PUBLIC-PRIVATE PARTNERSHIPS IN

INFRASTRUCTURE
Session Outline

• The characteristics that make PPPs different from conventional public sector
projects;
• Models in public-private partnerships; and
• The basic structure of a PPP model.
.
What is public-private partnership in
infrastructure projects
• Governments in most developing countries face the challenge to
meet the growing demand for new and better infrastructure services.
As available funding from the traditional sources and capacity in the
public sector to implement many projects at one time remain limited,
governments have found that partnership with the private sector is
an attractive alternative to increase and improve the supply of
infrastructure services.

• The partners in a PPP, usually through a legally binding contract

or some other mechanism, agree to share responsibilities related to
implementation and/or operation and management of an
infrastructure project.
 This collaboration or partnership is built on the expertise of each
partner that meets clearly defined public needs through the appropriate
allocation of:
• Resources
• Risks
• Responsibilities, and
• Rewards

It is important to emphasize here that a PPP is not a solution option to an

infrastructure service problem but it is a viable project implementation
mechanism for a preferred solution option.
What advantages PPPs may provide?
• Governments worldwide have increasingly turned to the private sector to provide
infrastructure services in energy and power, communication, transport and water sectors
that were once delivered by the public sector. There are several reasons for the growing
collaboration with the private sector in developing and providing infrastructure services,
which include:
• Increased efficiency in project delivery, and operation and management;
• Availability of additional resources to meet the growing needs of investment in the
sector; and
• Access to advanced technology (both hardware and software).
• Properly executed planning and development of a project also allows better screening
of options, and helps in deciding appropriate project structure and choice of technology
considering cost over the whole life cycle of the project
Should lack of government budget be the
main factor in considering a PPP?
• Often, lack of government funding has been the main reason for considering a PPP
option for a project. However, lack of government funding may not be the main reason for
deciding a PPP option for the implementation of a project. There are additional costs for
PPP projects – usually the cost of borrowing money is higher for the private sector than
for the public sector and there are administrative costs for the management of PPP
contractual regimes. Transaction costs of PPP projects can also be substantial. PPP
projects may also impose many explicit and implicit liabilities on the government.

• A project may not be considered for being implemented as a PPP project unless
efficiency gains from improved project delivery, operation and management, and access
to advanced technology can offset the above-mentioned additional costs. In fact, many
countries have established value for money as the main criterion in judging the merits of a
PPP option for a project.
Why PPPs are attractive to
governments?
PPPs have become attractive to governments as an off-budget mechanism
for infrastructure development as:
• They can enhance the supply of much-needed infrastructure services.
• They may not require any immediate cash spending.
• They provide relief from the burden of the costs of design and
construction.
• They allow transfer of many project risks to the private sector.
• They promise better project design, choice of technology,
construction, operation and service delivery.
• The development of a PPP project requires firms and governments to prepare and
evaluate proposals, develop contract and bidding documents, conduct bidding and
negotiate deals, and arrange funding. The costs incurred in these processes are called
transaction costs, which include staff costs, placement fees and other financing costs,
and advisory fees for investment bankers, lawyers, and consultants. Transaction costs
may range from 1 to 2 percent to well over 10 per cent of the project cost. Experts suggest
that transaction costs vary mainly with familiarity and stability of the policy and
administrative environment and not so much with the size or technical characteristics of a
project.
• There can be underlying fiscal costs and contingent liabilities of PPPs on the government
that may arise in the medium- and -long-term. These underlying fiscal costs and
contingent liabilities on the government should be given due consideration when a PPP
project is considered
How a PPP project is different from a
conventional project?
There are significant differences between a conventional construction procurement project
and a PPP project that need to be clearly understood. The main differences include:
• PPP projects are different from conventional construction projects in terms of project
development, implementation, and management. The administrative and approval
processes in the case of PPP projects are also different.
• A PPP project is viable essentially when a robust business model can be developed.
• The focus of a PPP project should not be on delivering a particular class/type of
assets but on delivering specified services at defined quantity and levels.
• The risk allocation between the partners is at the heart of any PPP contract design
and is more complex than that of a conventional construction project. Both partners
should clearly understand the various risks involved and agree to an allocation of
risks between them.
• A PPP contract generally has a much longer tenure than a construction contract.
Managing the relationship between the private company and the implementing
agency over the contract tenure is vital for the success of a PPP project.
 Are there any limitations of PPPs?
There are many important economic, social, political, legal, and administrative aspects, which need to
be carefully assessed before approvals of PPPs are considered by the government. PPPs have various
limitations which should also be taken into account while they are being considered. The major
limitations include:
• Not all projects are feasible (for various reasons: political, legal, commercial viability, etc.).
• The private sector may not take interest in a project due to perceived high risks or may lack
technical, financial or managerial capacity to implement the project.
• A PPP project may be more costly unless additional costs (due to higher transaction and
financing costs) can be off-set through efficiency gains.
• Change in operation and management control of an infrastructure asset through a PPP may not
be sufficient to improve its economic performance unless other necessary conditions are met.
These conditions may include appropriate sector and market reform, and change in operational
and management practices of infrastructure operation.
• Often, the success of PPPs depends on regulatory efficiency
IMPORTANT CHARACTERISTICS OF
PPP PROJECTS
• Promise of better project structure and design.
• Allows better screening of projects. A bad project is a bad project no matter
whether it is implemented by the public or the private sector.
• Better choice of technology based on life-cycle costing.
• Better service delivery, especially if performance based payment is considered.
• Better chances of completion on time and within the budget.
− Risk of default.
− Project risks can easily turn into government risks.
− Various liabilities on government (direct and indirect).
− A long-term contract management system needs to be in place.
− An administrative mechanism and special skills in the government are
required to develop and implement PPP projects.
B. MODELS OF PPP
MODELS OF PPP
A wide spectrum of PPP models has emerged. These models
vary mainly by:
• Ownership of capital assets;
• Responsibility for investment;
• Assumption of risks; and
• Duration of contract.
MODELS OF PPP
The PPP models can be classified into five broad categories in
order of generally (but not always) increased involvement and
assumption of risks by the private sector. The five broad categories
are:
• Supply and management contracts
• Turnkey contracts
• Affermage/Lease
• Concessions
• Private Finance Initiative (PFI) and Private ownership.
Basic features of PPP model
Classification of PPP models
Supply and management contracts
• A management contract is a contractual arrangement for the management of
a part or whole of a public enterprise (for example, a specialized port terminal for
container handling at a port or a utility) by the private sector. Management
contracts allow private sector skills to be brought into service design and
delivery, operational control, labour management and equipment procurement.
However, the public sector retains the ownership of facility and equipment. The
private sector is assigned specified responsibilities concerning a service and is
generally not asked to assume commercial risk.
• The private contractor is paid a fee to manage and operate services.
Normally, the payment of such fees is performance-based. Usually, the contract
period is short, typically three to five years. But the period may be longer for
large and complex operational facilities such as a port or an airport.
Supply and management contracts
Pros:
• Can be implemented in a short time.
• Least complex of all PPP models.
• In some countries, politically and socially more acceptable for certain
projects (such as water projects and strategic projects like ports and
airports).
Cons:
• Efficiency gains may be limited and little incentive for the private
sector to invest.
• Almost all risks are borne by the public sector.
• Applicable mainly to existing infrastructure assets.
Turnkey
• Turnkey is a traditional public sector procurement model for
infrastructure facilities. Generally, a private contractor is selected through
a bidding process. The private contractor designs and builds a facility for
a fixed fee, rate or total cost, which is one of the key criteria in selecting
the winning bid. The contractor assumes risks involved in the design and
construction phases. The scale of investment by the private sector is
generally low and for a short-term. Typically, in this type of arrangement,
there is no strong incentive for early completion of the project. This type
of private sector participation is also known as Design-Build.
Turnkey
Pros:
• Well understood traditional model.
• Contract agreement is not complex.
• Generally, contract enforcement is not a major issue.

Cons:
• The private sector has no strong incentive for early completion.
• All risks except those in the construction and installation phases are
borne by the public sector.
• Low private investment for a limited period.
• Only limited innovation may be possible.
 Affermage/Lease
• In this category of arrangement, the operator (the leaseholder) is responsible for operating and
maintaining the infrastructure facility (that already exists) and services, but generally the operator is not
required to make any large investment. However, often this model is applied in combination with other
models such as build- rehabilitate-operate-transfer. In such a case, the contract period is generally much
longer and the private sector is required to make significant investment.
• The arrangements in an affermage and a lease are very similar. The difference between them is
technical. Under a lease, the operator retains revenue collected from customers/users of the facility and
makes a specified lease fee payment to the contracting authority. Under an affermage, the operator and
the contracting authority share revenue from customers/users.
• In the affermage/lease types of arrangements, the operator takes lease of both infrastructure and
equipment from the government for an agreed period of time. Generally, the government undertakes
the responsibility for investment and thus bears investment risks. The operational risks are transferred
to the operator. However, as part of the lease, some assets also may be transferred on a permanent basis
for a period which extends over the economic life of assets. Fixed facilities and land are leased out for a
longer period than for mobile assets. Land to be developed by the leaseholder is usually transferred for
a period of 15-30 years.
Pros:
• Can be implemented in a short time.
• Significant private investment possible under longer term agreements.
• In some countries, legally and politically more acceptable for strategic projects
like ports and airports.
Cons:
• Has little incentive for the private sector to invest, particularly if the lease
period is short.
• Almost all risks are borne by the public sector.
• Generally used for existing infrastructure assets.
• Considerable regulatory oversight may be required.
Concessions
• In this form of PPP, the government defines and grants specific rights to an
entity (usually a private company) to build and operate a facility for a
fixed period of time. The government may retain the ultimate ownership
of the facility and/or right to supply the services. In concessions,
payments can take place both ways: concessionaire pays to government
for the concession rights and the government may pay the concessionaire,
which it provides under the agreement to meet certain specific conditions.
Usually, such payments by the government may be necessary to make
projects commercially viable and/or reduce the level of commercial risk
taken by the private sector, particularly in a developing or untested PPP
market. Typical concession periods range between 5 to 50 years.
 Concessions
• Pros:
• Private sector bears a significant share of the risks.
• High level of private investment.
• Potential for efficiency gains in all phases of project development and implementation and
technological innovation is high.

• Cons:
• Highly complex to implement and administer.
• Difficult to implement in an untested PPP market.
• May have underlying fiscal costs to the government.
• Negotiation between parties and finally making a project deal may require long time.
• May require close regulatory oversight.
• Contingent liabilities on government in the medium and long term.
BOT
• In a Build-Operate-Transfer or BOT type of concession (and its other variants namely, Build-
Transfer-Operate (BTO), Build-Rehabilitate-Operate-Transfer (BROT), Build-Lease-Transfer (BLT)
type of arrangement), the concessionaire makes investments and operates the facility for a fixed
period of time after which the ownership reverts back to the public sector. In a BOT modal, operational
and investment risks can be substantially transferred to the concessionaire.
• In a BOT model, the government has, however, explicit and implicit contingent liabilities that may
arise due to loan guarantees and sub-ordinate loans provided, and default of a sub-sovereign
government and public or private entity on non- guaranteed loans. By retaining ultimate ownership,
the government controls the policy and can allocate risks to parties that are best suited to assume or
remove them. BOT projects may also require direct government support to make them commercially
viable.
• The concessionaire’s revenue in a BOT project comes from managing and marketing of the user
facilities (for example, toll revenue in a toll road project) and renting of commercial space where
possible. Concessions for BOT projects can be structured on either maximum revenue share for a
fixed concession period or minimum concession period for a fixed revenue share, a combination of
both, or only minimum concession period.
Private Finance Initiative (PFI)
• In the private finance initiative model, the private sector remains
responsible for the design, construction and operation of an infrastructure
facility. In some cases, the public sector may relinquish the right of
ownership of assets to the private sector.
• In this model, the public sector purchases infrastructure services from the
private sector through a long-term agreement. PFI projects, therefore, bear
direct financial obligations to the government in any event. In addition,
explicit and implicit contingent liabilities may also arise due to loan
guarantees provided to the lenders and default of a public or private entity
on non-guaranteed loans.
• A PFI project can be structured on minimum payment by the government
over a fixed contract tenure, or minimum contract tenure for a fixed annual
payment, or a combination of both payment and tenure.
• In the PFI model, asset ownership at the end of the contract period is generally
transferred to the public sector. Setting up of a Special Purpose Vehicle (SPV) may not be
always necessary (see discussion on SPV in the following section). A PFI contract may be
awarded to an existing company. For the purpose of financing, the lenders may, however,
require the establishment of an SPV. The PFI model also has many variants.
• In a PFI project, as the same entity builds and operates the services, and is paid for
the successful supply of services at a pre-defined standard, the SPV / private company
has no incentive to reduce the quality or quantity of services. This form of contractual
agreement reduces the risks of cost overruns during the design and construction phases or
of choosing an inefficient technology, since the operator’s future earnings depend on
controlling the costs. The public sector’s main advantages lie in the relief from bearing the
costs of design and construction, the transfer of certain risks to the private sector and the
promise of better project design, construction and operation.
• Pros:
• Private sector may bear a significant share of the risks.
• High level of private investment.
• Potential for efficiency gains and innovation is high.
• Attractive to private investors in an untested or developing PPP market.
• Most suitable for social sector infrastructure projects (schools, dormitories,
hospitals, community facilities, etc.).
• Cons:
• Complex to implement and manage the contractual regimes.
• Government has direct financial liability.
• Negotiation between parties may require long time.
• Regulatory efficiency is very important.
• Contingent liabilities on the government in the medium and long term.
Which model to select?
• The answer to this question needs careful assessment of many things.
• Each model has its own pros and cons and can be suitable for achieving the major
objectives of private-private partnership to a varying degree. Special characteristics of
some sectors and their technological development, legal and regulatory regimes, and
public and political perception about the services in a sector can also be important factors
in deciding the suitability of a particular model of PPP.
• There is no single PPP model that can satisfy all conditions concerning a project’s
locational setting and its technical and financial features. The most suitable model should
be selected taking into account the country’s political, legal and socio- cultural
circumstances, maturity of the country’s PPP market and the financial and technical
features of the projects and sectors concerned.
• As an example, for a new project, a BOT type of model may be quite suitable in a
matured PPP market while a PFI or BOO type of models may be more appropriate in a
developing/untested market.
C. Understanding the basic structure
of a PPP arrangement
• A typical PPP structure can be quite complex involving contractual arrangements
between a number of parties, including the government, project sponsor, project operator,
financiers, suppliers, contractors, engineers, third parties (such as an escrow agent5), and
customers.
• The creation of a separate commercial venture called a Special Purpose/Project Vehicle
(SPV) is a key feature of most PPPs. The SPV is a legal entity that undertakes a project
and negotiates contract agreements with other parties including the government. An
SPV is also the preferred mode of PPP project implementation in limited or non-recourse
situations, where the lenders rely on the project’s cash flow and security over its assets
as the only means to repay debts.
• An SPV is usually set up by the private concessionaire/sponsor(s), who in exchange
for shares representing ownership in the SPV contribute the long-term equity capital, and
agree to lead the project8. The SPV may not always be directly owned by the sponsors.
They may use a holding company for this purpose.
• An important characteristic of an SPV as a company is that it cannot undertake any
business that is not part of the project. An SPV as a separate legal entity protects the
interests of both the lenders and the investors. The formation of
• an SPV has also many other advantages. A project may be too large and complicated to
be undertaken by one single investor considering its investment size, management and
operational skills required and risks involved. In such a case, the SPV mechanism allows
joining hands with other investors who could invest, bring in technical and management
capacity and share risks, as necessary.
• The government may also contribute to the long-term equity capital of the SPV in
exchange of shares. In such a case, the SPV is established as a joint venture company
between the public and private sectors and the government acquires equal rights and
equivalent interests to the assets within the SPV as other private sector shareholders.
• .
• Sometimes, governments want to ensure a continued interest (with or without controlling authority) in the
management and operations of infrastructure assets such as a port or an airport particularly those which have strategic
importance, or in assets that require significant financial contribution from the government. In such a case, a joint venture
may be established. A joint venture is an operating company owned by a government entity and a private company (or
multiple companies including foreign companies if permitted by law), or a consortium of private companies.
• Often, an SPV is formed as a joint venture between an experienced construction company and a service operations
company capable of operating and maintaining the project.
• Other than its strategic, financial and economic interest, the government may also like to directly participate in a PPP
project. The main reasons for such direct involvement may include:
• To hold interest in strategic assets;
• To address political sensitivity and fulfil social obligations;
• To ensure commercial viability of the project;
• To provide greater confidence to lenders; and
• To have better insight to protect public interest.
• Direct government involvement in a PPP project is usually guided by the legal and regulatory regime of the country
and the government policy on PPPs. For example, the government may hold certain defined percentage of the stake in a
strategic project such as an airport or a port.
PPP in INDIA
Thank you