Public Private Partnership: 1.0 Different Schemes of PPP O&M: Operations and Maintenance
Public Private Partnership: 1.0 Different Schemes of PPP O&M: Operations and Maintenance
Public Private Partnership: 1.0 Different Schemes of PPP O&M: Operations and Maintenance
1.0
DB: Design-Build
A DB is when the private partner provides both design and construction of a project to
the public agency. This type of partnership can reduce time, save money, provide
stronger guarantees and allocate additional project risk to the private sector. It also
reduces conflict by having a single entity responsible to the public owner for the
design and construction. The public sector partner owns the assets and has the
responsibility for the operation and maintenance.
DBM: Design-Build-Maintain
A DBM is similar to a DB except the maintenance of the facility for some period of time
becomes the responsibility of the private sector partner. The benefits are similar to the
DB with maintenance risk being allocated to the private sector partner and the
guarantee expanded to include maintenance. The public sector partner owns and
operates the assets.
DBO: Design-Build-Operate
A single contract is awarded for the design, construction, and operation of a capital
improvement. Title to the facility remains with the public sector unless the project is a
design/build/operate/ transfer or design/build/own/operate project. The DBO method
of contracting is contrary to the separated and sequential approach ordinarily used in
the United States by both the public and private sectors. This method involves one
contract for design with an architect or engineer, followed by a different contract with a
builder for project construction, followed by the owners taking over the project and
operating it.
A simple design-build approach creates a single point of responsibility for design and
construction and can speed project completion by facilitating the overlap of the design
and construction phases of the project. On a public project, the operations phase is
normally handled by the public sector under a separate operations and maintenance
agreement. Combining all three passes into a DBO approach maintains the continuity
of private sector involvement and can facilitate private-sector financing of public
projects supported by user fees generated during the operations phase.
DBOM: Design-Build-Operate-Maintain
The design-build-operate-maintain (DBOM) model is an integrated partnership that
combines the design and construction responsibilities of design-build procurements
with operations and maintenance. These project components are procured from the
private section in a single contract with financing secured by the public sector. The
public agency maintains ownership and retains a significant level of oversight of the
operations through terms defined in the contract.
DBFOM: Design-Build-Finance-Operate-Maintain
With
the
Design-Build-Finance-Operate-Maintain
(DBFOM)
approach,
the
agreement with the agency, and then transfers the facility to the agency at the end of
the specified period of time. In most cases, the private partner will also provide some,
or all, of the financing for the facility, so the length of the contract or franchise must be
sufficient to enable the private partner to realize a reasonable return on its investment
through user charges.
At the end of the franchise period, the public partner can assume operating
responsibility for the facility, contract the operations to the original franchise holder, or
award a new contract or franchise to a new private partner. The BTO model is similar
to the BOT model except that the transfer to the public owner takes place at the time
that construction is completed, rather than at the end of the franchise period.
BOO: Build-Own-Operate
The contractor constructs and operates a facility without transferring ownership to the
public sector. Legal title to the facility remains in the private sector, and there is no
obligation for the public sector to purchase the facility or take title. A BOO transaction
may qualify for tax-exempt status as a service contract if all Internal Revenue Code
requirements are satisfied.
BBO: Buy-Build-Operate
A BBO is a form of asset sale that includes a rehabilitation or expansion of an existing
facility. The government sells the asset to the private sector entity, which then makes
the improvements necessary to operate the facility in a profitable manner.
Developer Finance
The private party finances the construction or expansion of a public facility in
exchange for the right to build residential housing, commercial stores, and/or industrial
facilities at the site. The private developer contributes capital and may operate the
facility under the oversight of the government. The developer gains the right to use the
facility and may receive future income from user fees.
While developers may in rare cases build a facility, more typically they are charged a
fee or required to purchase capacity in an existing facility. This payment is used to
expand or upgrade the facility. Developer financing arrangements are often called
can
include
variety
of
different
leasing
arrangements
(e.g.
and subsequently leases it back from the new owner. Both public and private entities
may enter into sale/leaseback arrangements for a variety of reasons. An innovative
application of the sale/leaseback technique is the sale of a public facility to a public or
private holding company for the purposes of limiting governmental liability under
certain statues. Under this arrangement, the government that sold the facility leases it
back and continues to operate it.
Tax-Exempt Lease
A public partner finances capital assets or facilities by borrowing funds from a private
investor or financial institution. The private partner generally acquires title to the asset,
but then transfers it to the public partner either at the beginning or end of the lease
term. The portion of the lease payment used to pay interest on the capital investment
is tax exempt under state and federal laws. Tax-exempt leases have been used to
finance a wide variety of capital assets, ranging from computers to telecommunication
systems and municipal vehicle fleets.
Turnkey
A public agency contracts with a private investor/vendor to design and build a
complete facility in accordance with specified performance standards and criteria
agreed to between the agency and the vendor. The private developer commits to build
the facility for a fixed price and absorbs the construction risk of meeting that price
commitment. Generally, in a turnkey transaction, the private partners use fast-track
construction techniques (such as design-build) and are not bound by traditional public
sector procurement regulations. This combination often enables the private partner to
complete the facility in significantly less time and for less cost than could be
accomplished under traditional construction techniques.
In a turnkey transaction, financing and ownership of the facility can rest with either the
public or private partner. For example, the public agency might provide the financing,
with the attendant costs and risks. Alternatively, the private party might provide the
financing capital, generally in exchange for a long-term contract to operate the facility.
2.0
STAKEHOLDERS IN PPP
Whereas the list of stakeholders taking part in a specific PPP scheme can vary
according to its nature and that of the project, some typical agents and/or roles can be
identified:
The public authority: This is the public entity that is ultimately responsible for
the project and for the decision to carry out and design the PPP scheme.
During the preparation of the scheme, the public authority is responsible for
preparing the tender documents, managing the tender3 process, assessing the
proposals submitted by the different bidders, selecting one proposal, and
formalizing the contractual framework. During the lifetime of the project, the
public authority is responsible for the enforcement of the terms of the
contract4 . In concessions, where there is a transfer of assets back to the
public sector at the end of the contractual period, the public authority is
responsible for arranging alternative management or operation of the services
for the moment the transfer takes place.
The PPP contractor: This is the entity responsible for the development of the
project in accordance with the terms specified by the public authority.
Therefore, the project PPP contractor is the main party responsible for
delivering the services specified in the PPP contractual framework, which can
be provided by the PPP contractor directly or by other third parties selected by
the PPP contractor. The project PPP contractor can be an existing company.
However, in many cases it can be a special purpose company set up especially
for the development of the project. This is very often the case when the PPP is
structured as a project finance. In this case, the shareholders may include
several of the stakeholders in the project, such as the building contractors, the
operators, or even the public authority.
The operator: The project PPP contractor can directly operate the
infrastructure7 . However, if specific know-how is required (market or
specialized technical knowledge), then an independent company can be
brought on board to carry out the operation on behalf of the project PPP
contractor. The relationship between them including capacity, level of service,
or pricing policy must be clearly regulated in a specific contract.
Financial agents: The use of private finance can be one of the most defining
aspects of a PPP. Normally, the project requires an initial investment, which
must later be recovered through an income stream. Therefore, a finance
scheme must be set up in order to compensate the cash flows over the lifetime
of the project. Basic sources of finance in a PPP may include the capital
provided by the project PPP contractor (equity), loans provided by banks, and
securities or bonds sold on capital markets as an investment product.
Funding agents: Funding agents are responsible for providing the income
stream on which the feasibility of the project rests. The funding agent could be
the users in schemes with direct tolls or the public authority in shadow toll
schemes. The funding role of the public authority may also include public
subventions for the operation or contributions towards the initial investment.
Regulator: Apart from the public authority responsible for the scheme, other
public bodies may have a role to play in the technical or economic regulation of
certain aspects of the project.
3.0
financial return on the project and its economic feasibility, and from that
perspective it should represent a fair price.
Public and private objectives: The public objective is to provide a public service,
which in this case means providing a safe and efficient road infrastructure at an
adequate cost.
The private objective is to develop a business and generate a profit. Both are
equally respectable. A PPP is not about putting one set of objectives ahead of
the other. Far from it, a good PPP scheme is one that allows the fulfilment of
both sets of objectives at the same time. A PPP where one party loses
regardless of which party that is a failed scheme.
ADVANTAGES OF PPP
4.0
The financial crisis of 2008 onwards brought about renewed interest in PPP in both
developed and developing countries. Facing constraints on public resources and fiscal
space, while recognizing the importance of investment in infrastructure to help their
economies grow, governments are increasingly turning to the private sector as an
alternative additional source of funding to meet the funding gap. While recent attention
has been focused on fiscal risk, governments look to the private sector for other
reasons:
Incentivizing the private sector to deliver projects on time and within budget
Supplementing limited public sector capacities to meet the growing demand for
infrastructure development