1: Rationale, Objectives & Forms of Public-Private Partnerships (PPPs) in ICT Ned White Institute...

1: Rationale, Objectives & Forms of Public-Private

Partnerships (PPPs) in ICT

Ned WhiteInstitute for Public-Private Partnerships

(IP3)February 17 – 19, 2008

1. Rationale & Objectives for PPPs in ICT

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Module 3:Identifying,

Analyzing & Structuring

ICT Projects to be Viable PPPs

Module 4: Tendering &

Procuring PPP Projects

in ICT

Module 5:Negotiating

Contracts &Financing

PPP Projects

in ICT

Module 6: Managing

PPP ICT Contracts

& Monitoring Contractor

Performance

The Sequence of the ProjectLife Cycle for

PPPs in ICT & e-Government

Module 2: Establishing Effective Policy, Legal, Institutional, & Regulatory Frameworks for PPPs in ICT/e-Govt.


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1: Understanding the Rationale & Objective for

PPPs in ICT & e-Government1.1 The Definition of “Public-Private

Partnerships”1.2 The Goals of PPPs in ICT1.3 The Benefits of PPPs in ICT1.4 Forms of PPPs Applicable for Use in ICT &

e-Government1.5 PPP ICT Case Example: Bangalore City

Corp., India


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1.1 What ARE PPPs?• Definition:

A Public-Private Partnership (PPP) is a form of legally enforceable contract between the public sector and private sector, which requires new investments by the private contractor (money, technology, expertise/time, reputation, etc.), in which payments are made only in exchange for performance, for the purpose of delivering a service traditionally provided by the public sector.


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“Hard” vs. “Soft” forms of “Public-Private Partnerships”

PPP Transactions & Contracts (“Hard”)

Policy “Partnerships”& Dialogs (“Soft”)

•Ensures joint support for the PPP policy•Common agreement on the overall framework

•Implements the policy•Demonstrates results

Public - Private

Priv.Pub.- Priv. Priv. Priv.Pub.- Pub.- Pub.-


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PPPs have been called different things.. “Re-Privatization” – Peter Drucker (1970’s) “Privatisation” - UK and Malaysia (1980’s) “Private Sector Participation” PSP - Indonesia & Egypt “Peoplisation” - Sri Lanka “Indigenisation” – Zimbabwe “Equitization” – Vietnam “Ownership Reform“ – China “Disincorporation” - Mexico “Marketization” & “Managed Competition” – U.S. Cities “Partnerships” - South Africa “Capitalization” - Bolivia “Private Finance Initiative” (PFI) – United Kingdom “Commercially Viable Municipal Utilities” - India


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1.2 – The Goals of PPPs in ICT &

e-GovernmentMobilize new private sector investment to

leverage limited public sector funds for the development of ICT and e-Government networks

Attract more innovation in ICT & e-Government network designs and in more effective & efficient operation & management by the private sector

Utilize private sector customer service & delivery expertise in ICT & e-Government sectors


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1.3 – The Benefits of PPPs in ICT & e-

Government:• Increased expansion of ICT & e-Govt. networks

due to new, additional private sector financing & investments

• The use of more advanced & innovative technology in the design of ICT networks e-Government services

• Increased quantity and quality of public services delivery through ICT application & e-Government techniques and increased consumer satisfaction


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Additional Reasons for PPPs in ICT & e-Govt:“Avoided Costs”:

By contracting with the private sector to undertake a cost-recovering e-Government project, scarce Government capital budgets can be directed to other priority social services (education, health care, environment, etc.)

Without a PPP:Govt. Capital

Budget

Project A:ICT NetworkConstruction

Project B:Health ClinicsConstruction

OR

With a PPP:Govt. Capital

Budget

Project A:ICT NetworkConstruction

Project B:Health ClinicsConstruction

AND

Private ICTDeveloper

PPP


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Additionality:The increased economic benefits to consumer welfare of having needed ICT services accessible NOW because of the PPP, rather than having to wait until Govt. could provide the services much later


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Reasons for PPPs in ICT & e-Government

• Improved Efficiency & Service:

• Higher quality of services & lower per unit costs. Better “Value for the Public’s Money” (This is a combination of both lower prices and/or lower risk to the Government over the entire life of the ICT project)

• Increased public control over the delivery of public services: Management decisions are guided by legally enforceable contracts & clear, technical performance indicators – rather than by politics…

• Technology Transfer:

• Access to new, innovative technologies and experienced management not currently available through the public monopoly providing services in the sector

• NOT Policy Change per se…

• Increasing the size of the private sector (and the taxes they pay) is a welcomed side-effect of PPPs, but NOT a sufficient reason to undertake a transaction. PPPs can easily be more expensive and offer less quality than traditional public sector provision.

• Careful feasibility analysis & risk-structuring for all PPPs is a MUST!


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“Privatization” vs. “Competition”?Government Ownership

Private Ownership

Monopoly Competition

1? 2?

3?

NOTE: The participation of the private sector in ICT is the MEANS of achieving the GOAL of more competitive delivery of public services. PPPs are NOT the GOAL itself.


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“Value for the Public’s Money” is a combination of PRICE

and RISK

AverageTariff

Level of Sector RISK Bourne by Government

?

?

PPP Option#1

Public “Utility” Curves

The Private Sector’s Price-RiskOffer Curve

PPP Option#3

PPP Option #2

P’P’’

P’’’

Thus, “The Lowest-priced bid is often NOT the best bid”… Especially over a long (5-10 yr.) Contract Term.

Low High


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Each Govt. Agency and each sector will have its

own unique ability to share risks & afford

tariffs

AverageTariff

Level of Sector RISK Bourne by Government

BOTLease/Affermage Management

Contract

Concession

Govt. AGovt. B

Govt. C

The Private Sector’s Price-RiskOffer Curve


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1.4 – Forms of PPP Applicable for Use in ICT

e-Government

• Corporatization• Service Contracting• Management Contracting• Lease/Affermage• Concession/BOT• Divestiture/Asset Sales

Public Sector

Private Incentives


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Menu of PPP Structuring Techniques

“RISK”(Private Sector Investment Required)

“REWARDS”(Returns toThe Private

Sector)

High

Low

ServiceContract

ManagementContract

Lease

Concession

Divestiture(Investor-

OwnedUtility)

Low High


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Service Contracting

• A specific area of ICT/electronic service is “unbundled” from a Public Corporation, Govt. Dept. or Ministry (i.e. billing & collections, licensing, records management, customer service, etc.)

• A prior full cost analysis of the service must be performed to compare current public performance levels (cost per unit) and with competitive bids to determine if a PPP offers better value for the public’s money, or not

• An affordability analysis must identify the limit the public budget can afford to pay for this project; unaffordable projects should be rejected.

• Private firms competitively bid on providing the ICT/e-Govt. service• Private investment requirements are relatively low, asset lives of 3-5 yrs.• Contractors are paid only for verified performance delivered• Operating efficiency is usually the principle objective• Labour participation is often critical, especially if ICT replaces human functions.

Public Services Corp.

Service1

Service2

Service3

Service1

Service2

Pub. Services Corp.

PrivateService

ContractorFees

Service


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Management Contracting

• A Public Corp. identifies specific priority operating problems

• Private firms competitively bid for the right to manage the Public Organization in exchange for a “Management Fee”

• The Management Contract identifies specific target operating and performance levels that the Contractor must meet (incentives payment clauses are critical)

• The Private contractor needs the authority to make all operating decisions (including hiring & firing), Government still owns the organization and its assets, and its Govt.-appointed Board still makes all long-term strategic decisions – including monitoring the PPP contractor’s performance.

• New investments required by private contractors are usually low & Contract terms usually 3 - 5 years

Board

MANAGEMENT

Employees

Public Services Corp.

MANAGEMENT

Board

Employees

Managmnt.Contractor

ManagementFees

Management


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Lease

• A Public Corporation or Asset Holding Company identifies specific short-term and long-term operating problems

• Private firms compete for the right to lease some or all of its assets in exchange for a lease payment fee, terms usually 7 - 15 years

• The Lease Contract specifies required performance measures and targets (including commercial incentives & penalties for lack of performance)

• The private lease Contractor provides management, operating & maintenance decisions, spare parts, working capital, and keeps any remaining commercial profits

• Government still maintains ownership of all long-term assets, is responsible for servicing long-term debt, and makes long-term planning decisions.

• Public employees become employees of the private Lease Contractor

Board

Public Services

Corp.

Leased Corp.

Board

Lease Fee

LeaseContractor

WorkingCapital

NetProfits


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Design-Build-Operate-Transfer (DBOT)• Govt. Dept. or Public Corp. competitively tenders for a private contractor to

Design-Build-Operate & Transfer a new ICT/e-Govt. network or facility, requiring significant new long-term investment (>$20 million) to be recovered over a longer contract term of 7 – 15+ years.

• Govt. Dept. still collects any fees or tariffs from end users (if applicable) for the services it provides, and it pays a single “Availability Payment” to the private contractor, as long as the contractor meets performance & maintenance standards

• Often a consortium of private firms establish a new Project Company (SPV) to undertake this project, capitalized with equity from the private sponsors and new long-term loans from commercial banks. The lenders look to the projected future revenue generated by the project to repay all loans

• Govt. does not provide a sovereign guarantee to lenders, nor do the private corporate sponsors (“Off-Balance-Sheet” financing). However, Govt. Min. of Fin. Usually needs to provide a financial performance guarantee for any “non-creditworthy” Govt. Depts. Or SOEs.

• Key to success are clear, measurable ICT/e-Govt. performance standards; monitoring capacity by the Govt., and analytical capacity to determine if the PPP really delivers better value for the public’s money (not just avoided sovereign borrowing)


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Design-Build-Operate-Transfer (DBOT)

Private Sponsor 1Developer/Investor

Loan

Repayments “Availability”Services

UnitaryPayments

Equity

$Single Purpose

Project Co. (SPV)Lenders

Private Sponsor 2 Design/Construction/ICT Equip. Supply

Private Sponsor 3 IT Operator

Govt. Dept./Public Corp.

FinancialPerform.Guarantee

PublicServices

User Fees & Tariffs

State Budget

DBOTContract

Government(Min. of Fin.)

TAXES

End Users


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Concessions• Private sponsors incorporate a new single-purpose project co. (SPV)• This SPV receives a Concession Contract from the Govt. which legally “cedes” or

transfers an exclusive right to provide new e-Govt. services directly to retail end users to this SPV for a specific period.

• The PPP Contractor collects revenues from thousands of different retail end users, rather than from a single Govt. Agency.

• The SPV is capitalized by equity from the owners and new project-backed debt from commercial banks & lenders.

• Investment requirements are usually large (>$20 million) & contract terms 7-15+years.

Sponsor1

Sponsor3

End Users

Government

Sponsor2

ConcessionContract

Loans

ICT/e-Govt.Services

User Fees

Single-PurposeProject Co. (SPV)

$

Lenders

Repayments

Equity


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Concession vs. BOT

• Monopoly (one provider)• Based upon “ceding” an

exclusive right to provide services, usually enshrined in sector law

• Individual End Users now interface directly with the private concessionaire

• Higher collection risks• Often involves taking over a

poorly functioning Govt. ICT network – risk of unknown condition of assets/records.

• Incentive for improved system-wide operating efficiency

• Regulatory Body needed, to protect consumers & investors

• Monopsony (one customer)

• Existing (public) Utility simply buys a key input (e-Govt service) instead of providing it internally

• End users still interface with the existing Public Agency/Govt. Dept.

• Lower collection risk

• Usually involves a new greenfield project, with little or no risk of conditions of existing assets

• Adds capacity, but does not always improve system-wide operating efficiency

• Contract Compliance Office needed within the client Govt. Agency/Dept.


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Review of PPP Structures:

Type of Contract

Duration (years)

What the Private Contractor Receives

Nature of Private Contractor Performance

Examples

Service Contract (outsourcing)

1-3Fee from government for performing a non-core service

Definitive, often technical type of service

Website design and management, ICT Capacity Building

Management Contract

3-8Fee from government for the service and a performance-based incentive

Manage the operation of a government service

Call center staffing; Seat Management, Parking enforcement, regional water supply management

Lease 8-15

All revenues, fees or charges from consumers for the provision of the service; the service provider rents the facility from government

Manage, operate, repair, and maintain (and maybe invest in) a service to specified standards and outputs

Land for ICT Infrastructure Development, Existing airport or port facilities

BOO & BOOT 15-25The government mostly pays the service provider on a unit basis

Construct and operate, to specified standards, the facilities necessary for service provision

ICT Infrastructure; e-procurement systems; e-business portals; Network of Kiosks

Concession 15-30

All revenues from consumers service provision; the service provider pays a concession fee to the government and may assume existing debt

Manage, operate, repair, maintain and invest in public service infrastructure to specified standards

Telecom operations and expansion, New airport or seaport facilities, toll road or bridge


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1.5 – PPP ICT Case ExampleBangalore City Corporation (BCC), India• BCC was suffering from a continued “leakage” in their

financial resources, while at the same time experiencing increased customer dissatisfaction over slow response rates and bureaucratic delays in processing transactions.

• With assistance from the Asian Development Bank, BATF was contracted to improve the technical capacity of the financial management systems, and providing electronic access for improved transaction processing speed


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Technology Architecture of BCC:


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Role of the BCC’s new ICT System:

• The role of information and communications technology (ICT) was not limited to the replacement of manual systems with computer-based systems. It included substantial revamping of business processes, a form of business process re-engineering.

• ICT was also more than just an enabler for better information flows - it was used to:• Convert manual sheets to computerized data files,• Create new tools for management• Redefine audit and control mechanisms, and • Providing real-time information flow to and from banks

connected to the system via leased dedicated phone lines.


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Technical Design of BCC:


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BCC’s PPP Project Results:

• This PPP project, in which a private firm provided • The design and engineering;

• Also served as government’s partner in the implementation and management of the system,

• This PPP was successful in converting a government organization that had been plagued by financial leakage and slow transaction processing into an organization that continues to be financially viable and provides high-quality customer service.


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Questions?

The Institute for Public-Private Partnerships (IP3)Washington | Cairo | Jakarta | Dakar

Cairo

19 Ahmed El Shattoury Street

Dokki, Giza, Egypt

Washington

1010 Wisconsin Avenue, NW, Suite 250

Washington, DC 20007 USA

Tel: 1-202-466-8930 Fax: 1-202-466-8934

www.ip3.org

Jeff Wuorinen

Regional Representative, Middle East/North Africa

E-mail: [email protected]

Tamer Shaltout

Program Manager, Egypt

E-mail: [email protected]

http://www.ip3.org/

mailto:[email protected]

mailto:[email protected]

1: Rationale, Objectives & Forms of Public-Private Partnerships (PPPs) in ICT Ned White Institute...

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