Designing a SustainablePublic-Private Partnership

Outline

• Understanding concept of Public-Private Partnership (PPP)

• Basic Structure of PPP• Benefits and Challenges of PPP• Applying Risk Allocation Principles to identify

potential PPP opportunities• Exercise: Using Basic PPP Screening Tool to

identify potential PPP project

PPP Defined

The PPP Reference Guide* provided a broad definition of PPP, as• a ‘long-term contract• between a private party and a government entity,• for providing a PUBLIC asset or service,• in which the private party bears significant risk

and management responsibility,• and remuneration is linked to performance’.

*Source: The World Bank, ADB, IADB, 2014, Public-Private Partnerships Reference Guide Version 2.0http://documents.worldbank.org/curated/en/600511468336720455/Public-private-partnerships-reference-guide-version-2-0

Basic Distinction betweenPublic and Private Goods

Divisibility of Benefits

Yes No

Rivalry of Consumption

Yes

Private Goods Common-pool Resources

No

Club Goods Public Goods

Mobile PhoneCar

ClothingFood

Fish StockTimber

Grass Land

Satellite TVCinema

Private Park

National Defense

Public Area Cleansing

Why PPP is useful?• Efficiency Enhancement

– As public institutions are often influenced by political considerations which do not generally focus of operation efficiency and often divert resources for other purposes.

– Value for the Money analysis to evaluate savings/gains from PPP comparing with a purely public project

– Transparency and Accountability• Technological Advancement, Innovation, and Know-How• Financial Benefits especially in the case where investment demand

exceeds public resources– Sources of Financing:

• Government Financing – domestic and international debts• Corporate Financing – debt and equity• Project Financing – loan can be provided directly to the project company (or a Special

Purpose Vehicle, SPV) where lenders rely on cash flow of the project for repayment.

Source: Delmon, J. 2009, Private Sector Investment in Infrastructure, 2nd ed., Kluwer Law International and the World Bank

Challenges of PPP• Potentially high transaction cost and long lead time• Private party requires steady stream of income to repay its debt financing• Public perception that tariff/user fee will increase with private sector involvement• Private party will only do what it is paid to do according to a contract and no more• Balancing between taking more risk and control of the operation• Government oversight is still required as the public will still hold the government

accountable. However, the role of the government would evolve from service provider to regulator, auditor, and evaluator. These skills and procedures need to be built.

• Unenforceable law and regulation could lead to failure in enforce the contract and hold the private party accountable

• As PPP has a long-term nature, it is unlikely to identify all the risks up-front. Therefore, both parties should anticipate periodically negotiation to adjust the contract to suite the situation at that time.

Source: Adopted from PPP in Infrastructure Resource Center, 2016, Government Objectives: Benefits and Risks of PPPs, the World Bankhttps://ppp.worldbank.org/public-private-partnership/overview/ppp-objectives

Risk Allocation Principles

Each Risk should be allocated to the Party:• Best able to control the likelihood of the risk

occurring• Best able to control the impact of the risk on

project outcomes, by assessing and anticipating a risk well and responding to it

• Able to absorb the risk at lowest cost

Source: The World Bank, ADB, IADB, 2014, Public-Private Partnerships Reference Guide Version 2.0http://documents.worldbank.org/curated/en/600511468336720455/Public-private-partnerships-reference-guide-version-2-0

Example of Risk Allocation inPPP Arrangement

Source: Cities Development Initiative for Asia (CDIA), 2010, CDIA PPP Guides for Municipalitieshttp://cdia.asia/wp-content/uploads/2014/09/PPP-guide-for-municipalities.pdf

Spectrum of PPP Arrangement

Source: Independent Evaluation Group, The World Bank, 2012, World Bank Group Support to Public-PrivatePartnerships: Lessons from Experience in Client Countries, FY02–12https://ieg.worldbankgroup.org/Data/reports/ppp_eval_updated2_0.pdf

Typical PPP Structure

Source: The World Bank, ADB, IADB, 2014, Public-Private Partnerships Reference Guide Version 2.0http://documents.worldbank.org/curated/en/600511468336720455/Public-private-partnerships-reference-guide-version-2-0

Basic Decision Tool toIdentify PPP Potential

Source: Cities Development Initiative for Asia (CDIA), 2010, CDIA PPP Guides for Municipalitieshttp://cdia.asia/wp-content/uploads/2014/09/PPP-guide-for-municipalities.pdf

What If, the investment can save public expenditures?

What if, the investment can be done cheaper by the private party?

Risk Management Tool forAn Irrigation Project

Siting Residents may oppose to land

acquisition

Legal Action 4 4 16 Consultation Irrigation Department

Operation Low service quality due to

lack of operation and maintenance

expenses

Annual Budget Request

4 4 16 Engage Private Sector

Irrigation Department and Water User Group

Exercise: Using Risk Allocation and Decision Tool to Identify PPP Project

Medium-Size Reservoir and Distribution System• What the Risk

Allocation would look like?

• Is there a potential for revenue generation?

Early Warning System

• What the Risk Allocation would look like?

• Is there a potential for revenue generation?

PPP Checklist

Political Issues

• Potential political deal breaker

• Ownership

Legal Framework

• Laws and regulation• Transparency and

accountability• Internal

coordination• Standard document

and procedures

Economics and Financial

Consideration

• Business model (e.g., Value for Money

• Financing• Fiscal issues

Execution

• Implementation capacity

• Procurement• Contract

management

Source: Adopted from World Bank, 2014, A Checklist for Public-Private Partnership Projects.http://ppp.worldbank.org/public-private-partnership/sites/ppp.worldbank.org/files/documents/global_checklist_ppp_g20_investmentinfrastructure_en_2014.pdf