Professional Documents
Culture Documents
Introduction
34.2.
Features of PPPs
Under PPPs, public and private sectors work together on the implementation of
projects, retaining their own identity and responsibilities. They collaborate on the basis of a
clearly defined sharing of tasks and risks to achieve benefits of added value and increased
efficiency. PPPs are a procurement tool where the contract payments are usually structured
in such a way that the public authority and/or users pay only for services rendered
satisfactorily. Project related risks are largely transferred to the private entity. In a PPP, the
focus of the government shifts to policy, strategy and monitoring role rather than service
delivery. In the short run a PPP may shift a financing requirement from the public to the
private sector, or may defer the costs incurred on the budget but does not increase the
quantum of services that the economy can accommodate. In the long term, the benefits are
in improved management and use of funds. Accordingly, affordability has to be the
cornerstone of the planning process.
The spectrum of options for PPPs from low to high private sector participation
includes works and services contracts, management and maintenance contracts, operation
and maintenance concessions, and full privatization.
34.3.
PPPs have become prominent over the last decade It is estimated by the World Bank
that an investment of US $ 890 billion was made globally in public private infrastructure
projects during 1990-2003. The leading sectors have been telecom (47 per cent) and energy
(33 per cent), followed by toll-roads (8 per cent), water and sanitation (5 per cent), railways
(3 per cent), seaports (2 per cent) and airports (2 per cent). The share of South Asia in this
investment (6 per cent) has remained low and there is considerable potential for an increase
in the region. Between 3-6 per cent of the infrastructure PPP projects have either been
cancelled or investments have been under stress due to a variety of reasons including
inexperience, incomplete contracts and risk allocations, inadequate capacity of institutions,
factors affecting investment climate, issues relating to cost recovery and affordability, and
regulatory framework.
The United Kingdom was one of the first countries to start the private finance
initiative. The PPP programme was applied across a broad range of sectors (transport,
education, health, prisons, defence, leisure, government offices, environment, housing,
courts, technology and others) based upon long term arrangements and fixed price, outputbased contracts. About 80 per cent of the projects were completed on time and within
budget compared with 30 per cent in the public sector. PPPs have also been used
extensively in South Africa and Canada, and several developing countries with positive
results. Pakistan has also gained some experience in the telecom, energy and transport
sectors.
Issues and concerns that have emerged include the following:
i)
ii)
It is also argued that the long term cost of paying the private sector to run
certain municipal services is much more than what it would cost in the public
sector.
iii)
Local officials are liable to be held accountable for infrastructure services even
though they may no longer have direct control over the delivery of those
services.
The local authorities need to play an important role in partnership arrangements and
should facilitate, monitor, evaluate and control the performance of the private partner and
finally decide whether to extend or cancel contracts with private partners. Indicators should
be developed to measure the performance both in terms of efficiency and effectiveness, of
the private partner and these should be reflected in contractual arrangements to ensure
accountability.
Underlying all these concerns is a culture that requires direct control over service
provision in order to demonstrate public accountability. Only in this way, it is possible to
ensure that services are delivered at the appropriate time to the people having regard to
quality standards. Unfortunately there may be no formal measurements to judge whether
this is so. The position may be made worse with a traditional accounting system, which is
geared to a management control process designed to manage and audit expenditure against
budgets rather than to measure outputs and minimize costs.
Consequently, when government departments are asked to publicly demonstrate the
level of value for money they offer in the services they provide directly, they are often
unwilling to do so because the controls and processes are not designed to answer such
questions, and the management culture militates against a commercial approach. That is not
to say that the use of a private partner will change this. In fact only a devoted administration
with competent professional staff and adequately designated authority commensurate with
responsibility would be fully able to develop, negotiate, manage, monitor and enforce a
contract for service provision with a private sector organization.
The key points that have emerged from international experience for successful
implementation of PPPs include the following:
i)
ii)
Government has central role in defining what it wants and as the regulator.
iii)
PPP deals must make sense in terms of delivering both the desired outcomes
and commercial returns.
iv)
Good PPPs involve optional risk allocation, demonstrable value for money,
clarity of affordability and certainty of public service payment obligations
based on delivery of outputs.
v)
Output based techniques are important for targeted and efficient subsidy
allocation.
vi)
A well defined policy framework is required that (a) sets out clearly the
processes, priorities and scope of PPP; (b) drives transparent procurement
processes; (c) includes a communication strategy to improve public and
34.4.
vii)
viii)
ix)
x)
Pakistan, for a long time, has financed infrastructure and development projects
directly from budget allocations, and therefore lacks the institutional and regulatory
capacity necessary to facilitate private participation in infrastructure provision. There is also
need for a change in the mindset of public functionaries. The reasons why private sector
infrastructure projects have not materialized in Pakistan include: (i) reforms have not
progressed as fast as anticipated; (ii) present governance structures are not suited for the
broad participation by the private sector in infrastructure envisaged in liberalized
environment; (iii) the public-private interface needs substantial strengthening, including
enhancement of skills and institutional mechanisms within the Government for effective
interaction with the private sector; and (iv) it remains difficult to disaggregate and allocate
risks in the domestic capital market.
Currently, important pilot PPP transactions are being prepared and completed on
BOT including $ 300 million Karachi Mass Transit Project (which in conjunction with power
plant and real estate development could grow to a size of $ 600 700 million), LahoreSheikhupura -Faisalabad provincial expressway, Lakhpass Tunnel, Karachi Wastewater
Reuse, Gujrat Solid Waste Composting, Karachi-Hyderabad Superhighway, LodhranKhanewal Section of N-5, Tarnol Interchange at N-5, and many other important groundbreaking efforts. However, these critical PPP pilot transactions are currently taking
considerable time and cost to prepare and to complete. The preparation periods and costs
must be significantly reduced or else the much-needed private investments in infrastructure
will not reach closure. Private Investors who have proposed PPPs in Punjab and Sindh
Provinces have noted that they are unable to pay for project preparation costs when it takes
several years to address issues related to legal and regulatory framework for PPP
preparation and implementation.
34.5.
With PPP as a core focus of MTDF, the work to be undertaken as a matter of priority
would include; (i) establishing a policy framework and coordinating the PPP programme
across government agencies; (ii) establishing core centre of expertise; (iii) reviewing and
establishing legal framework; (iv) establishing a communications strategy; (v) identifying
prospective projects in line with market capacity; and (vi) identifying funding mechanisms.
Some aspects of further work on PPPs are elaborated below.
34.6.
During the MTDF period, a review and assessment of current and proposed
legislation in the country which affects the ability to carry out PPPs would be conducted.
The assessment will also include whether the existing laws and proposals are in harmony.
This will facilitate the process of drafting regulatory framework for PPPs, and provide an
umbrella enabling structure that would explicitly allow government agencies to enter into
PPPs for providing infrastructure and other services at the national, provincial and local
levels.
The regulatory framework will empower the Government to conduct, identify,
design, tender, evaluate, award and regulate PPP projects. First, it would be flexible enough
to cater to all kinds of PPPs across sectors and would provide the enabling environment
necessary to undertake simplest to most complex projects. Second, it will clearly lay out the
procurement process for PPPs and assign roles and responsibilities. Finally it will create a
central agency to regulate procurement of PPPs by establishing gateways through which all
projects must pass through. The actual procurement, implementation and monitoring of the
projects would lie with relevant line ministries, departments, provincial or district
governments.
34.7.
International experience strongly indicates that PPPs are likely to be more successful
if governments move from an ad-hoc, case-by-case approach to creating a PPP Unit, staffed
with professionals with the skills to take PPPs through the entire project life cycle and
provide programme support. While every project is different, PPP projects share similar
features and can benefit from a consistent and structured approach to project identification,
design, tendering, evaluation, negotiation and award, which reflect best practices.
Governments in countries with successful PPP programs, such as the Philippines, Malaysia,
Ireland, Italy and South Africa have created PPP Units to provide the skills to take PPPs
through the life cycle. This results in stronger projects that have a better chance of being
implemented more quickly.
For the PPP Unit to be effective, it is necessary that it should be created in such a
public institution that has clout, credibility and effective coordination with all the ministries.
The process will not only need buy-in from other public sector stakeholder, but the private
sector must also perceive it as an arm of government that is serious and has the proper
mandate and credentials.
Based on international experience, a dedicated PPP Policy and Support Unit will be
established in the Planning Commission as a matter of priority to deal with policy,
programme and project activities. Project activities would be geared towards processing
specific PPP projects through the PPP cycle. Programme activities would be more general,
cross cutting activities to support the portfolio of PPP projects. Project support activities for
PPP would include assistance in identification, design, preparation of Request for Proposal
and Request for Qualification documents, evaluation of proposals, negotiations, award, and
in cooperation with regulatory bodies, post award monitoring. Programme activities would
include stakeholder consultation, public awareness, marketing and credit enhancement. The
credit enhancement activities would include working with multilateral agencies to provide
financing and guarantees, as well as to identify government support measures that are
needed to bring the project to financial closure.
Skills that would be required for implementing PPP activities include legal, financial,
economic, procurement, project management and technical such as engineering and sector
specific skills in telecommunications, power, transport, water, social infrastructure and other
services, as required. Any centralized capacity that is developed would not eliminate the
need for Government departments to develop their own capacity and use their own expert
advisors. Rather, it would assist in building such capacities and developing a wider pool of
expertise, within and outside government, to bolster the implementation of PPPs in the long
run.
In order for the Planning Commission to comprehensively appraise/evaluate
projects proposed for PPPs, its capacity would be augmented to (i) assess complex project
finance based PPP structures and their implications in terms of contingent liabilities arising
out of guarantees issued, (ii) the cost of risk for risk retained by the Government, (iii) the
timing and payment of subsidies (and issues related to cost recovery) in a targeted manner
that offers value for money, and (iv) policy issues in terms of what is acceptable and not
acceptable in terms of guarantees and the risk undertaken. These policies can be fed into the
guidelines that would be developed by the PPP Policy and Support Unit.
The PPP Policy and Support Unit would have proper delegation in terms of relevant
legislation and would provide detailed guidelines for developing the project through the
entire project life cycle. Thus guidelines will be developed for each stage, including;
Inception, Needs Analysis, Options Analysis, Feasibility, Procurement (Drafting request for
Qualification Document, Request for Proposal Document, Bidding procedures and bid
evaluation procedures, most importantly the model concession agreement), negotiations,
and post award contract monitoring.
The Unit would have capacity to deal with transaction execution as well as
infrastructure planning at the federal level. The Unit would not initiate projects, but would
help implementing entities by providing hands-on technical assistance. Since many of the
PPP projects will be at the provincial and district/local level, the Unit will also provide
training to relevant officials. It would also assist in setting up provincial and district/local
level PPP implementation capacities.
The basic theme in having this strength developed at the federal level is to create a
focal point for PPPs throughout the country. This focal point will become a centre of
excellence for best practice and a resource into which every one can tap. The Unit would be
able to use the economies of scale provided by all sector entities to develop credit
enhancement and financing instruments that can be applied throughout the country. Thus
special funds or instruments could be created and negotiated with multilateral and financial
institutions on the strength and needs of the several projects that individually could not
have attracted much attention in terms of creating customized products.
34.8.
i)
Charter for the Unit laying out its objectives, roles, responsibilities, authorities
and the overall structure to be created.
ii)
iii)
iv)
ii)
iii)
(iv)
The line ministries/executing agencies will have to develop the following expertise:
i)
(b)
(c)
34.9.
ii)
iii)
(iii)
Legal : Legal expertise will help understand financial implications of
various legislations, the financial implications of various legal clauses (e.g.
ones pertaining to termination, penalties, risk, guarantees etc.), draft
contracts, negotiate contracts and developing standardized contractual terms.
Infrastructure Fund