the service that is required. Should the PPP option be the preferred method of procurement, the government leaves it to the private sector partner to develop a proposal to meet the required service. The private sector partner will be selected through a bidding process. This approach ensures that projects are driven substantially by the private partner, resulting in greater value for money.
What are PPP Sectors, Contracts and Agreements abbreviations?
| ADP Platform | Asian Development Platform Asia Development Partners Asian Development Professionals ADP Capital UK Aandyal Developments Partners Group |
| ADP Group | Al-Nahda Development Partners Group Asia Development Partners Group African Development Group |
| ADP-AF | Afghanistan Development Partners Alternative Development Program |
| ADSCR | Annual Debt Service Cover Ratio |
| ALOP | Advance Loss of Profit |
| APP | Alianza Publico Privada (Public-Private Partnership) |
| B | Build |
| BAFO | Best And Final Offer |
| BoK | Body of Knowledge |
| BOOT | Build-Own-Operate-Transfer |
| BOT | Build-Operate-Transfer |
| BRT | Bus Rapid Transit |
| BTO | Build-Transfer-Operate |
| BRICS Group | Brazil, Russia, India China, South Africa including new members |
| CA | Consortium Agreement |
| CAF | Corporación Andina de Fomento (Development Bank of Latin America) |
| Capex | Capital expenditure |
| CAPM | Capital Asset Pricing Model |
| CBA | Cost-Benefit Analysis |
| CEA | Cost-Effectiveness Analysis |
| CFADS | Cash Flows Available for Debt Service |
| CIC | Cabinet Infrastructure Committee (New South Wales, Australia) |
| CJV | Cooperative Joint Venture |
| CND | State-owned investment promotion agency that acts as a PPP agency (Uruguay) |
| CONFIS | National Fiscal Council (Colombia) |
| CONPES | National Council for Economic and Social Policy (Colombia) |
| CPI | Consumer Price Index |
| CPP | São Paulo Partnerships Corporation (Companhia Paulista de Parcerias) (Brazil) |
| DB | Design-Build |
| DBF | Design-Build-Finance |
| DBJ | Development Bank of Jamaica |
| DBFM | Design-Build-Finance-Maintain |
| DBFO | Design-Build-Finance-Operate |
| DBFOM | Design-Build-Finance-Operate-Maintain |
| DBFORM | Design-Build-Finance-Operate-Rehabilitate-Maintain |
| DBO | Design-Build-Operate |
| DBOM | Design-Build-Operate-Maintain |
| D&C | Design and Construction |
| DRB | Dispute Resolution Board |
| DRP | Dispute Resolution Process |
| DSCR | Debt Service Coverage Ratio |
| EBITDA | Earnings Before Interest, Taxes, Depreciation and Amortization |
| EBRD | European Bank for Reconstruction and Development |
| EC | European Commission |
| ECA | Export Credit Agency |
| EIA | Environmental Impact Assessment |
| ESIA | Environmental and Social Impact Assessment |
| EIB | European Investment Bank |
| eIRR | Economic Internal Rate of Return |
| EMDE | Emerging Markets and Development Economies |
| eNPV | Economic Net Present Value |
| EOI | Expression of Interest |
| EPC | Engineering, Procurement and Construction |
| EPCC | Engineering, Procurement and Construction Consortium |
| EPEC | European PPP Expertise Centre |
| ERC | Expenditure Review Committee, New South Wales, Australia |
| ERM | Enterprise-Risk-Management |
| ESA | European System of National and Regional Accounts |
| ESIA | Environmental and Social Impact Assessment |
| EU | European Union |
| FDI | Foreign Direct Investment |
| FIDIC | International Federation of Consulting Engineers(Fédération Internationale Des Ingénieurs-Conseils) |
| FINFRA | Infrastructure Investment Fund |
| FC | Financial closure |
| FHWA | Federal Highway Administration (US Department of Transportation) |
| FM | Facilities Management or Financial Modelling (depending on the context) |
| FMC | Facilities Management Company |
| FOI | Freedom of Information |
| FOMIN | Multilateral Investment Fund (IDB Group) |
| FONADIN | Fondo Nacional de Infraestructura (National Infrastructure Fund, Mexico). |
| FOREX | Foreign Exchange |
| GAAP | Generally Accepted Accounting Principles |
| GDP | Gross Domestic Product |
| GPC | Global Certification Program |
| HM Treasury | Her Majesty’s Treasury (UK) |
| HOT | High Occupancy Toll or Heads of terms (depending on the context) |
| HSR | High Speed Rail |
| IAS | International Accounting Standards |
| ICC | International Chamber of Commerce |
| ICSID | International Centre for Settlement of Investment Disputes |
| ICT | Information and Communications Technology |
| IDB | Inter-American Development Bank |
| IDC | Interest during Construction |
| IFC | International Finance Corporation |
| IFI | International Financial Institutions |
| IFRS | International Financial Reporting Standards |
| IIC | Inter-American Investment Corporation |
| IIGF | Indonesia Infrastructure Guarantee Fund |
| IMF | International Monetary Fund |
| INTOSAI | International Organization of Supreme Audit Institutions |
| IPO | Initial Public Offerings |
| IPP | Independent Power Producers |
| IPPP | Institutional PPP |
| IPR | Intellectual Property Rights |
| IPSAS | International Public Sector Accounting Standards |
| IRR | Internal Rate of Return |
| IRS | Interest Rate Swap |
| ISO | International Organization for Standardization |
| IT | Information Technology |
| ITP | Invitations to propose |
| ITPD | Invitation to participate in the dialogue |
| ITSFT | Invitation to Submit a Final Tender |
| IUK | Infrastructure UK |
| JV | Joint Venture |
| KPI | Key Performance Indicators |
| LAC | Latin America and Caribbean |
| LD | Liquidated Damages |
| LDC | Least Developed Countries |
| LIC | Low Income Countries |
| LLCR | Life Loan Coverage Ratio |
| LoI | Letter of Intent |
| LP | Limited Partners |
| LRT | Light Rail Transit |
| MCA | Multicriteria Analysis |
| MDB | Multilateral Development Bank |
| MEAT | Most Economically Advantageous Tender |
| MIGA | Multilateral Investment Guarantee Agency |
| MIRR | Modified Internal Rate of Return |
| MIS | Management Information Systems |
| M&E | Monitoring and Evaluation |
| MOU | Memorandum of Understanding |
| NAO | National Audit Office |
| NDA | Non-Disclosure Agreement |
| NDB | New Development Bank (BRICS Group Bank) |
| ENBD | Emirates National Bank of Dubai |
| NPV | Net Present Value |
| O&M | Operate and maintain |
| OECD | Organization for Economic Co-operation and Development |
| OJEU | Official Journal of European Union |
| OpCo | Operating Company |
| Opex | Operating expenditure |
| PA | Procuring Authority |
| PCG | Parent company guarantee |
| PEM | Project Evaluation Memo |
| PLCR | Project Life Coverage Ratio |
| PMO | Project Management Office |
| PBCE | Project Bonds Credit Enhancement |
| PF2 | Private Finance Initiative (reformed edition, UK) |
| PFI | Private Finance Initiative |
| PIM | Project Information Memorandum |
| PLCR | Project Life Coverage Ratio |
| PSC | Public Sector Comparator |
| PPA | Power Purchase Agreement |
| PFI | Public Finance Initiative |
| PPIAF | Public-Private Infrastructure Advisory Facility |
| PPI | Private Participation in Infrastructure |
| PPIF | Public Participation in International Forums |
| PPP | Public-Private Partnership |
| PPPIRC | Public-Private Partnerships Infrastructure Resource Centre |
| PROINVERSION | Private Investment Promotion Agency of Peru |
| PSC | Public Sector Comparator |
| PUK | Partnerships UK |
| QC | Quality control |
| QCBS | Quality and Cost Based Selection |
| QMPP | Quality Management Project Plan |
| QMS | Quality Management System |
| RFP | Request For Proposal |
| RFQ | Request for Qualification |
| ROT | Rehabilitate-Operate-Maintain |
| RoW | Right of Way |
| RPI | Retail Price Index |
| SC | Steering Committee |
| SIA | Social Impact Assessment |
| SMART | specific, measurable, achievable, relevant, and time constrained |
| SDG | Sustainable Development Goals |
| SOE | State Owned Enterprise |
| SoQ | Submission of Qualification |
| SoPC | Standardization of PFI Contracts (UK) |
| SPC | Special Purpose Company |
| SPV | Special Purpose Vehicle |
| TIFIA | Transportation Infrastructure Finance and Innovation Act (US) |
| TIFU | Treasury Infrastructure Finance Unit (UK) |
| ToR | Terms of Reference |
| TTF | Treasury Taskforce (UK) |
| TWF | Time Weighting Factors |
| UK | United Kingdom |
| UNCITRAL | United Nations Commission on International Trade |
| UNECE | United Nations Economic Commission for Europe |
| US | United States |
| USP | Unsolicited Proposals |
| VAT | Value-Added Tax |
| VfM | Value for Money |
| VGF | Viability Gap Funding |
| WACC | Weighted Average Cost of Capital |
| WBG | World Bank Group |
| WBI | World Bank Institute |
| WEF | World Economic Forum |
| WWTP | Waste Water Treatment Plants |