Publicprivate partnership

Introduction:
A publicprivate partnership (PPP or 3P or P3) is a
government service or private business venture that is funded
and operated through a partnership of government and one or
more private sector companies.
PPP involves a contract between a public sector authority and
a private party, in which the private party provides a public
service or project and assumes substantial financial, technical
and operational risk in the project. In some types of PPP, the
cost of using the service is borne exclusively by the users of
the service and not by the taxpayer.[1] In other types (notably
the private finance initiative), capital investment is made by
the private sector on the basis of a contract with government
to provide agreed services and the cost of providing the
service is borne wholly or in part by the government.
Government contributions to a PPP may also be in kind
(notably the transfer of existing assets). In projects that are
aimed at creatingpublic goods like in the infrastructure sector,
the government may provide a capital subsidy in the form of a
one-time grant, so as to make the project economically viable.
In some other cases, the government may support the project
by providing revenue subsidies, including tax breaks or by
removing guaranteed annual revenues for a fixed time period.
In all cases, the partnerships includes a transfer of significant
risks to the private sector, generally in an integrated and
holistic way, minimizing interfaces for the public entity. An
optimal risk allocation is the main value generator for this
model of delivering public service.
There are usually two fundamental drivers for PPPs. Firstly,
PPPs are claimed to enable the public sector to harness the
expertise and efficiencies that the private sector can bring to

the delivery of certain facilities and services traditionally

procured and delivered by the public sector. Secondly, a PPP
is structured so that the public sector body seeking to make a
capital investment does not incur any borrowing. Rather, the
PPP borrowing is incurred by the private sector vehicle
implementing the project. On PPP projects where the cost of
using the service is intended to be borne exclusively by the
end user, the PPP is, from the public sector's perspective, an
"off-balance sheet" method of financing the delivery of new
or refurbished public sector assets. On PPP projects where the
public sector intends to compensate the private sector through
availability payments once the facility is established or
renewed, the financing is, from the public sector's perspective,
"on-balance sheet"; however, the public sector will regularly
benefit from significantly deferred cash flows. Generally,
financing costs will be higher for a PPP than for a traditional
public financing, because of the private sector higher cost of
capital. However extra financing costs can be offset by private
sector efficiency, savings resulting from an holistic approach
to delivering the project or service, and from the better risk
allocation in the long run.
Typically, a private sector consortium forms a special
company called a "special purpose vehicle" (SPV) to develop,
build, maintain and operate the asset for the contracted period.
[1][2]
In cases where the government has invested in the project,
it is typically (but not always) allotted an equity share in the
SPV.[3] The consortium is usually made up of a building
contractor, a maintenance company and equity investor(s). It
is the SPV that signs the contract with the government and
with subcontractors to build the facility and then maintain it.
In the infrastructure sector, complex arrangements and
contracts that guarantee and secure the cash flows make PPP
projects prime candidates for project financing. A typical PPP

example would be a hospital building financed and

constructed by a private developer and then leased to the
hospital authority. The private developer then acts as landlord,
providing housekeeping and other non-medical services while
the hospital itself provides medical services.

. Defining Public Private Partnerships

1.1 Public Private Partnership means an arrangement between a government / statutory entity / 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 being made and/or
management being undertaken by the private sector entity, for a specified period of time, where there is well defined allocation of risk
between the private sector and the public entity and the private entity receives performance linked payments that conform (or are
benchmarked) to specified and pre-determined performance standards, measurable by the public entity or its representative.
1.2 Essential conditions in the definition are as under: i.Arrangement with private sector entity: The asset and/or service under the
contractual arrangement will be provided by the Private Sector entity to the users. An entity that has a majority non-governmental
ownership, i.e., 51 percent or more, is construed as a Private Sector entity1. ii.Public asset or service for public benefit: The facilities/
services being provided are traditionally provided by the Government, as a sovereign function, to the people. To better reflect this intent,
two
key
concepts
are
elaborated
below:
(a)Public Services are those services that the State is obligated to provide to its citizens or where the State has traditionally provided the
services
to
its
citizens.
(b)Public Asset is that asset the use of which is inextricably linked to the delivery of a Public Service, or, those assets that utilize or
integrate sovereign assets to deliver Public Services. Ownership by Government need not necessarily imply that it is a PPP.

iii. Investments being made by and/or management undertaken by the private sector entity:
The arrangement could provide for financial investment and/or non-financial investment by the private sector; the intent of the
arrangement is to harness the private sector efficiency in the delivery of quality services to the users.

iv. Operations or management for a specified period:

The arrangement cannot be in perpetuity. After a pre-determined time period, the arrangement with the private sector entity comes
to a closure.

v. Risk sharing with the private sector:

Mere outsourcing contracts are not PPPs.

vi. Performance linked payments:

The central focus is on performance and not merely provision of facility or service.

vii. Conformance to performance standards:

The focus is on a strong element of service delivery aspect and compliance to pre-determined and measurable standards to be
specified
by
the
Sponsoring
Authority.
1.3 The above definition puts forth only the essential conditions for an arrangement to be designated as a Public Private Partnerships

(PPP). In addition to these, some of the desirable conditions or good practices for a PPP include the following:
a. Allocation
of
risks
in
an
optimal
manner
to
the
party
best
suited
to
manage
the
risks;
b. Private sector entity receives cash flows for their investments in and/or management of the PPP either through a performance
linked fee payment structure from the government entity and/or through user charges from the consumers of the service provided;
c. Generally a long term arrangement between the parties but can be shorter term dependent for instance on the sector or focus of
PPP;
d. Incentive and penalty based structures in the arrangement so as to ensure that the private sector is benchmarked against service
delivery;
e. Outcomes of the PPP are normally pre-defined as output parameters rather than technical specifications for assets to be built,
though minimum technical specifications might be identified. Such a structure is expected to leave room for innovation and technology
transfer
in
project
execution
/
implementation
by
the
private
sector
entity.
1.4 The models where ownership of the underlying asset remains with the public entity during the contract period and project is
transferred back to the public entity after the termination contract are the preferred forms of Public Private Partnership models. The final
decision
on
the
form
of
PPP
is
a
determinant
of
the
Value
for
Money
analysis.
1.5 Some of the commonly adopted forms of PPPs include management contracts, build-operate-transfer (BOT) and its variants, buildlease-transfer
(BLT),
design-build-operate-transfer
(DBFOT),
operate-maintain-transfer
(OMT),
etc.
1.6 Build-own-operate (BOO) model is normally not the supported form of Public Private Partnership in view of the finite resources of the
Government and complexities in imposing penalties in the event of non-performance and estimation of value of underlying assets in the
event of early termination. Government of India does not recognise service contracts, Engineering-Procurement-Construction (EPC)
contracts
and
divestiture
of
assets
as
forms
of
PPP.
1.7 Government commits to the spirit of partnership amongst all the stakeholders public, private, end users and community. While the
current initiatives on having a strong public community private partnerships would continue, with the growing capacity and maturity of the
stakeholders concerned under a PPP arrangement, Government would in due course selectively consider newer models of partnerships
which would be simpler, flexible and engage increased participation amongst the contracting parties.

Box1: PPP Models supported by the Government:

User-Fee Based BOT models - Medium to large scale PPPs have been awarded mainly in the energy and transport sub-sectors (roads,
ports and airports). Although there are variations in approaches, over the years the PPP model has been veering towards competitively
bid concessions where costs are recovered mainly through user charges (in some cases partly through VGF from the government).
Annuity Based BOT models In sectors/projects not amenable for sizeable cost recovery through user charges, owing to socio-politicalaffordability considerations, such as in rural, urban, health and education sectors, the government harnesses private sector efficiencies
through contracts based on availability/performance payments. Implementing annuity model will require necessary framework conditions,
such as payment guarantee mechanism by means of making available multi-year budgetary support, a dedicated fund, letter of credit etc.
Government may consider setting-up a separate window of assistance for encouraging annuity-based PPP projects. A variant of this
approach could be to make a larger upfront payment (say 40% of project cost) during the construction period.
Performance Based Management/ Maintenance contracts In an environment of constrained economic resources, PPP that improves
efficiency will be all the more relevant. PPP models such as performance based management/maintenance contracts are encouraged.
Sectors amenable for such models include water supply, sanitation, solid waste management, road maintenance etc.
Modified Design-Build (Turnkey) Contracts: In traditional Design-Build (DB) contract, private contractor is engaged for a fixed-fee
payment on completion. The primary benefits of DB contracts include time and cost savings, efficient risk-sharing and improved quality.
Government may consider a Turnkey DB approach with the payments linked to achievement of tangible intermediate construction

milestones (instead of lump-sum payment on completion) and short period maintenance / repair responsibilities. Penalties/incentives for
delays/early completion and performance guarantee (warranty) from private partner may also be incorporated. Subsequently, as the
market sentiment turns around these projects could be offered to private sector through operation-maintenance-tolling concessions.

What is ppp?
Public-private partnership (PPP) is a funding model for a public infrastructure project such
as a new telecommunications system, airport or power plant. The public partner is
represented by the government at a local, state and/or national level. The private partner
can be a privately-owned business, public corporation or consortium of businesses with a
specific area of expertise.
PPP is a broad term that can be applied to anything from a simple, short term
management contract (with or without investment requirements) to a long-term contract
that includes funding, planning, building, operation, maintenance and divestiture. PPP
arrangements are useful for large projects that require highly-skilled workers and a
significant cash outlay to get started. They are also useful in countries that require the
state to legally own any infrastructure that serves the public.
Different models of PPP funding are characterized by which partner is responsible for
owning and maintaining assets at different stages of the project. Examples of PPP models
include:

Design-Build (DB): The private-sector partner designs and builds the infrastructure to
meet the public-sector partner's specifications, often for a fixed price. The privatesector partner assumes all risk.

Operation & Maintenance Contract (O & M): The private-sector partner, under
contract, operates a publicly-owned asset for a specific period of time. The public
partner retains ownership of the assets.

Design-Build-Finance-Operate (DBFO): The private-sector partner designs, finances

and constructs a new infrastructure component and operates/maintains it under a longterm lease. The private-sector partner transfers the infrastructure component to the
public-sector partner when the lease is up.

Build-Own-Operate (BOO): The private-sector partner finances, builds, owns and

operates the infrastructure component in perpetuity. The public-sector partner's
constraints are stated in the original agreement and through on-going regulatory
authority.

Build-Own-Operate-Transfer (BOOT): The private-sector partner is granted

authorization to finance, design, build and operate an infrastructure component (and to
charge user fees) for a specific period of time, after which ownership is transferred back
to the public-sector partner.

Buy-Build-Operate (BBO): This publicly-owned asset is legally transferred to a

private-sector partner for a designated period of time.

Build-lease-operate-transfer (BLOT): The private-sector partner designs, finances and

builds a facility on leased public land. The private-sector partner operates the facility
for the duration of the land lease. When the lease expires, assets are transferred to the
public-sector partner.

Operation License: The private-sector partner is granted a license or other

expression of legal permission to operate a public service, usually for a specified term.
(This model is often used in IT projects.)

Finance Only: The private-sector partner, usually a financial services company, funds
the infrastructure component and charges the public-sector partner interest for use of
the funds.

Example:

Vinayak Chatterjee: PPP in India:

t is difficult to determine when exactly the public-private partnership, or PPP, movement started in India,
considering that we use the term rather loosely.
Private investment and involvement in infrastructure occurs through the following three routes:

Full private provision, or FPP: In this case, the government allows complete ownership of the asset to private
players. The government assumes no responsibility or risk for example, the Hyderabad Metro, telecom and so
on.
PPP schemes: In the case of PPPs, the investment is funded and operated through a partnership between the

government and one or more private sector players. For example, Delhi and Mumbai airports.
Private finance initiative, or PFI: These schemes introduce the benefits of private sector management and
finance into public sector projects. This differs from privatisation since the responsibility of providing essential
services to the public is not transferred to the private sector; nor is the asset-ownership transferred. As, for
example, in solid waste management, electricity distribution franchising and so on.
Today, in India, PPP is generally used to broadly connote all these models of private sector involvement
in the infrastructure arena. This is, holistically, PSP or private sector participation. PPP, though
technically a subset of PSP, will be used in this article to denote PSP generally. It is too early in the
game to split hairs on this issue when bigger issues are waiting to be resolved.
It could be argued that the PPP story began with private sterling investments in Indian railroads in the
latter half of the 1800s. By 1875, about 95 million was invested by British companies in Indian
guaranteed railways. Or we could trace it to the early 1900s, when private producers and distributors
of power emerged in Kolkata (Calcutta Electric Supply Corporation) and Mumbai, with the Tatas playing
a prominent role in starting the Tata Hydroelectric Power Supply Company in 1911.
PPP INVESTMENTS IN INFRA ($ Billion)
Approx infra Estimate
Period
sector
d
investments
PPP %
10th Plan
222
25
11th Plan
500
37
(Estimated)
12th Plan
1,000
50
(Projection)

Estimated
PPP
investments
56
185
500

Cut to the early 1990s, and one could postulate that it was then that the new-wave PPP movement
started. A policy of opening electricity generation to private participation was announced by the central
government in 1991, which set up the structure of independent power producers, or IPPs. The National
Highways Act, 1956, was amended in 1995 to encourage private participation. In 1994, through a
competitive bidding process, licences were granted to eight cellular mobile telephone service operators
in four metro cities and 14 operators in 18 state circles.
But if one were to choose a date that would capture the essence of a clear historic shift, one could zero
in on January 30, 1997, when the Infrastructure Development Finance Company was incorporated in
Chennai under the initiative of the then Finance Minister P Chidambaram. The firm, promoted by the
government of India, was set up on the recommendations of the Expert Group on Commercialisation of
Infrastructure Projects under the chairmanship of Rakesh Mohan. And Deepak Parekh was chosen as
the first chairman. The idea was that this would signal the governments seriousness in channelling
private sector capital, expertise and management in the nations infra development.
The period between 1997 and 2012, thus, marks a decade and a half of PPP.
So, what is it that we should be celebrating?
One, the huge contributions of the warp and weft of PPP into Indias infrastructure fabric. The table (see
PPP investments in infra) shows the giant strides made.

Had someone in the late eighties asked about the future role of private capital and enterprise in Indian
infra (when the state ran close to 100 per cent of public utilities and core infra) he would have received
a look of bemused incredulity at such a possibility. Today, while Chinas economy may be four times
larger than Indias, our PPP market is 10 times larger than that of Chinas. In fact, India is today easily
the worlds largest PPP market. Across various shades of politicalopinion and different party lines, our
political leadership, supported by a near-converted bureaucracy, managed to affect this tectonic shift
across the geo-plates of Indias economy. Surely, on this score, they deserve our appreciation. So does
the private sector that rose admirably to the occasion and responded with entrepreneurial energy,
conviction and capital.
Two, let us acknowledge and salute the huge efforts made to create the right enabling environment for
the PPP story to unfold rapidly. These relate to enacting new legislation for example, the Electricity
Act, 2003; the amended National Highways Authority of India Act, 1995; the Special Economic Zone
Act, 2005; and the Land Acquisition Bill. As also the creation of new institutions like regulatory
authorities in telecom, power and airports, implementing authorities like the National Highways Authority
of India (NHAI), and financial institutions like the Infrastructure Development Finance Company, the
India Infrastructure Finance Company and so on. A slew of model concession agreements across
sectors created the template for private participation. Innovative financial interventions like viability gap
funding, annuity models and stimulation of debt for infra have also added fiscal punch. The Planning
Commission, the Department of Economic Affairs in the Ministry of Finance and the Prime Ministers
Office have all played a stellar role in making PPP happen. Many states, too notably Punjab,
Gujarat, Maharashtra, Delhi, Karnataka and Tamil Nadu have built significant capacity to deliver on
PPP.
Three, increasing transparency of the bidding-out process. Even as India still has a long way to go on
the Transparency International list, it is indeed heartening to see that there has been a sharp fall in
crony capitalism in the award of PPP projects. Recent times have seen practically no complaints from
the slew of NHAI projects bid out. Power bids have been ferociously fought. And airport bids were
examples in ultimate transparency. Even as a lot of governance issues still remain in execution and
implementation, few will disagree that the average newspaper reader can easily discover the bid-criteria
point at which a private player has been selected. E-auctions are adding to this credibility. The scams in
telecom and other sectors have lead to transparency alertness in the media, the judiciary, civil society,
and investigative and audit institutions. The largest PPP market in the world, India, can now lay claim to
being the least crony capitalist.

Public Private Partnership (PPP) projects in India A

view on top Engagement Models and related
statistics:
Private Partnership Policy, 2011 states PPP as:
A partnership between the public and private sectors with clear agreement on shared objectives
for the delivery of public infrastructure and/or public services. Public Private Partnership means
an arrangement between a government / statutory entity / 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 being made and/or management being undertaken by the private sector
entity, for a specified period of time, where there is well defined allocation of risk between the
private sector and the public entity and the private entity receives performance linked payments
that conform (or are benchmarked) to specified and pre-determined performance standards,
measurable by the public entity or its representative. There is no single PPP engagement model
that can satisfy all conditions concerning a projects location setting and its technical and financial
features. The most suitable model should be selected taking into account the countrys political,
legal and socio-cultural circumstances, maturity of the countrys PPP market and the financial and
technical features of the projects and sectors concerned. This has led to innovation in the
engagement models.
The below are the top ten prevalent PPP Engagement Models in India:

1. BOT-Toll (Build Operate Transfer Toll) - The private entity meets the upfront cost of design,
construction and recurring cost on operation and maintenance. The Private entity recovers the
entire cost along with the interest from collection of user utilization during the agreed concession
period. Capital infusion is available from the public entity. A risk sharing model is predominant in
this model.
2. BOOT (Build Operate Own Transfer) - This engagement model is similar to the Build Operate
Transfer model except that the private entity has to transfer the facility back to the public sector.
In BOOT model the government grants a private entity to finance, design, build and operate a
facility for a specific period of time before the transfer.
This is a variation of the BOT model, except that the ownership of the newly built facility will rest
with the private party and during the period of contract.

This will result in the transfer of most of the risks related to planning, design, construction and
operation of the project to the private entity. The public sector entity will however contract to
purchase the goods and States and their area of development in PPPs services produced by the
project on mutually agreed terms and conditions.. The facility built under PPP will be transferred
back to the government department or agency at the end of the contract period, generally at the
residual value and after the private entity recovers its investment and reasonable return agreed to
as per the contract. Status of PPP Projects in India
3. Joint Venture (JV) - In a PPP arrangement commonly followed in our country (such as for airport
development), the private sector body is encouraged to form a joint venture company (JVC) along
with the participating public sector agency with the latter holding only minority shares.

The private sector body will be responsible for the design; construction and management of the
operations targeted for the PPP and will also bring in most of the investment requirements. The
public sector partners contribution will be by way of fixed assets at a pre-determined value,
whether it is land, buildings or facilities or it may Public Private Partnership (PPP) projects in India A
view on top Engagement Models and related statistics 2 contribute to the shareholding capital. It
may also provide assurances and guarantees required by the private partner to raise funds and to
ensure smooth construction and operation. The public service for which the joint venture is
established will be provided by the entity on certain pre-set conditions and subject to the required
quality parameters and specifications. Examples are international airports (Hyderabad and
Bangalore), ports etc.
4. Management Contract (MC) - A management contract is a contractual arrangement for the

management of a part or whole of a public enterprise 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 provided 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, payment of such fees is performance-based. Usually,
the contract period is short, typically two to five years. But longer period may be used for large
and complex operational facilities such as a port or airport. Top 10 active states in PPP
5. BOT (Build Operate Transfer) - The private business builds and operates the public facility for an
agreed period of time. Once the facility is operational as agreed, or at the end of the time period,
the private entity transfers the facility ownership to the public, here it may be construed as
Government.

Under this category, the private partner is responsible to design, build, operate (during the
contracted period) and transfer back the facility to the public sector. The private sector partner is
expected to bring the finance for the project and take the responsibility to construct and maintain
it. The public sector will either pay a rent for using the facility or allow it to collect revenue from
the users. The national highway projects contracted out by NHAI under PPP mode is an example.
This model is a classic example for IT industry. Public Private Partnership (PPP) projects in India A
view on top Engagement Models and related statistics 3
6. BOT Annuity (Build Operate Transfer Annuity) This model though is globally accepted one
does not have the favour of the Planning Commission of India. In case of annuity model, the cost of
building the entity is paid to the private entity or the developer annually after the starting
commercial operations of the facility. payments etc. It may be noted that most of the project risks
related to the design, financing and construction would stand transferred to the private partner.
The public sector may provide guarantees to financing agencies, help with the acquisition of land
and assist to obtain statutory and environmental clearances and approvals and also assure a
reasonable return as per established norms or industry practice etc., throughout the period of
concession

7. DBFOT (Design Build Finance Operate Transfer) - These are other variations of PPP and as the
nomenclatures highlight, the private party assumes the entire responsibility for the design,
construct, finance, and operate or operate and maintain the project for the period of concession.

These are also referred to as Concessions. The project will recover its investments (ROI) through
concessions granted or through annuity PPP Projects categorized based on development areas
Public Private Partnership (PPP) projects in India A view on top Engagement Models and related
statistics .
8. BOO (Build Own Operate) - In a BOO project, ownership of the project usually remains with the
Private entity. The government grants the rights to design, finance, build, operate and maintain the
project to a private entity, which retains ownership of the project. In BOO the private entity is
usually not required to transfer the facility back to the government
9. PPP (Public Private Partnership) - A partnership between the public and private sectors with
clear agreement on shared objectives for the delivery of public infrastructure and/or public
services. There exists well defined allocation of risk between the private and the public entities and
the private entity receives performance linked payments that conform to specified and predetermined performance standards, measurable by the public entity or its representative.
10. BOOST (Build Operate Own Share Transfer) This model is very similar to the BOOT model,
except that there exists an arrangement or sharing the revenue to the private entity for a longer
time even after the rights of the private entity is transferred to the public entity.

Types of Public Private Partnership Models in India

PPPs broadly refer to long term, contractual partnerships between
the public and private sector agencies, specially targeted towards
financing, designing, implementing, and operating infrastructure
facilities and services that were traditionally provided by the
Government and/or its agencies. These collaborative ventures are
built around the expertise and capacity of the project partners and
are based on a contractual agreement, which ensures appropriate
and mutually agreed allocation of resources, risks, and returns. This
approach of developing and operating public utilities and
infrastructure by the private sector under terms and conditions
agreeable to both the government and the private sector is called
PPP.

Types of PPP::
Service Contract :

Under a service contract, the Government (public authority)

hires a private
company or entity to carry out one or more
specified tasks or services for a period, typically 13 years.
The public authority remains the primary provider of the
infrastructure service and contracts out only portions of its
operation to the private partner.
The private partner must perform the service at the agreed
cost and must typically meet performance standards set by the
public sector.
The Government pays the private partner a predetermined fee
for the service, which may be a one time fee, based on unit

cost, or some other basis.

Management Contract :

A management contract expands the services to be contracted

out to include some or all of the management and operation of
the public service (i.e., utility, hospital, port authority, etc.).
Although ultimate obligation for service provision remains in
the public sector, daily management control and authority is
assigned to the private partner or contractor. In most cases, the
private partner provides working capital but no financing for
investment.
The private contractor is paid a predetermined rate for labour
and other anticipated operating costs.
Management contract variants include supply and service
contract,
maintenance
management
and
operational
management.

Lease contract :

Under a lease contract, the private partner is responsible for

the service in its entirety and undertakes obligations relating to
quality and service standards.
Except for new and replacement investments, which remain the
responsibility of the public authority, the operator provides the
service at his expense and risk.
The duration of the leasing contract is typically for 10 years
and may be renewed for up to 20 years.
Responsibility for service provision is transferred from the
public sector to the private sector and the financial risk for
operation and maintenance is borne entirely by the private

sector operator.

In particular, the operator is responsible for losses and for

unpaid consumers' debts.
Leases do not involve any sale of assets to the private sector.

Concessions :

A
concession
makes
the
private
sector
operator
(concessionaire) responsible for the full delivery of services in a
specified area, including operation, maintenance, collection,
management, and construction and rehabilitation of the
system.
Importantly, the operator is now responsible for all capital
investment. Although the private sector operator is responsible
for providing the assets, such assets are publicly owned even
during the concession period.
The public sector is responsible for establishing performance
standards and ensuring that the concessionaire meets them. In
essence, the public sectors role shifts from being the service
provider to regulating the price and quality of service.
The concessionaire collects the tariff directly from the system
users.
The tariff is typically established by the concession contract,
which also includes provisions on how it may be changed over
time.
In some cases, the government may choose to provide
financing support to help the concessionaire fund its capital
expenditures.
The concessionaire is responsible for any capital investments

required to build, upgrade, or expand the system, and for

financing those investments out of its resources and from the
tariffs paid by the system users.

A concession contract is typically valid for 2530 years so that

the operator has sufficient time to recover the capital invested
and earn an appropriate return over the life of the concession.
Government may contribute to the capital investment cost by
way of subsidy (Viability Gap Funding - VGF) to enhance
commercial viability of the concession.
The concessions are effective contracts to provide investment
for creation of new facilities or rehabilitation facilities.

Build Operate Transfer (BOT) :

BOT and similar arrangements are a kind of specialized

concession in which a private firm or consortium finances and
develops a new infrastructure project or a major component
according to performance standards set by the government.
Under BOTs, the private partner provides the capital required to
Build the new facility, Operate & Maintain (O&M) for the
contract period and then return the facility to Government as
per agreed terms.
Importantly, the private operator now owns the assets for a
period set by contractsufficient to allow the developer time to
recover investment costs through user charges.

BOTs generally require complicated financing packages to achieve

the large financing amounts and long repayment periods required.

At the end of the contract, the public sector assumes ownership but
can opt to assume operating responsibility, contract the operation
responsibility to the developer, or award a new contract to a new
partner. The main characteristic of BOT and similar arrangements
are given below:-

Design Build (DB) : Where Private sector designs

constructs at a fixed price and transfers the facility.

and

Build Transfer Operate (BTO) : Where Private sector designs

and builds the facility. The transfer to the public owner takes
place at the conclusion of construction. Concessionaire is given
the right to operate and get the return on investment.
Build-Own-Operate (BOO) : A contractual arrangement
whereby a Developer is authorized to finance, construct, own,
operate and maintain an Infrastructure or Development facility
from which the Developer is allowed to recover his total
investment by collecting user levies from facility users. Under
this Project, the Developer owns the assets of the facility and
may choose to assign its operation and maintenance to a
facility operator. The Transfer of the facility to the Government,
Government Agency or the Local Authority is not envisaged in
this structure; however, the Government, may terminate its
obligations after specified time period.
Design-Build Operate (DBO) : Where the ownership is
involved in private hands and a single contract is let out for
design construction and operation of the infrastructure project.
Design Build Finance Operate (DBFO) : With the design
buildfinanceoperate (DBFO) approach, the responsibilities for
designing, building, financing, and operating & maintaining, are
bundled together and transferred to private sector partners.

DBFO arrangements vary greatly in terms of the degree of

financial responsibility that is transferred to the private partner

Build- Operate- Transfer (BOT) : Annuity/Shadow User

Charge : In this BOT Arrangement, private partner does not
collect any charges from the users. His return on total
investment is paid to him by public authority through annual
payments (annuity) for which he bids. Other option is that the
private developer gets paid based on the usage of the created
facility.

Joint Venture:

Joint ventures are alternatives to full privatization in which the

infrastructure is co-owned and operated by the public sector
and private operators.
Under a joint venture, the public and private sector partners
can either form a new company (SPV) or assume joint
ownership of an existing company through a sale of shares to
one or several private investors.
A key requirement of this structure is good corporate
governance, in particular the ability of the company to maintain
independence from the government, because the government
is both part owner and regulator.
From its position as shareholder, however, the government has
an interest in the profitability and sustainability of the company
and can work to smoothen political hurdles.

Examples of Successful Public-private Partnerships

There is growing awareness in both the developed and developing world that alleviating the infrastructure gap, i.e., the
difference between needed and extant infrastructure and services, is a monumental requirement, well beyond the financial
capacity of the public sector. This awareness has led to an increased focus on private-sector participation in infrastructure
projects and, in particular, the use of public-private partnerships (PPPs).
This volume presents examples of PPP projects, with a particular emphasis on PPPs designed to achieve development
goals. The intention is not to provide rigid models since each partnership must be crafted to meet the local conditions and
needs. Rather, the aim is to convey the range of possibilities offered by this unique tool, which can be of substantial help in
providing services and infrastructure where government financing options may be limited.
The 23 case studies presented in this volume were prepared by the National Council for Public-Private Partnerships
(NCPPP).
The case studies in this publication focus on:

healthcare (for hospital infrastructures and improved delivery of services),

power (including renewable and more efficient delivery of traditional power),

transportation (both urban and transnational),

water/wastewater infrastructure (for urban and major metropolitan areas) and

environment (such as eco-friendly and financially feasible approaches).

This publication on examples of public-private partnership for development would not have been possible without the
lessons learned from selected projects. The case studies in this volume include not only experiences from developing
countries but also a few from developed parts of the world. In this way, a clearer picture can be presented as to when and
where PPPs can provide an appropriate response to a public need. For this same reason, both successes and failures
have been included since the latter can often provide critical insights into how to develop a successful partnership.
Chapter

Chapter Title

Country

ThematicArea

MDG

Hospital Co-location, Bloemfontein

South Africa

Public-private
Partnerships

Combat HIV/AIDS,
Malaria and other Diseases

Malaria Control

Mali

Public-private
Partnerships

Combat HIV/AIDS,
Malaria and other Diseases

Nationwide Water and Power

Gabon

Public-private
Partnerships

Environmental
Sustainability

Rural Electrification

Guatemala

Public-private
Partnerships

Environmental
Sustainability

Solar Power

Morocco

Public-private
Partnerships

Environmental
Sustainability

Public Market, Mandaluyong City

Philippines

Public-private
Partnerships

Environmental
Sustainability

James F. Oyster Bilingual

Elementary School, Washington,
D.C.

United States

Capacity-building

Universal Education

Union Station, Washington, D.C.

United States

Capacity-building

Environmental
Sustainability

Martin Garcia Channel

Argentina,
Uruguay

Capacity-building

Environmental
Sustainability

10

Bus Rapid Transit Project, Bogot

Colombia

Capacity-building

Environmental
Sustainability

11

Port Expansion, Colombo

Sri Lanka

Capacity-building

Environmental
Sustainability

12

Mixed-use Tunnel, Kuala Lumpur

Malaysia

Capacity-building

Environmental
Sustainability

13

North Luzon Expressway, Luzon

Philippines

Capacity-building

Environmental
Sustainability

14

N4 Toll Road

South Africa,
Mozambique

Capacity-building

Environmental
Sustainability

15

East Coast Road, Tamil Nadu

India

Capacity-building

Environmental
Sustainability

16

New York Avenue Metro Station,

Washington, D.C.

United States

Capacity-building

Environmental
Sustainability

17

Urban Water Expansion, Cantagena

Colombia

Capacity-building

Environmental
Sustainability

18

Urban Water Expansion,

Cochabamba

Bolivia

Capacity-building

Environmental
Sustainability

19

Urban Water Expansion, Dakar

Senegal

Capacity-building

Environmental
Sustainability

20

2004 Tsunami Relief

East Asia

Capacity-building

Environmental
Sustainability

21

Water/Wastewater Improvements,
Manila

Philippines

Capacity-building

Environmental
Sustainability

22

Urban Water, Jakarta

Indonesia

Capacity-building

Environmental
Sustainability

23

Chesapeake Forest, Maryland

United States

Capacity-building

Environmental
Sustainability

What are benefits / advantages of PPP?

It is increasingly clear that governments cannot meet the constantly growing demand
for services by acting on their own, and that there is a need to look for support from
other sectors of society. Government revenues are usually not sufficient to meet
spending demands. Partnerships can provide a continued or improved level of
service at reduced costs. By developing partnerhips with private-sector entities,
governments can maintain quality services despite budget limitations.
Public-private partnership is one of the most promising forms of such collaboration. It

is based on the recognition that both public and private sectors can benefit from
pooling their financial resources, know-how and expertise to improve the delivery of
basic services to all citizens.
If properly designed and implemented, PPPs can bring real benefits in terms of
helping governments to finance infrastructure investment in a more efficient way,
freeing up scarce resources to allocate them to other national spending priorities.
The advantages of PPP in a competitive environment are considered as follows:

to remove the responsibility of funding the investment from the governments balance sheet;

to introduce competition;

to adopt managerial practices and experience of the private sector;

to restructure public sector service by embracing private sector capital and practices;

to achiveve greater efficiency than traditional methods of providing public services.

Disadvantages of PPPs
PPP contracts are typically much more complicated than conventional procurement contracts. This is principally
because of the need to anticipate all possible contingencies that could arise in such long-term contractual
relationships. Each party bidding for a project spends considerable resources in designing and evaluating the
project prior to submitting a tender. In addition, there are typically very significant legal costs in contract
negotiation. Having several bidders do this involves a cost which can add up in total to tens of millions. It has
been estimated that total tendering costs equal around 3% of total project costs as opposed to around 1% for
conventional procurement.[13] The cost of both successful and unsuccessful bids is, in effect, built into total
project costs. The Australian Council for Infrastructure Development has expressed the view that unless
tendering processes are well run it is possible that the benefits of using a PPP for delivering the project may be
outweighed by the tendering costs.[14] Under conventional procurement, the sunk costs of private contractors
are much smaller and contracts (e.g. for operations) often do not exceed 5 years. The risks to be covered off in
the contract are therefore significantly less.

Contract renegotiation: Given the length of the relationships created by PPPs and the difficulty in
anticipating all contingencies, it is not unusual for aspects of the contracts to be renegotiated at some
stage. Wherever possible, provisions are included in the contract that spell out how variations are to be
priced. But, given the length of time spanned by the contract, it is almost inevitable that circumstances
will arise which cannot be foreseen.
Where the need for renegotiation comes from the public agency (which, it appears, is often the case,
perhaps as a result of a change in government policy) and no pricing rule is contained in the contract,
the Crown can end up paying a heavy price, since the price is not determined in a competitive bidding
context. The cost of such changes is difficult to factor into the original project evaluation, since by

definition it is unanticipated.

Performance enforcement: One of the difficulties with performance specification in the area of service
delivery is that performance sometimes has dimensions which are hard to formulate in a way that is
suitable for an arms-length contract. Examples include maintaining good customer relations, and not
creating public relations blunders which rebound on the government. In the case of building a motorway
through a dense urban setting, a public roading authority will sometimes find it difficult to specify all
performance elements in service level terms.
The reputation effect and the prospect of repeat business can sometimes provide incentives to achieve
soft performance targets. For example, unsatisfactory performance by a prison management company
will affect its reputation and therefore its ability to obtain contracts elsewhere.
However, in other cases neither reputation effects nor contractual remedies will be sufficient. A
command relationship or master-servant relationship, such as exists within an organisation, may be
more efficient. In essence, if for whatever reason one isnt able to clearly specify the required services,
then a master-servant relationship enables one to change the service requirement as one goes along,
at relatively little cost.[15] At the construction stage, a project alliance approach may be most
appropriate, while at the infrastructure operation stage a series of short-term contracts may be
acceptable as they provide the opportunity for the public agency to take corrective action if it finds that
some performance dimensions were inadequately specified or no longer appropriate given changing
public expectations.

Political acceptability: Given the difficulty in estimating financial outcomes over such long periods, there
is a risk that the private sector party will either go bankrupt, or make very large profits. Both outcomes
can create political problems for the government, causing it to intervene. Examples of the former
include the National Air Traffic Services (NATS), which encountered financial difficulties after 11
September 2001. The British government bailed it out rather than let NATS bankers take it over.
Another example is Melbournes tram and train services, contracted out in 1999. Patronage didnt
increase to the levels expected, causing the operator to threaten to fail. The government agreed to
increase the operating subsidy.
http://www.afd.fr/webdav/shared/PORTAILS/PAYS/MEDITERRANEE/PPP-Amman/AFD-Francoz.pdf