Public Private Partnership: 1.0 Different Schemes of PPP O&M: Operations and Maintenance

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Public Private Partnership

1.0

DIFFERENT SCHEMES OF PPP

O&M: Operations and Maintenance


A public partner (federal, state, or local government agency or authority) contracts with
a private partner to provide and/or maintain a specific service. Under the private
operation and maintenance option, the public partner retains ownership and overall
management of the public facility or system.
OMM: Operations, Maintenance & Management
A public partner (federal, state, or local government agency or authority) contracts with
a private partner to operate, maintain, and manage a facility or system proving a
service. Under this contract option, the public partner retains ownership of the public
facility or system, but the private party may invest its own capital in the facility or
system. Any private investment is carefully calculated in relation to its contributions to
operational efficiencies and savings over the term of the contract. Generally, the
longer the contract term, the greater the opportunity for increased private investment
because there is more time available in which to recoup any investment and earn a
reasonable return. Many local governments use this contractual partnership to provide
wastewater treatment services.

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

responsibilities for designing, building, financing, operating and maintaining are


bundled together and transferred to private sector partners. There is a great deal of
variety in DBFOM arrangements in the United States, and especially the degree to
which financial responsibilities are actually transferred to the private sector. One
commonality that cuts across all DBFOM projects is that they are either partly or
wholly financed by debt leveraging revenue streams dedicated to the project. Direct
user fees (tolls) are the most common revenue source. However, others ranging from
lease payments to shadow tolls and vehicle registration fees. Future revenues are
leveraged to issue bonds or other debt that provide funds for capital and project
development costs. They are also often supplemented by public sector grants in the
form of money or contributions in kind, such as right-of-way. In certain cases, private
partners may be required to make equity investments as well. Value for money can be
attained through life-cycle costing.
DBFOMT: Design-Build-Finance-Operate-Maintain-Transfer
The Design-Build-Finance-Operate-Maintain-Transfer (DBFOMT) partnership model is
the same as a DBFOM except that the private sector owns the asset until the end of
the contract when the ownership is transferred to the public sector. While common
abroad, DBFOMT is not often used in the United States today.
BOT: Build-Operate-Transfer
The private partner builds a facility to the specifications agreed to by the public
agency, operates the facility for a specified time period under a contract or franchise

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

capacity credits, impact fees, or extractions. Developer financing may be voluntary or


involuntary depending on the specific local circumstances.
EUL: Enhanced Use Leasing or Underutilized Asset
An EUL is an asset management program in the Department of Veterans Affairs (VA)
that

can

include

variety

of

different

leasing

arrangements

(e.g.

lease/develop/operate, build/develop/operate). EULs enable the VA to long-term lease


VA-controlled property to the private sector or other public entities for non-VA uses in
return for receiving fair consideration (monetary or in-kind) that enhances VAs mission
or programs.
LDO or BDO: Lease-Develop-Operate or Build-Develop-Operate
Under these partnerships arrangements, the private party leases or buys an existing
facility from a public agency; invests its own capital to renovate, modernize, and/or
expand the facility; and then operates it under a contract with the public agency. A
number of different types of municipal transit facilities have been leased and
developed under LDO and BDO arrangements.
Lease/Purchase
A lease/purchase is an installment-purchase contract. Under this model, the private
sector finances and builds a new facility, which it then leases to a public agency. The
public agency makes scheduled lease payments to the private party. The public
agency accrues equity in the facility with each payment. At the end of the lease term,
the public agency owns the facility or purchases it at the cost of any remaining unpaid
balance in the lease.
Under this arrangement, the facility may be operated by either the public agency or
the private developer during the term of the lease. Lease/purchase arrangements
have been used by the General Services Administration for building federal office
buildings and by a number of states to build prisons and other correctional facilities.
Sale/Leaseback
This is a financial arrangement in which the owner of a facility sells it to another entity,

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.

Building contractor: Building contractors can be one of the project PPP


contractors shareholders. However, if the influence of the contractor in the
arrangement of the project is too large, this may lead to suboptimal value over
the lifetime of the project, as the potential profit during the construction phase
can be disproportionately large in comparison with the capital it may have to
provide in terms of equity. The project PPP contractor must in any case monitor
construction management carefully in order to ensure that the particular interest
of any individual shareholder does not prevail over that of the project as a
whole.

Other beneficiaries: In large and complex infrastructure projects, there may be


beneficiaries other than those using the infrastructure. Such beneficiaries could
be parties benefiting from increased land values, enhanced accessibility, or
new business opportunities created by the operation of the infrastructure.
Therefore, it could be reasonable to integrate such stakeholders into the PPP
structure so that they contribute to the feasibility of the project.

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

PRIVATE FUNDING AND FINANCE

Increasing the involvement of private resources in road finance could be an adequate


way forward in terms of mitigating the described limitations of public funding. However,
the number of projects that could be developed under a fully private scheme22 without
any public contribution is relatively small. PPPs represent a way forward in terms of
trying to overcome the limitations of private financing of road infrastructures, thereby
allowing the use of such schemes to become more widespread. Rather than a tool,
PPP can be considered a principle whose ongoing development should allow new
formulas that contribute to a greater role for the private sector in road development.
The list of different PPP types is constantly growing as individual schemes
incorporating new ways of blending different elements of public and private interests
are developed. In this way, the traditional BOT toll concession formula has been
extended to include mechanisms that allow public contributions or risk mitigations that
allow a private PPP contractor to develop the project in market terms. Some of these
have been described in section 3.3, but this does not preclude the implementation of
other potential formulas adapted to the specific requirements of a particular case. In
principle, there should be no limits to creativity as long as the objectives of both
parties, public and private, are met. Nevertheless, some aspects inherent in the
private funding of road infrastructures and PPP should be born in mind when making
decisions:

The cost of a PPP: The development of a project as part of a PPP scheme is


not necessarily cheaper. Despite the public contribution to the project, users
still have to pay tolls, which could be perceived as unfair. However, it must be
remembered that the public contribution must bridge the gap between the

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.

Funding and finance: Both concepts represent different things. Whereas it


could be argued that private finance is not advisable on the basis of potentially
higher costs as a result of its higher rates or the requirements of a private profit,
it is harder to argue against the funding of the infrastructure by its users rather
than the taxpayers. Whereas so far, both concepts seem to have developed
together (private funding and finance), NRAs could develop strategies to make
users pay for the infrastructure, regardless of its public or private management
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:

Exploring PPPs as a way of introducing private sector technology and


innovation in providing better public services through improved operational
efficiency

Incentivizing the private sector to deliver projects on time and within budget

Imposing budgetary certainty by setting present and the future costs of


infrastructre projects over time

Utilizing PPPs as a way of developing local private sector capabilities through


joint ventures with large international firms, as well as sub-contracting
opportunities for local firms in areas such as civil works, electrical works,
facilities management, security services, cleaning services, maintenance
services

Using PPPs as a way of gradually exposing state owned enterprises and


government to increasing levels of private sector participation (especially
foreign) and structuring PPPs in a way so as to ensure transfer of skills leading
to national champions that can run their own operations professionally and
eventually export their competencies by bidding for projects/ joint ventures

Creating persification in the economy by making the country more competitive


in terms of its facilitating infrastructure base as well as giving a boost to its
business and industry associated with infrastructure development (such as
construction, equipment, support services)

Supplementing limited public sector capacities to meet the growing demand for
infrastructure development

Extracting long-term value-for-money through appropriate risk transfer to the


private sector over the life of the project from design/ construction to
operations/ maintenance

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