Public-Private Partnership (PPP)

Public-private partnerships are on-going agreements between government and

private sector organizations in which the private organization participates in the
decision-making and production of a public good or service that has traditionally
been provided by the public sector and in which the private sector shares the risk of
that production.
A legally-binding contract between government and business for the provision of
assets and the delivery of services that allocates responsibilities and business risks
among the various partners.
Public-private partnership (PPP) is a model where the government associates with
private companies to accomplish infrastructure projects. This alliance between both
the parties, ensure financing, designing, flourishing and maintaining of the
infrastructural amenities within the country.
The PPP approach initiates the efficient facilitation of public goods to the people.
This is because, such projects are handed over to the relevant private entities, who
hold expertise and knowledge in their field.
The model is well-established for the construction of economic infrastructure such
as roads, bridges and public transport systems but it is also used for social
infrastructure such as schools, prisons, and hospital.
Background of PPP in Bangladesh
Bangladesh is on the way to adjust with the modern concept of development
administration that is PPP. In vision 2021 government action plan there was some
certain goals and objectives to be achieved. It includes raising GDP growth to 8
percent by 2013. Still we are far behind to it.
Without investment in development work this goal seems to be a day-dream. This
disparity between current status and goal can be reduced only through a strong and
viable public private partnership. Investment deficit cannot be filled up only through
PPP. The government of Bangladesh realized the fact and demand of globalization
and incorporated the idea in budgetary framework and economic policy. To create
investment friendly environment on sustainable basis government introduced PPP
concept through FY-2009-10 national budget and give significant fund allocation to
encourage the sector. It is clearly indicating good political commitment from gov. to
PPP- project. Government also introduced a position paper pertaining to it entitled
as ‘"Invigorating Investment Initiative Through Public-Private Partnership”, s in
June 2009. But this effort didn’t guarantee success in terms of work on ground due
to lack of proper and specific guideline towards PPP. To fill this gap government
issued “policy and strategy for Public Private Partnership (PPP), 2010” in august,
2010. Past experience says that the success story regarding PPP can be found in
power, gas, and telecommunication. The potential sector to be invested is ports,
railway, water supply, waste management, tourism, eservice delivery etc.

Features of Public-Private Partnership

To understand the PPP concept, we must know its fundamental characteristics.

Some of these are discussed in detail below:
 Service-Oriented: The PPP approach deals with the facilitation of long-
term public services. It includes roads for transportation, dams for
electricity and water supply and street lights for lighting.
 Whole Life Costing: In the PPP model, the project’s total cost is
computed at once for its entire life span. Thus, taking into consideration
the initial capital expenditure, repair and maintenance expenses,
modification expense and the eventual disposition cost.
 Innovation: With the involvement of the private firms, the PPP approach
also initiates the implications of creativity and new technology to the
infrastructure projects.
  Participants: The two parties involved in the public-private alliance are;
the government and the respective private company.
 Risk Allocation: Infrastructure projects involve high risk; thus, PPP helps
the government to transfer this risk to private firms.
 Long-term Relationship: These projects are usually for years; therefore,
the government authority and the private entity remains associated for an
extended period.
 Resource Sharing: The capital, financial, design and other resources
required, are shared between the government and the firm for successful
project accomplished.

Types of Public-Private Partnership (PPP)

When we talk about the public-private partnership, we come across various ways
in which this approach functions. To understand some of the frequently adopted
PPP structures, read below:
 Build-Operate-Transfer (BOT)
The toll road construction projects are illustrated under this conventional model.
The private company construct the road, collect toll or revenue (for the contract
period) and then pass its possession to the government.
 Build-Own-Operate (BOO)
It is though very similar to the BOT model; here, the possession of the facility
remains with the private entity itself.
  Build-Own-Operate-Transfer (BOOT)
To recover the cost of construction and incur gains, the private firm, after
development, keeps the possession of the facility up to the contract period. After
which it passes on the ownership to the public sector.
 Build-Lease-Operate-Transfer (BLOT)
The private company uses a leased public property to develop a facility. It
functions on this property for the lease period to recover cost and earn revenue.
Later as the lease expires, the land is handed over, back to the government.
 Design-Build (DB)
This is the basic form of P3 where the private company layouts and constructs the
facility as per the government requirements, after complete risk assessment. In
return, it takes a fixed amount as its charges.
 Design-Build-Finance (DBF)
The private sector firm undertakes a project to design the layout, build the facility
and meet the capital cost involved in such designing and construction.
 Design-Build-Finance-Operate (DBFO)
In the DBFO model, the private company is responsible for planning the project
layout, facility construction, arranging the required capital and operating it till the
grant period. The facility operations revenue meets the cost incurred and generates
profit to the company.
 Design-Build-Finance-Maintain (DBFM)
This model can also be termed as a management contract. Here, the public sector
entity remains associated with the project from the beginning to the end.
The process starts right from designing of the layout, to construction, funding and
lifetime maintenance of the facility. The firm either charges a fixed sum or shares
profit; also, it is involved in the project’s managerial decision making.
 Design-Build-Finance-Maintain-Operate (DBFMO)
It is an extended version of DBFO. Here, the private firm prepares the blueprint,
builds up the facility, invest the required sum and carry out the operations to
generate revenue. Since the company undertakes the project for a long-term, it has
to take care of the maintenance work too.
 Design-Construct-Maintain-Finance (DCMF)
In the DCMF model, the private entity understands the government specifications
and accordingly designs, develops, upkeeps and invest in a facility. This facility is
then leased out to the government body itself.
 Operation and Maintenance(O&M)
This model involves assigning of a sub-contract to the private companies for
running and up keeping a facility.
The firms which undertake such projects are experts in maintenance work. Also,
the possession of the facility remains with the government body. The revenue for
private entities is commonly generated through a performance-based fee. In some
cases, the companies charge a lump sum and fixed price for their services.

Advantages of Public-Private Partnership (PPP)

The PPP approach is highly beneficial for the government, the country, the economy,
the private organizations and the public. Given below are some of the prominent
pros of this concept:

 Early Completion Bonus: To improve efficiency, the private companies are

motivated through bonus if they complete the project before time.
 Cut Downs Tax: The cost-efficient infrastructure projects help the
government to save funds and thus, provides for a reduction in the tax rates.
 Project Completion Efficiency: When the standard time for completing a
project is estimated, its execution and fulfilment become more competent.
 Project Feasibility: As the project’s risk involvement and practical
implementation are well-analyzed, the chances of failure reduce remarkably.
 Superior Quality Standards: PPP approach initiates benchmarking for the
desired quality of the project and ensuring the same during the project’s life
cycle.
 Excellent Infrastructure Solutions: This has been possible since, the
proficient private companies work in collaboration with the government,
where each of them contributes their best.
 Better Return on Investment: The ROI of the P3 infrastructure projects
might be reasonably high in the long run. The reason being it has been
monitored and accomplished by both parties together.
 Transfer of Risk: The government hands over the associated risk along with
the project to the private firms who have relevant experience and knowledge
in the area.
 Reduces Budget Deficits: In the PPP approach, the private companies
determine the cost and performs the capital budgeting to avoid any shortage
of funds in future.
 Ensures Efficient Government Investment: Since P3 initially let the private
companies invest their funds in the infrastructure projects, the government
can utilize its capital for socio-economic welfare.
Disadvantages of Public-Private Partnership (PPP)

On the one hand, it helps to improve the infrastructure conditions in a country.

Whereas, on the other hand, it has the following limitations:
 Involves Risk for Private Firms: The public-private partnership provides for
the transfer of risk to the private entities, overburdening them with the
responsibility of failure.
 Varying Profitability: The complexity, competition level, associated risk,
nature, size and impact of the project determines its profitability.
 Raise Government Expenses: Due to the project’s high-risk involvement, the
companies usually demand huge compensation, leading to a hike in
government expenses.
 May Not Be Cost-Efficient: At times, the government lacks sufficient
knowledge of the project cost. When the private company holds the complete
cost information; the public sector may be misled.
 Dependency on Private Sector: The most significant limitation of the PPP
approach is that the government majorly relies on the private sector for
project undertaking and accomplishment.
Public-Private Partnership (PPP) Example
The public relations officer noticed the problem of conveyance between the two
villages in her area, which were separated by a river. The only means of reaching
the other village was through boats. Therefore, she proposed the bridge construction
project in front of the government; to establish connectivity between the villages.
The task being highly complicated, the government decided to go for a PPP approach
for this project.
Public-Private Partnership Process

Let us now understand how the project in the above illustration will proceed, through
the following significant steps involved in it:
 Planning: The government initiates the basic plan of the bridge and select a
suitable private company providing the best offer to undertake the project.
 Financing: Now, comes the role of the private entity. It first analyzes the
whole life costing of the bridge and accordingly finances the project. This
cost can be recovered from the government later on.
 Designing: The experts and engineers then draft the final layout of the bridge,
and both the parties give their input for the purpose. Also, a time frame is
ascertained for project accomplishment through the Critical Path Method.
 Building: The company engages an experienced contractor and the laborers
to construct the bridge. The project completes efficiently within the estimated
duration.
 Operating: After the proper testing and quality check, the bridge is opened
for the public to use. Thus, facilitating the connectivity and conveyance for
the natives.
  Maintaining: As estimated in the whole life costing, after five years of use,
the bridge requires some repairing. Such maintenance cost is also borne by
the private company which has undertaken the project.

Risks Underlying a PPP Structure

 Market Risks: market risks are closely linked to the users’ willingness and
ability to pay. volume risks – which relate to uncertainties arising from the
number of users and their frequency and intensity of use of the infrastructure
service – and price risks, which arise due to uncertainties in the tariff that can
be charged for the use of the infrastructure service.
 Development/Planning Risks: Development or planning risks are the risks
arising from planning or preparing projects for private sector participation.
Governments or the private sector may invest substantial amounts of money
to develop a project (through payment for several scoping, feasibility and
structuring studies), but bear the risk of the project being infeasible.
 Project Risks: Project risks relate to uncertainties in relation to project
construction, completion and operation (i.e. activities post award of contract
and which occur while implementing the PPP project) and financing, and can
be split into start-up risks, such as capital cost over-run, completion delays
and ongoing risks, such as operating performance, operating costs and life
cycle costs.
 Political Risks: Political risks are risks that arise from wars, civil
disturbances, terrorism, etc., and include currency transfer restrictions,
expropriation, war and civil disturbance, and breach of contract. Political risks
are more serious in certain regions of the world than in others.
 Regulatory Risks: Risks that arise from the lack of a suitably developed
regulatory system which, for example, ensures regulatory independence from
the government, regulations for the participation of the private sector in
infrastructure or appropriate periodic review of tariffs can cause considerable
uncertainties for lenders and investors in any infrastructure sector.
 Financial Risks: Infrastructure projects are impacted by financial risks such
as exchange rate appreciation/depreciation and changes in interest rates,
which can have a substantial impact on costs and revenues. The ability to
hedge financial risks depends on the level of development of capital markets
and/or access to specialist hedging facilities
Constraints to Infrastructure PPPs in Developing Countries
While infrastructure PPPs have been employed on a considerable scale in developed
countries, they have been slow to take off in least developed countries (LDCs). This
stems from a number of constraints, including:
 Lack of political acceptability of PPPs;
 Lack of a clear policy statement;
 Weak capacity of the public sector;
 An inappropriate enabling environment in terms of legal, regulatory and
institutional frameworks;
 The high costs and risks of project development facing the private sector;
 Lack of private sector players;
 Absence of long-term debt;
 Inability of users to afford service fees;
 The small size of the economy/sector.
These constraints impact on the government, as well as on private sector players
(developers, sponsors, investors, etc.), impeding the development of PPPs. These
constraints are discussed below:
 Lack of Political Acceptability of PPPs
Involving the private sector in the provision of infrastructure services remains
politically sensitive in some countries. The main reasons for this include objections
that private participation in infrastructure entails higher tariffs and will lead to labor
retrenchment; these are issues that can become highly politicized.
The implication of this is that a PPP program may not get off the ground and that
projects may be stalled, delayed or even cancelled.
In contrast, strong political support has been regarded as one of the most important
factors driving the development and smooth functioning of PPPs.
 Lack of a Clear Policy Statement
The success of a PPP program requires formal support in terms of a clear policy
statement on the government’s strategy for the development of infrastructure PPPs,
including a definition of PPPs and objectives for their use. The lack of a clear policy
statement will imply uncertainty and ambiguity, and projects may therefore never
get off the ground. This is an important constraint for private investors, as their view
of the risks involved in a project will be extremely high.
Governments need to develop explicit PPP policies and include the use of PPPs in
their planning documents.

 Weak Public Sector Capacity

Lack of appropriate skills and experience in infrastructure PPPs can lead to delays,
inefficiencies and sometimes the failure of infrastructure projects. Poor project
development skills in the public sector can lead to the preparation of ‘unbankable’
projects, an issue common to many countries, where the project design and structure
is unattractive to private investors. Moreover, weak capacity in the public sector
reduces the government’s ability to negotiate and communicate effectively with
private companies.
Lack of project development capacity and resources on the government side has also
led to the rise of unsolicited proposals from the private sector. However, unsolicited
proposals must be managed carefully to avoid corruption, as well as uncompetitive
and nontransparent behavior.
Governments can also hire external advisers to support them during the PPP project
development process; for example, external legal, technical and financial advisers
are usually hired by governments to support them during the transaction phase of the
project development process.
Standardization of documents can also help mitigate poor capacity.

 Inappropriate Enabling Environment

Private sector participation in infrastructure requires an enabling legal, regulatory
and institutional framework that will guide and support transactions.
However, many countries do not have legislation to regulate infrastructure PPPs or
a regulator that monitors performance and ensures compliance.
An inappropriate enabling environment is likely to reduce confidence among private
investors. While this can be overcome through the inclusion of international dispute
resolution and other measures, it may create political problems, as national
governments have to comply with international rulings on domestic matters.
  High Costs and Risks of Project Development for the Private Sector
Early stage project development involves a significant investment of resources (in
developing feasibility studies, negotiating license agreements with government,
securing land rights, etc.) that are only recoverable if the project is ultimately
successful.
In many cases, the assessment by commercial developers, especially for smaller
projects or those in more difficult sectors (e.g. water and sanitation), is that the
attractiveness of the opportunity and its likelihood of success are insufficient to
justify the upfront investment. In addition, in many developing countries, the private
sector is at an early stage of development and lacks the knowledge to develop,
prepare and structure projects.
In response to this constraint, some countries are attempting to develop their project
development capabilities by setting up dedicated project development funds.
A number of donor-funded project preparation facilities, provide a range of different
types of support, including financial support for the public and private sectors for
project development, and advisory and capacity building support.

 Lack of Private Sector Players

Lack of private sector players implies non-competitive bidding, as well as poor
performance during the project due to insufficient experience and skills.
The international private sector may not be interested in bidding for projects in
smaller developing countries, especially when the size of the project is below the
minimum efficient size; the risks may be too high for the project to be attractive.
International bidders can be encouraged to participate by structuring a consortium
to include both international and domestic sponsors, with a minimum equity
contribution from the international sponsor. This consortium structure has been
employed in a number of water sector PPPs, in particular, where the
service/management contract is with the international sponsor and the domestic
sponsors provide most of the equity.
Suitable contract design, for example structuring a larger contract instead of many
smaller contracts, can also attract international private sector participation.
  Absence of Long-term Debt
A 20-year life cycle (sometimes longer) for an infrastructure project implies a
considerable time lag between the raising of finance and the ability to pay back
through project generated\ revenues, especially when utilization of the service is
expected to grow over the life of the asset. Thus infrastructure development requires
debt that can be of sufficiently long tenor to match cash flows. In most developing
countries, it is not possible to raise finance of sufficiently long tenor for
infrastructure development. This not only constrains the development of
infrastructure due to increased uncertainty, but also makes the infrastructure services
more expensive in the short term because of the front-end loaded prices and other
factors.
In response to this constraint, some governments have set up project financing
facilities.
 Affordability Issues
Lack of willingness and ability to pay for infrastructure services is another important
constraint in developing countries. It is often believed that large numbers of people
on lower incomes will be unable to afford full cost-recovery tariffs for electricity or
water, especially if the tariff level reflects the high costs of building greenfield
infrastructure.
In addition, many people may be perceived as being unwilling to pay for essential
infrastructure services for political or social reasons. There is also the issue of
‘willingness to charge’, a problem caused, for example, by politicians being
unwilling to impose tariffs in order to remain popular with voters.
Affordability is a particularly important constraint in developing rural infrastructure,
where income levels are typically much lower than in urban areas, and where there
are fewer opportunities to share costs with corporate customers.

 Size of the Economy or Sector

The size of the economy or infrastructure sector is also an important constraining
factor limiting the development of PPPs for the delivery of infrastructure services.
Small size implies lack of economies of scale in project development, as well as a
project size which is below the minimum that is efficient. While size is a constraint
for public provision of infrastructure services as well, this is particularly so for PPPs,
as a small-scale project may be ‘unbankable’.
The public and private sectors can help mitigate this constraint through suitable
project design and structuring. Regional initiatives can also help improve economies
of scale.

Recommendation
Hereby it can be recommended that
 Government should ensure investment friendly environment at all
 All the bureaucratic complexities should be overcome
 Proper training should be given to gov. officials in terms of contractual
capacity building
 Foreign PPP model should be revised
 Incentives should be marketized
 Country image should be promoted
 Bankability should be enhanced
All these can lead to a PPP friendly environment.

Considerations in Public–Private Partnership Procurement

PPP projects vary from traditional projects in several important ways, which affect
the procurement approach and procurement methods.
These include the following:
 PPP contracts are usually long-term and the environment in which the PPP
operates over the life of the partnership can change in unforeseen ways. This
may require the selection of criteria used to evaluate proposals that are
different from those used in conventional procurement, in which requirements
over the life of the contract are more clearly known.

 PPP contracts generally involve the private sector partner constructing the
asset and then operating and maintaining it. The public sector partner usually
 specifies requirements in terms of outputs, e.g., megawatts of power output of
a power plant, rather than the conventional procurement approach of
specifying inputs, such as the specifications of the type and size of plant.

 The private sector operator will generally have an equity stake in the entity
(special purpose vehicle or project company) that will procure the asset, and
will receive or share revenue generated by the asset, rather than the
conventional procurement approach of being paid for provision of goods or
services or for the construction of an asset. This changes the balance of risk
in the relationship and the nature of the contract management task over the
course of the contract.