PUBLIC PRIVATE PARTNERSHIP
An alternate method for procurement and development
About 30 per cent of development outlay in the budget for 2008-09 is likely to be earmarked for completion of projects under PP partnerships 
By Alauddin Masood

Public private (PP) partnerships have, till recently, taken place mainly in economic infrastructure, such as telecommunications, power and water. However, the desire for greater efficiency and better services, coupled with resource constraints, are now increasingly leading governments to embrace PP partnership approach to provide services in health, education and other social segments, like garbage collection, facilities management, etc.

In the Federal Budget for the fiscal year 2008-09, about 30 per cent of the total development outlay is likely to be earmarked for completion of development projects through PP partnerships. A comparatively new and innovative approach for the citizens of Pakistan, the PP partnerships modality of procurement for the public sector and supply of services to the people needs a thorough appraisal.

We can define a PP partnership as a contract between a public sector ‘Institution’ and a private party, in which the latter assumes substantial financial, technical and operational risks in the design, financing, building and operation of an infrastructure project. It is thus an alternative method of procurement for the public sector, involving a medium to long term relationship between the public and private sector in which private sector capital and management is mobilised to plan, implement and operate an infrastructure project.

It involves sharing and transferring of risks and rewards between the public sector and the private partner. Obviously, a private party does not enter into a PP partnership for public good or charity; its primary aim is to earn profit. In other words, PP partnership is about building assets for provision of services to the masses through private sector participation and monitoring of performance by public sector Institutions.

The major benefit of PP partnership modality is that the initial financial expense for the project is carried out by the private party, thereby involving minimal capital expenditure from the government.

Initiated by the government with ADB and World Bank’s assistance to promote/develop PP partnership or infrastructure development, the national PP partnership rogramme recognises that tight fiscal constraints require innovative approaches for accelerated development of infrastructure projects.

Like many other countries, for coordinating/promoting PP partnership, the government has set up a dedicated PP partnership unit - infrastructure project development facility (IPDF). Incorporated under the Companies Ordinance, IPDF was formally launched in November 2006 to provide expertise and hands on support to implementing Institutions, at all tiers of the government, intending to implement infrastructure projects under PP partnership modality.

IPDF has produced a series of guidelines/documents to help government agencies decide whether PP partnership are appropriate for particular projects. Practical, useable and consistent with the global approach, these documents include: standardised contractual provisions, risk management framework, feasibility guidelines, project inception guidelines, project procurement guidelines, practice note on tariff setting and adjustment, economic benefit guidelines etc.

These documents provide public institutions a framework to ensure a realistic approach to analysing procurement options. Amongst IPDF produced documents, the one on ‘standardised contractual provisions’ (SCP) is a practical and ready to be used by both the public and private parties for the drafting of agreements for infrastructure projects.

In addition to multipurpose water reservoirs, IPDF is providing technical services to various institutions (federal, provincial and local government) on multi-million infrastructure projects for implementation under PP partnership modality. These projects are: national trade corridor cool chain project, CNG buses project in Karachi, Faisalabad water and sanitation project, Faisalabad solid waste management project, Charsadda solid waste management project, federal board of revenue automation project, Pakistan software export board it park project Islamabad, shipyards project, Kallinger water supply project Kharipur, PTDC corporate complex Islamabad, Thar coal project etc.

Special purpose vehicle

One of the key aspects of SCPs is incorporation of a Special Purpose Vehicle (SPV) as a company to act as the private party that will undertake the project and would be responsible to meet obligations under the PP partnership agreement. Representing the PP partnership, SPV will be responsible for the design, construction, operations, maintenance and transfer of the project as well as for arranging finances for it. The equity investments of shareholders are guaranteed, as per the agreement. The role of the Institution is to monitor the delivery of services under the agreement.

The SCPs provide detailed understanding on all expected contractual obligations, including performance monitoring/measurement, at contract inception, as provided in the accompanying figure. SCPs also aim to save considerable time/resources throughout the project’s life cycle and serve as an important foundation of an effective partnership. These also provide a clear identification of key stakeholders, their respective roles and relationship.

Following Key Contractual Issues, covered through SCPs, would help in having a better understanding of PP partnership projects: 

Risk management process: SCPs stipulate the risk management process, which is a key consideration to manage a PP partnership agreement. The optimum risks, i.e. design, construction, operations and maintenance (or technical, financial, and operational) are assumed by the private party. The Institution retains the minimal risks. The SCPs also ensure that the risks transferred to the private party are retained by her during the project’s life cycle and are not transferred back to the Institution.

Risk allocation profile: SCPs aim to achieve a generic ‘risk allocation profile’ between private parties and the public sector across a range of infrastructure sectors. A major benefit of SCPs is that the Institution does not have to renegotiate ‘common risks’ in each transaction.

Payment methods: The payment for provision of services to SPV is usually done either through (a) Unitary Payment Method whereby the Institution pays SPV, as agreed, for provision of services, or, User-charges method whereby SPV is allowed to charge the users for services.

Through a clause containing the Long Stop Date (LSD), SCPs entail that the service commencement should not be delayed indefinitely by the PP partnership. LSD is a date after which the Institution is entitled to terminate the PP partnership agreement if the PP partnership fails to commence the services. Penalties are imposed on the PP partnership in the event of poor performance, or any other specific failure.

The PP partnership and SPV implements PP partnership projects through engaging sub-contractors in various fields and also bears the risk of sub-contracts.

To avoid costly and time consuming judicial process for dispute resolution, SCPs provide ‘Fast Track Dispute Resolution’ through adjudication of disputes between the parties by experts having extensive knowledge in the relevant field. In the event of failure of resolution through this process, the matters may be referred to alternative resolution processes, including adjudication by courts.

The SCPs also contain that a project may involve the transfer of existing operations of an Institution. In this scenario, post-transfer benefits must be paid to employees and not to the PP partnership.

The public institution retains the right to protect the ongoing delivery of public services and the SCPs include clearly defined protection options should the PP partnership fail to deliver on its required service deliverables. A default, under the agreement, occurs when the PP partnership does not rectify a continued failure to meet the stipulated service. In such circumstances, the lenders are allowed to step in to rectify the situation by bringing another private party for the continuation of the agreement.

The SCPs also provide for termination due to corrupt acts either of the PP partnership or its sub-contractors.

SCPs also entail the expected conditions of project assets which are to be handed to the institution at the time of expiry of the agreement.

The SCPs basically aim to achieve common provisions relating to PP partnership to save the time with regard to closure and costs of the parties. Finally, a strong political will is required to attract the private sector to invest in PP partnership. It is also important to promulgate legislation for support of PP partnership to show consistency in government policies and encourage not only public Institutions to execute PP partnership agreements but also to protect the investment and rights of the PP partnership. Such legislation is common in many countries, where PP partnership modality is being used extensively.