The PPP projects are capital intensive, wherein public partner wishes to hone in private partner expertise and pass on the risks in implementation and operations of project to it. The PPP does not happen on its own unless pre-requisite structure and institutions are in place which allow healthy partnership to flourish amongst the parties in project.
The are 2 themes which need to be defined from institutional set-up perspective –
1. A central PPP unit which enjoys a high degree of government commitment for driving and guiding PPP initiatives.
2. An independent monitoring unit which monitors the contract and helps government in transition of service provisioning to service provider.
PPP units thus would also help government with assessing project affordability, prioritization and support. It serves as the center of expertise for all government departments in identifying, structuring and implementing viable PPP projects, including deal flow and capacity building. Thus with the introduction of PPP, government goes from being the direct provider and financer of the service to overseeing the delivery of service at a higher standard of quality. PPPs are typically more costly than straightforward public procurement. and they only attract private partners if public pays for both the project and profit of private enterprise.
“The risk management of PPP(Public Private Partnership) project can improve the level of risk control between government departments and private investors, so as to make more beneficial decisions, reduce investment losses and achieve mutual benefit as well.”
Major Political Constraints and Challenges in PPP
Shift in government policy is often met with resistance from political and social quarters. Common criticisms, which come in way of PPP projects are:
- Perceived misuse of taxpayer money by engaging with profit driven organization
- Private enterprises profit in exchange for service quality
- Past failures in technology investments may make it challenging for government to engage private partners.
- Political election cycle may derail or delay projects
- Lack of capacity to develop and manage PPP in Government may make executing PPP project challenging
- It is important to have eGovernment PPP champion as spokesperson.
- Lack of private ICT industry that are sufficiently developed to partner with government on e-Government projects
PPP Project Life Cycle
Public Private Partnership project guidelines mandate adherence to PPP project life cycle. Many challenges and risks in the success of project are clearly articulated in PPP project life cycle stages. The full feasibility of the project therefore already has lot many concerns and risks addressed.
Government body identifies, proposes and prioritizes PPP project.
Conduct research and analysis to determine economic and financial feasibility
Assessment of project feasibility to guage market and investor interests.
PPP unit assists in structuring the risk allocation, contractual relationships and financing arrangement
Conducting a fair and competitive procurement process through RFQ and RFP
Contract negotiation, regulation, monitoring and enforcement
Major Risks in PPP Projects and How are they managed
It is important to keep interest of private partners and governments considerations in perspective when assessing feasibility of PPP projects. Usually PPP projects are long duration, and in this period often the technology changes. So a degree of flexibility is required to be built into the contract. The art of PPP resides in the allocation of risks of the project and in definition of framework, principles and rules to deal with change. Private parties seek stability and sustainability when entering a PPP project. In countries where tariff law can change or political uncertainty may spell change in policies, private partners seek guarantees, arbitration for dispute resolution and higher returns for guarding their risks. Similarly public party seeks performance bank guarantee (PBG), Service levels (SLA) and compliance levels. There is a combination of incentives and penalties built into the contract to keep both parties interested in the sustainability of project.
Generally, the development period risk is allocated to private party, which is usually required to provide bank guarantee (bond). The bonds ensure that if project implementation experiences delays and/ or cost overruns beyond a certain point then government can liquidate the bond to cover its cost. At the same time, there are things in the contract that are reasonably under the control of government. If government fails to perform its responsibilities as laid out in agreement, it must compensate the private party for losses incurred as a result of such failure.
Operations and Maintenance risks on the levels of quantity and quality of services are covered in O&M section of service contract. Normally the monitoring agencies or regulators demand compliance and certification against O&M clauses. The O&M risks are normally delegated to private partner. O&M is paramount for government as assets belong to government, and at the end of contract period – assets should not near “end-of-support” and should be returned to government in reasonable working condition.
Quality of service is part of O&M requirements, and is delegated to service partner who is required to deliver services as per agreed SLAs. If SLAs are not met, penalties are imposed. The contract may carry clauses for severe actions on private partner in case the QoS levels fall below identified levels.
There may be other kind of risks such as financing risks (for example private partner goes bankrupt) or currency risks (not having sufficient foreign exchange reserves to meet expenses in foreign country). In-spite of building all measures right from the stage of project identification, a very high percentage of projects still fail. It is the nature of business. There is a need for lot of business development skill including interdisciplinary expertise – finance, legal, engineering, economics etc. In some cases, there are unresolvable differences (government refusal to provide certain guarantees or unacceptable risk allocation) which may lead to failure of project.
Arresting project challenges right at the start
It is advisable to limit risks by following best practice in Tendering, Evaluating and Negotiating PPP Transactions. Government should commit to good project feasibility study at the highest level. The feasibility study essentially addresses following area:
- Affordability: Assess consumer demand, affordability and Stakeholder’s willingness to pay for services. Also, perform a review of budget available with government for the project.
- Risk Allocation: Government department should draw risk allocation matrix that will be transferred to private partner, and whether the private partner is best able to manage that kind of risks.
- Value for money: The proposed project must give value for money to government. It is determined by comparing what it will take government to build and operate the same quantity and quality of services versus that for a private partner.
When starting to invite bidders, the procurement process follows Request for Qualifications (RFQ), Request for Proposal (RFP), Bidder Selection (Techno-commercial evaluation) and Negotiation phase.
The Monitoring Part
A poorly designed contract is difficult to enforce. Having a clearly established guideline for designing PPP project contracts is critical to project success. The contract should clearly articulate who, what, when and how of monitoring. It is imperative to build mechanisms for dispute resolution, force majeure and contract renegotiation.