Public-Private Partnership

Handbook
Introduction 
Acknowledgments
The Handbook was initially drafted by Klaus Felsinger, a former staff member of the Asian
Development Bank’s (ADB) Regional and Sustainable Development Department (RSDD),
Special Initiative Group (RSOD-SI) and a member of the Innovation and Efficiency Initiative
(IEI) Team, under the direct supervision of Juan Miranda, Director General of Central and
West Asia Department (CWRD) and Head of the IEI Team. Heather Skilling and Kathleen
Booth carried out research and compiled and elaborated on the information. The Handbook
further benefited from relevant comments contributed by ADB staff through review of
drafts. Elsie Araneta, Maria Anna Birken, Sally Pedersen, and Stephen Edwards provided
helpful advice and information. Ian Woodward contributed valuable information and editorial
commentary. Virginia Herrera, Majella Canzon, and Aldwin Sutarez provided their best
support at the pre-publication stage. Finally, Nariman Mannapbekov of RSOD-SI painstakingly
completed this Handbook.
Introduction 
Table of Contents
Introduction  vii
1  Public–Private Partnerships (PPPs)—An Overview  1
1.1 Defining Public–Private Partnerships  1
1.2 Motivation for Engaging in PPPs  3
1.2.1 Mobilization of Private Capital  3
1.2.2 PPP as a Tool for Greater Efficiency  3
1.2.3 PPP as a Catalyst for Broader Sector Reform  5
2  Recent Experience with Infrastructure Privatization and PPPs  7 
2.1 The Level and Form of Infrastructure Privatization/PPPs from 1990–2004  7
2.2 Incorporating Local and Regional Investment Sources  8
2.3 Incorporating Social Priorities  10
3  Structuring a PPP: Sector Diagnostic and Sector Road Map  11 
3.1 Requirements and Expectations  11
3.2 Technical Issues  12
3.3 Legal, Regulatory, and Policy Framework  13
3.4 Institutional Structures and Capacity  14
3.5 Commercial, Financial, and Economic Issues  16
3.6 Stakeholder Consultation  20
3.7 Clear Sector Strategy and Road Map  24
3.8 Clear Government Commitment and a Designated Champion  26
4  Structuring a PPP: Available PPP Options  27 
4.1 Service Contract  29
4.2 Management Contracts  31
4.3 Affermage or Lease Contracts  33
4.4 Concessions  34
4.5 Build–Operate–Transfer and Similar Arrangements  37
4.6 Joint Venture  41
4.7 Hybrid Arrangements  43
5  Structuring a PPP: Selecting the Option  45
6  PPP Preparatory Work  49 
6.1 Establishing Appropriate Legal, Regulatory, and Policy Frameworks  49
6.2 Technical Preparation  50
6.3 Institutional Structures and Capacity Building  53
6.3.1 PPP Unit  53
6.3.2 Project Implementation Unit  54
6.3.3 Technical Assistance  55
6.4 Commercial, Financial, and Economic Preparation  55
6.4.1 Project Financing  56
6.4.2 Tariff Design  58
6.4.3 Tariff Adjustments  60
6.4.4 Subsidy Design  63
6.5 Labor Considerations  65
6.6 Including Local Partners  66
6.7 Stakeholder Involvement  67
7  Implementing PPPs  69 
  7.1 Collecting Feedback from Potential Bidders  69
7.2 Notification and Prequalification  70
7.3 Defining the Procurement Process  72
7.3.1 Unsolicited Proposals or Direct Negotiations  72
7.3.2 Competitive Negotiations  73
7.3.3 Competitive Bidding  73
7.4 Defining the Bid Evaluation Process  75
7.4.1 Initial Decisions  75
7.4.2 Technical and Financial Evaluation  76
7.5 Bid Package  77
7.6 The Contract  78
7.7 Negotiations and Contract Start  79
7.8 Key Implementation Issues  80
8  Specific Pro-Poor Activities in PPPs  81 
  8.1 Pro-Poor Characteristics of PPP Options  81
8.2 Pro-Poor Interventions in the Context of PPPs  82
8.3 Output-Based Aid Contracts  84
9 Framework for Measuring, Monitoring, and Reporting on Results 87
10 Resources and Tools 91 
  10.1 Websites – General PPPs  91
10.2 Websites – PPP Organizations and Units  92
10.3 Websites – Sector-Specific Infrastructure  92
10.4 Literature – General PPPs  93
10.5 Literature – Infrastructure PPPs  93
10.6 Literature – Pro-Poor PPPs  98
Endnotes  100 
Introduction 
Acronyms
ADB Asian Development Bank
BOO build–own–operate
BOOT build–own–operate–transfer
BOT build–operate–transfer
CBO community-based organization
IFC International Finance Corporation
IFI international financial institution
LIG low-income group
NGO nongovernment organization
OBA output-based aid
ODA official development assistance
PIU project implementation unit
PPIAF Public–Private Infrastructure Advisory Facility
PPP public–private partnership
PRC People’s Republic of China
PSP private sector participation
Note
In this handbook, “$” refers to US dollars.
Introduction 
Introduction
This Public–Private Partnership (PPP) Handbook is designed for the staff of the Asian Develop-
ment Bank (ADB) and its developing member countries’ clients. It provides an overview of
the role, design, structure, and execution of PPPs for infrastructure development.
With inputs from policy and transaction specialists, this handbook addresses a range of
matters associated with PPPs, from policy considerations to implementation issues. Each of
the 10 chapters focuses on a specific area of information about PPPs:
• Chapter 1: introduces and defines PPPs and their context within infrastructure and de-
velopment finance.
• Chapter 2: gives examples of evolving PPP experience within various infrastructure sec-
tors.
• Chapter 3: describes the activities required to diagnose and plan for a PPP.
• Chapter 4: provides an overview of the major types of PPP from management and service
contracts to concessions and build–operate–transfer arrangements.
• Chapter 5: examines the issues associated with choosing the appropriate PPP structure
for a project.
• Chapter 6: describes key tasks associated with designing and preparing a PPP project
that will attract bidders.
• Chapter 7: covers the implementation of a PPP including bidder involvement and selec-
tion, the procurement process, due diligence, and contracting.
• Chapter 8: relates “pro-poor growth” criteria to PPP design and implementation.
• Chapter 9: highlights the monitoring and evaluation requirements of PPP projects.
• Chapter 10: includes additional resources for PPP practitioners including access points
for information on PPP policy, design, and implementation issues.
This handbook is meant as an introduction or primer to the design and execution of PPP
strategies and projects in the context of development finance.
1 Public–PrivatePartnerships
(PPPs)—AnOverview
This chapter introduces the concept of the public–private partnerships or PPPs, as well as
its key characteristics and rationale.
1.1 DefiningPublic–PrivatePartnerships
The term “public–private partnership” describes a range of possible relationships among
public and private entities in the context of infrastructure and other services. Other terms
used for this type of activity include private sector participation (PSP) and privatization. While
the three terms have often been used interchangeably, there are differences:
• PPPs present a framework that—while engaging the private sector—acknowledge and
structure the role for government in ensuring that social obligations are met and suc-
cessful sector reforms and public investments achieved.
A strong PPP allocates the tasks, obligations, and risks among the public and private
partners in an optimal way. The public partners in a PPP are government entities,
including ministries, departments, municipalities, or state-owned enterprises. The
private partners can be local or international and may include businesses or investors
with technical or financial expertise relevant to the project. Increasingly, PPPs may also
include nongovernment organizations (NGOs) and/or community-based organizations
(CBOs) who represent stakeholders directly affected by the project.
Effective PPPs recognize that the public and the private sectors each have certain advan-
tages, relative to the other, in performing specific tasks. The government’s contribution
to a PPP may take the form of capital for investment (available through tax revenue), a
transfer of assets, or other commitments or in-kind contributions that support the part-
nership. The government also provides social responsibility, environmental awareness,
local knowledge, and an ability to mobilize political support. The private sector’s role in
the partnership is to make use of its expertise in commerce, management, operations,
and innovation to run the business efficiently. The private partner may also contribute
investment capital depending on the form of contract.
The structure of the partnership should be designed to allocate risks to the partners
who are best able to manage those risks and thus minimize costs while improving
performance.
Public–Private Partnership Handbook
• PSP is a term often used interchangeably with PPPs. However, PSP contracts transfer
obligations to the private sector rather than emphasizing the opportunity for partner-
ship. In the mid to the late 1990s, there was a slowdown in public–private contracting
in infrastructure sectors, which was largely precipitated by a social backlash against
the perceived preference for the private sector over the public sector in delivering in-
frastructure services in developing countries. To some degree, the social backlash was
rooted in confusion between PSP and privatization. Some PSP schemes were overly
ambitious and the social agenda was overlooked, leading to legitimate public concerns.
The critical analysis of PSP experience has led to the design of a new generation of
transactions, which are now more commonly known as PPPs.
• Privatization involves the sale of shares or ownership in a company or the sale of oper-
ating assets or services owned by the public sector. Privatization is most common and
more widely accepted in sectors that are not traditionally considered public services, such
as manufacturing, construction, etc. When privatization occurs in the infrastructure or
utilities sectors, it is usually accompanied by sector-specific regulatory arrangements to
take account of social and policy concerns related to the sale, and continuing operation
of assets used for public services.
Sectors in which PPPs have been completed worldwide include:
• power generation and distribution,
• water and sanitation,
• refuse disposal,
• pipelines,
• hospitals,
• school buildings and teaching facilities,
• stadiums,
• air traffic control,
• prisons,
• railways,
• roads,
• billing and other information technology systems, and
• housing.
Introduction  J Public–Private Partnerships (PPPs)—An Overview
1.2 MotivationforEngaginginPPPs
The three main needs that motivate governments to enter into PPPs for infrastructure are:
1. to attract private capital investment (often to either supplement public resources or
release them for other public needs);
. to increase efficiency and use available resources more effectively; and
. to reform sectors through a reallocation of roles, incentives, and accountability.
Each of these is discussed below.
1.2.1 MobilizationofPrivateCapital
Governments face an ever-increasing need to find sufficient financing to develop and maintain
infrastructure required to support growing populations. Governments are challenged by the
demands of increasing urbanization, the rehabilitation requirements of aging infrastructure,
the need to expand networks to new populations, and the goal of reaching previously unserved
or underserved areas. Furthermore, infrastructure services are often provided at an operating
deficit, which is covered only through subsidies, thus constituting an additional drain on public
resources.
Combined with most governments’ limited financial capacity, these pressures drive a desire to
mobilize private sector capital for infrastructure investment. Structured correctly, a PPP may
be able to mobilize previously untapped resources from the local, regional, or international
private sector which is seeking investment opportunities.
The goal of the private sector in entering into a PPP is to profit from its capacity and experi-
ence in managing businesses (utilities in particular). The private sector seeks compensation
for its services through fees for services rendered, resulting in an appropriate return on
capital invested.
1.2.2 PPPasaToolforGreaterEfficiency
The efficient use of scarce public resources is a critical challenge for governments—and one in
which many governments fall far short of goals. The reason is that the public sector typically
has few or no incentives for efficiency structured into its organization and processes and is
thus poorly positioned to efficiently build and operate infrastructure. Injecting such incen-
tives into an entrenched public sector is difficult, though not impossible, as Singapore has
demonstrated by developing a government-wide dedication to efficiency while maintaining
many critical services within the public domain.
Public–Private Partnership Handbook
Private sector operators, however, enter into an investment or contracting opportunity
with the clear goal of maximizing profits, which are generated, in large part, by increased
efficiency in investment and operations. If the PPP is structured to let the operator pursue
this goal, the efficiency of the infrastructure services will likely be enhanced. Improving
the efficiency of services and operations also increases the chances that those services are
economically sustainable and provided at affordable rates—even after satisfying the profit
requirements of the private operators.
PPP allows the government to pass operational roles to efficient private sector operators while
retaining and improving focus on core public sector responsibilities, such as regulation and
supervision. Properly implemented, this approach should result in a lower aggregate cash
outlay for the government, and better and cheaper service to the consumer. This should hold
true even if the government continues to bear part of the investment or operational cost
since government’s cost obligation is likely to be targeted, limited, and structured within a
rational overall financing strategy.
In 005, investment commitments to private infrastructure projects in low- and mid-
dle-income countries grew by over 0% against 00 to almost $96 billion.
The World Bank estimates that about 70% of infrastructure investment currently comes from the public sector,
8% from official development assistance, and % from the private sector.
Source: http://ppi.worldbank.org/features/sept006/currentFeatureSept006.pdf
Figure1:InvestmentCommitmentsinInfrastructureProjectswithPrivate
ParticipationinDevelopingCountriesbySector,1990–2005
10
100
80
60
0
0
0
US$ billion
1990 1995 000 001 00 00 00 005
Total
Telecom
Energy
Transport
Water
Introduction  5
1.2.3 PPPasaCatalystforBroaderSectorReform
Governments sometimes see PPP as a catalyst to provoke the larger discussion of and com-
mitment to a sector reform agenda, of which PPPs are only one component. A key issue
is always the restructuring and clarifying of roles within a sector. Specifically, there is a
requirement to reexamine and reallocate the roles of policy maker, regulator, and service
provider, particularly to mobilize capital and achieve efficiency, as outlined above. A reform
program that includes PPP provides an opportunity to reconsider the assignment of sector
roles to remove any potential conflicts and to consider a private entity as a possible sector
participant.
Implementing a specific PPP transaction often forces concrete reform steps to support the
new allocation of sector roles such as the passage of laws and establishment of separate
regulatory bodies. In essence, re-examination of the regulatory and policy arrangements is
critical to the success of a PPP project.
Public–Private Partnerships (PPPs)—An Overview 5
Introduction  7
2 RecentExperiencewith
InfrastructurePrivatization
andPPPs
1
Analysis of privatization and PPPs since the 1990s reveals several interesting trends as
described in Notes on Public Policy for the Private Sector, developed by The World Bank/
International Finance Corporation, and based on the infrastructure projects tracked in the
World Bank’s global Private Participation in Infrastructure (PPI) Project Database.
2.1 TheLevelandFormofInfrastructurePrivatization/PPPsfrom
1990–2004
• In2004,investmentflowstoinfrastructureprojectswithprivateparticipationin
developingcountriesgrew for the first time since 000 to reach $6 billion. However,
the analysis shows that the growth was driven by the telecommunications sector which
accounted for $5 billion. All developing regions, apart from Sub-Saharan Africa, expe-
rienced increased investment in telecommunications. Within the telecommunications
sector, independent mobile operators attracted about 50% of sector investment.
• Proceeds

frominfrastructureprivatization in developing countries grew in recent
years, rising from 8% of the total in the 1990s to 55% in 000–00.
• East Asia and the Pacific raised twice as much in privatization proceeds

in
2000–2003asinthe1990s($66billionfrom420transactions). The People’s Re-
public of China (PRC) alone accounted for nearly 90% of the proceeds in the region
in 000–00, compared with 50% in the 1990s. PRC’s stock market offerings in
telecommunications and energy made it the top revenue earner among all developing
countries in 000–00.
• Greenfield projects accounted for 56% of total investment flows and 60% of
projectsin2001–2004. These are the most common form of privatization/PPP across
infrastructure sectors, except in water where concessions are still the preferred form.
Greenfield projects are also the most common in developing regions—except in Europe
and Central Asia, where divestitures are still preferred.
• Greenfieldprojectspredominatedindevelopingcountries, particularly in lowest-
income countries, based on data for 1990–1999. They constituted 65% of projects in
8 Public–Private Partnership Handbook
low-income countries compared with 7% for developing countries, reflecting the low
starting base of infrastructure in developing countries.
• After the global slowdown in PPPs in the late 1990s, preferenceforlow-riskcontracts
increased. Management contracts became more common, increasing from % of
projects in 1990–000 to 7% in 001–00 (based on the World Bank’s PPI Project
Database). They grew in number in all regions and sectors, but most were for water
projects. The share of lease contracts remained at % of projects in both periods.
• Fourteenleasecontractswereimplementedin2001–2004. In contrast, divestitures
and concessions declined as a share of both investment flows and projects. Most invest-
ment flows to divestitures in 001–00 went to projects that had reached financial
closure in the 1990s. New divestitures were limited to East Asia and Europe and Central
Asia by 00–00.
• Privatization/PPPshavereachednearlyalldevelopingcountries, generating more
than $00 billion in proceeds in 1990–00. Activity peaked in 1997 then declined,
but was reactivated in 001. Proceeds are concentrated in a small group of countries.
Five countries —Brazil, PRC, India, Poland, and Russian Federation—accounted for more
than 0% of proceeds in 1990–00.
• Infrastructure (telecommunications; electricity generation, transmission, and distribu-
tion; natural gas transmission and distribution; transport; and water) accounted for half
of privatization

/PPP proceeds in developing countries in 1990–00. These sectors
were followed by the competitive sectors (manufacturing, services, tourism, and other
firms), energy (production of oil and gas, other hydrocarbons, and petrochemicals),
finance, and the primary sector (minerals and metals) in terms of revenue generated.
Table 1 summarizes the flow of investment to developing countries both by sector and by
region.
This overview of trends focuses on quantifiable outcomes and may not fully represent the
additional value of the many PPPs that focus on improved operations and efficiencies, yield-
ing value in a different form than direct and immediate revenue and investment.
2.2 IncorporatingLocalandRegionalInvestmentSources
5
The Public–Private Infrastructure Advisory Facility
6
(PPIAF) has identified developing country
investors as an emerging, but major, source of investment finance for infrastructure projects with
private participation. For instance in 1998–00, these investors accounted for more investment
finance in transport across developing regions than did investors from developed countries. The
local and regional players are also taking on greater managerial and operational roles.
Introduction  9
Table1:InvestmentinInfrastructureProjectswithPrivateParticipationin
DevelopingCountries,bySectorandRegion1995–2004($billion)
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Sector
Energy 1.7 0.0 6. 9. 1.1 7. 15.6 19. 17.6 1.7
Electricity 18. 7. . . 18. .9 1.1 10. 1.7 1.1
Natural Gas .6 .6 .0 6.1 .7 .5 1.5 8.9 .9 0.6
Telecommunications 17. .6 9.9 51.8 6.1 8.9 5. .0 . 5.0
Transport 8. 15.7 19. 17.5 8. 9.1 8.1 .6 5.0 .5
Water and Sewage 1.5 1.7 8. . 6.5 .8 . .0 1. 1.9
Region
East Asia and Pacific 18.8 8.0 .9 9.7 1.1 1. 11.0 9.7 1.0 8.7
Europe and Central Asia 8.1 10.5 1. 1.1 9. 5.0 1. 16.8 1. 1.5
Latin America and
the Caribbean 17.1 5.8 9. 71. 7. 8.7 .7 19.6 15.8 17.
Middle East and
North Africa 0.1 0. 5.1 .1 .0 .1 . 1.6 6. 10.9
South Asia .8 5.8 6. . .6 . .6 6.0 . 9.6
Sub-Saharan Africa 0.8 1.7 . .5 .6 .7 5. . 6.5 .9
Total 48.7 72.1 114.1 100.9 72.0 90.2 71.3 57.8 57.0 64.1
Note: Date refers to projects reaching financial closure in 1990–00. (World Bank and Public–Private
Infrastructure Advisory Facility [PPIAF], Private Participation in Infrastructure Project Database.)
Source: Izaguirre, Ada Karina. 005. Private Infrastructure: Emerging Market Sponsors Dominate Private Flows.
|0b||c |o||cy for t|e |r|vate Sector Note No. 99. Washington, DC: World Bank.
Recent Experience with Infrastructure Privatization and PPPs 9
Developing country investors can be anticipated to take on even greater shares of infrastructure
investments as developing market capital markets deepen and expand, as the investors/opera-
tors develop more expertise, and as governments recognize the advantages (including a better
understanding of social, political, and economic risks) of these firms and structure transactions
(particularly prequalification and evaluation criteria) to be more inclusive of local participants.
According to PPIAF’s analysis, developing country investors contributed more than half the
private investment in concessions (5%) in 1998–00, slightly less than half in greenfield
projects (%), and a smaller share in divestitures (0%). Developing country investors
accounted for as much as 5% of the private investment in transport and 6% in telecom-
munications in 1998–00, but only about 7% in energy and 19% in water.
10 Public–Private Partnership Handbook
South Asia had the largest share of domestic investment at 55% of the region’s total invest-
ment in 1998–00. Local investors were also active in East Asia and Pacific, accounting
for % of private investment in 1998–00 and acting as the main sponsors in 6% of
projects. Telecommunications was again a predominant object of investment (local investors
invested 65%) with transport at 8%.
2.3 IncorporatingSocialPriorities
A further trend of note, discussed in chapter 8, relates to the restructuring of PPPs to be more
focused on the requirements of low-income consumers. When a primary goal of developing
countries is improved access to infrastructure (as a driver of economic growth) and when
a predominant characteristic of these countries is a high incidence of poverty, developing
strategies that fit the goal of universal service with the reality of poverty is sensible.
A concrete example of this shift has been the growing incorporation of output-based aid
(OBA) strategies to transaction design. OBA strategies design the complementary use of
donor and government financing to target social priorities specifically within the framework
of a PPP transaction.
Introduction  ´´
3 StructuringaPPP:
SectorDiagnosticand
SectorRoadMap
3.1 RequirementsandExpectations
PPPs can follow a variety of structures and contractual formats (which are described in
chapter ). However, all PPPs incorporate three key characteristics:
• a contractual agreement defining the roles and responsibilities of the parties,
• sensible risk-sharing among the public and the private sector partners, and
• financial rewards to the private party commensurate with the achievement of prespeci-
fied outputs.
PPP is one tool available to decision makers in reforming infrastructure or service delivery. It
is most effective when it is accompanied by other reform activities to underpin and reinforce
the PPP and to support sustainable improvement. A successful PPP is designed with careful
attention to the context or the enabling environment within which the partnership will be xt or the enabling environment within which the partnership will be
implemented. Where the operating environment can be reformed to be more conducive
to the goals of PPP, this should be accomplished. Where elements of the operating context
cannot be changed, the PPP design must be tailored to accommodate existing conditions.
Thus, in designing a PPP process and selecting a form of PPP, it is important to consider the
reform objectives; policy environment; the legal, regulatory, and institutional frameworks;
financing requirements and resources of the sector; and the political constraints and stake-
holder concerns. PPP will be an effective tool to address some, but probably not all, sector
issues.
To be successful, PPPs must be built upon a sector diagnostic that provides a realistic assess-
ment of the current sector constraints. Specifically, the sector diagnostic will cover:
•technical issues;
•legal, regulatory, and policy frameworks;
•institutional and capacity status; and
•commercial, financial, and economic issues.
1 Public–Private Partnership Handbook
The sector diagnostic helps the government assess the status quo, identify gaps and weak-
nesses, and develop a sector reform strategy or road map, outlining the tools and activities
required for reform. In many cases, reliable or comprehensive data on performance are not
available in every area, such as financial or technical areas. In those cases, it may be more
efficient to focus on the collection of limited, but key, indicators which provide an overview
of the overall performance of the sector.
The sector diagnostic is likely to be performed with the support of a team of local and/or
international engineers, lawyers, economists, financial analysts, and policy and transaction
specialists. The diagnostic is critical to getting the transaction structure right, so allowing
sufficient time for the process is important. Depending on the complexity of the sector,
the availability of data, and the consultant procurement process, the sector diagnostic can
take from 1 to years.
A critical part of the diagnostic is a process of stakeholder consultation and identification of
a government champion to drive the process into preparation and implementation.
As a result of the sector diagnostic, the government is able to determine to what degree
an enabling environment exists for PPP and what activities are required in advance of PPP
to create such an environment. The diagnostic is important to: (i) identify the strengths
and weaknesses of the sector and the most promising areas for efficiency increases,
(ii) regularly gauge and report on the progress of reform, and (iii) tweak the reform program
as needed.
The sector diagnostic leads to development of a road map and a sequence of PPP activities
as can be seen in Figure , which describes the components of the sector diagnostic.
3.2 TechnicalIssues
Under this stream of analysis, the government should assess current technical constraints in
the sector to be reformed (to the extent they are known) including system efficiency, util-
ity operations, and responsiveness to customers. It should determine the degree to which
operational issues are a result of underinvestment, poor investment planning, maintenance,
ineffective management, lack of operational expertise, or other issues.
Investments underway and investments planned, as well as existing assets, should be cata-
logued—to the degree that this information is relevant to the reform and can be obtained
in a cost-effective manner.
The analysis needs to take into account connectivities, links, and interdependencies of
various infrastructure elements (e.g., electricity generation vs. distribution, connectivity of
Introduction  ´J
transport modes, validity of tickets/billing across transport modes, technical standards to
be followed, etc.).
3.3 Legal,Regulatory,andPolicyFrameworks
The diagnostic should cover the existing legal, regulatory, and policy frameworks
including:
• applicable laws, and existing regime for assigning authority and setting performance
standards;
Structuring a PPP: Sector Diagnostic and Sector Road Map 1
Figure2:GenericPPPProjectSequence
Source: Heather Skilling. 007.
Decision to Enter PPP Process
Determine the Priority Projects
Define Project Team
Internal and External Advisors
Sector Diagnostic and Sector Road Map
PPP Preparation/Feasibility
Legal/Regulatory
Technical
Institutional
Commercial/Financial/Economic
Procurement Process
Select and Assign
Transaction Advisory Team
Prepare Bidding Package
Terms of Reference
Draft Contract
Bidding Requirements
Select PPP Option
PPP Prequalification
Bid Evaluation and Award
Negotiation and Contract Signing
Conduct Procurement
Underperforming
sector
Assess sector
constraints
Identify sector goals
Set tasks & timetable
Identify expertise
needed
Identify Gov’t
champion
Review options vis a
vis sector constraints
and goals
Enabling
environment for PPP
in terms of policy
and operating
environment.
Determine project
design
Ensure feasibility and
sustainability
Assign risks
Identify and train for
new roles
Solicit market
interest/feedback on
project
Refine bid package
Develop draft
contract
Final definition of
process
Train staff in
procurement
Transparent process
Put financing in
place
Start transition
arrangement
Publication/Announcement
S
T
A
K
E
H
O
L
D
E
R
C
O
N
S
U
L
T
A
T
I
O
N
1 Public–Private Partnership Handbook
• oversight arrangements, regulatory bodies, regulations;
• major sector institutions and government entities related to the sector;
• tariff and subsidy policies and arrangements;
• existence and applicability of legally mandated service quality standards;
• natural resource safeguards and management requirements important to sector
performance;
• environmental and health regulations;
 relevant labor laws and regulations; and
 limitations on foreign ownership/sector participation, foreign exchange restrictions,
and limitations on repatriation of profits, i.e., foreign investment laws.
In particular, the regulatory regime may have to be reformed and/or regulatory bodies cre-
ated to facilitate a shift from purely government-provided services to the private provision
of services.
Enabling legal, regulatory, and policy environments are critical to a sustainable PPP. At a base-
line level, a legal environment that can support private sector involvement in critical services
is needed. The legal environment has to minimize the likelihood of corruption and must be
sufficiently reliable as to encourage private participation and investment. To the degree that
the legal and judicial environment is not defined, investors and project participants will see
the project as unpredictable and highly risky. See Box 1 for the case in the PRC.
Equally, possible investors must have confidence that the laws and the contract will be
respected and can be enforced in the courts or through arbitration, if necessary.
The framework for economic regulation must be equally explicit. This may entail creating
an independent regulator, a regulatory unit within a part of government, or another form
of regulatory capacity. It can also be effective to embed regulatory principles within the
contract and the external capacity required is limited to an effective monitoring capacity
and audit of performance outcomes. Highly specific contract terms that establish duties,
performance targets, tariff level and structure, rules for changing tariffs, and dispute reso-
lution procedures, allow the private sector to better predict the profitability of the venture
and decide what the contract is worth bidding for. The basic principle is that the level of
service demanded and the costs of those services must be equitably balanced, while creating
incentives for improved efficiencies in the system.
3.4 InstitutionalStructuresandCapacity
PPPs require a range of stakeholders within and outside government to take on new roles or
perform existing roles in improved ways. Often, new entities are created, such as regulators
Introduction  ´5
or PPP units, to manage the process. Government must ask a series of key questions to under-
stand the institutional requirements of the reform strategy. These questions might include:
• Are the institutional and legislative frameworks in place to support sector improvement
and PPP, in particular? What are the impediments according to the ministry, users, and
utility?
• Do the level of autonomy and accountability of stakeholders match their proposed
obligations?
• Are the relevant levels of government prepared to relinquish or revise their roles?
• Are the relevant levels of government prepared to delegate some control to private
partners within defined policy and regulatory parameters?
• Does each institution have the funding, staff, training, and equipment required to
discharge its functions?
• Does each institution understand its role and know how to develop the procedures for
accomplishing this role?
• Is there a key stakeholder—i.e., a champion—with the capacity and the political will to
lead and drive the reform agenda forward?
These institutional roles must be clarified at the latest by the time the PPP process is complete.
However, the greater the degree of uncertainty about institutional roles during the PPP proc-
ess, the higher the level of perceptive risk is likely for potential investors. At the same time,
Structuring a PPP: Sector Diagnostic and Sector Road Map 15
Box1:ImpactofLegalandRegulatoryUncertaintyonBuild–Own–Transfer
WastewaterSchemesinthePeople’sRepublicofChina
At this stage, the People’s Republic of China does not have overarching privatization legisla-
tion. Instead, its build–own–transfer (BOT) schemes and other public–private partnership
(PPP) reform strategies are governed by a series of government policy papers.
Developing a BOT wastewater scheme is complicated, requiring consideration of issues rang-
ing from land use to the management of water companies, from investment mechanisms
to taxation, accounting systems to credit policies of development banks. And the fact that
existing policies on land use, taxation, and such considerations are not geared for the sector
makes things more difficult.
In the case of the 16 Foshan Wastewater Treatment Plants, over 50% of the projects could
not be implemented because they conflict with current land use policies.
Source: Dueñas, Ma. Christina. 007. Co0ntry  Water  Act|on.  |eop|e’s  |ep0b||c  of  C||na,  |r|vate  |0nds  for 
C|eaner Water—8O1 App||ed |n t|e C||nese Wastewater Sector. February. This article, written by the Asian
Development Bank (ADB), was based on the paper prepared by Lijin Zhong from Tsinghua University’s Department
of Environmental Science and Engineering and Tao Fu from Wageningen University’s Environmental Policy
Group.
16 Public–Private Partnership Handbook
there must be some flexibility to refine and update institutional roles as the sector evolves
and matures. Increasingly, as decentralization takes root, governments have the additional
burden of determining at what level of government each role is best performed.
In the institutional analysis, it is important not to overlook the capacity to support bidding,
negotiation, and contract compliance and monitoring. Governments may have unrealistic
expectations of the ability of their own organizations in that respect. The stages of the
procurement process are discussed in detail in chapter 7.
3.5 Commercial,Financial,andEconomicIssues
7
As part of the diagnostic assessment, the current commercial, financial, and economic
arrangements and outcomes of the sector should be understood and assessed. This under-
standing of the current scenario informs decisions about the desired sector outcomes and
how these might be achieved.
Commercial considerations relate to the business orientation of the infrastructure service
provider which may become a partner in the PPP. In preparation to a PPP, preliminary im-
provements to the billing system, customer database, the status of receivables, and funding
arrangements may be necessary. These may be needed to understand fully or to improve
the financial position of the service provider prior to entering into a PPP.
Financial considerations relate to the design of detailed and realistic pricing (including cus-
tomer tariffs, off-take agreements, etc.) strategies. The objective is to provide affordable
services, encouraging use, while providing the private partner with revenue sufficient for
commercially viable operations. Sometimes, the government’s provision of financial support
through investment contributions or other forms of “viability gap” support or even ongoing
subsidies can achieve this balance.
A key tool to support the analysis is a financial model. To develop a financial model, the
modeler has to review available data, ensure that consistent assumptions support all inputs
to the model, identify key points of sensitivity, and continually challenge and update critical
assumptions and results through ongoing review as the transaction develops.
1. The first step in financial analysis and modeling is the collection and analysis of historical
data, including financial as well as organizational (e.g., employment levels), operational (e.g.,
volumes produced and invoiced), and technical (e.g., types and capacities of operational
assets) information. Data required would include:
• audited financial statements as well as any current financial reports (unaudited) and
plans/budgets;
Introduction  ´7
• tariff schedules—historical and current;
• employees—numbers and types (e.g., operating, administrative, permanent, contract)
• database of customers;
• debt schedule and cost of capital;
• schedule of operating assets (information regarding production capacities, historical
production volumes, operating costs); and
• details of any ongoing and planned capital investment programs.
. In addition to sector-specific data, gathering critical macroeconomic (e.g., inflation rates,
historical gross domestic product, exchange rates, and interest rates) and demographic (popu-
lation growth rates) information is important. These macroeconomic and demographic data
are needed to project such key elements as demand, required tariff adjustments, operating
costs, revenues, investments, and debt service.
. Financial model structure. The financial model is generally constructed in a standard
spreadsheet program (such as Excel) and includes worksheets for the following:
• Inputs and assumptions such as:
– economic data (inflation, tax levels, etc.);
– construction data (construction costs and investments coming on stream over time, etc.);
– ongoing capital expenditure (both maintenance and growth related);
– funding levels and types (equity, credits, bonds, subsidies, etc.);
– financial data (such as the terms of the financing instruments); and
– operational data (operational cost, demand forecasts, toll rate, transfer prices, etc.).
• Sheets with cash-flow statement, profit and loss account, and balance sheet of the
project company.
• Results and summary sheets. These sheets demonstrate the results on the project’s
cash flow of different assumptions. These results are typically illustrated in the form of
financial indicators such as:
  |roject |nterna| |ate of |et0rn (or |roject |||)
This represents the return of the project regardless of the financing structure. The
project’s internal rate of return (r) is calculated from the following equation:
Where:
– Ri is the operating revenue at year i.
– Ii is the amount invested at year i.
– Ci is the operating cost at year i.
Structuring a PPP: Sector Diagnostic and Sector Road Map 17
||  ||  C|
(1 + r)
i
= 0
18 Public–Private Partnership Handbook
An attractive IRR would be high, preferably above 7–8% in real terms, depending on
countries and financial markets. (An appropriate IRR, in real terms—which takes into ac-
count country- and sector- or industry-specific factors as well as risk expectations—should
be achieved. For many potential investors in a PPP, an Equity or Geared IRR will be used
to assess their own investment case).
  |et0rn on |q0|ty (or |roject |O|)
This calculation shows the return to shareholders who receive dividends. The IRR (r) on
equity is calculated according to the following equation:
Where:
– Di is the dividend at year i.
– Ii is the amount invested by the shareholders at year i.
The project is profitable for the shareholders when r is high.
  Ann0a| |ebt Serv|ce Coveraçe |at|o (A|SC|)
This represents, for any operating year, the ability of the project company to repay
debt. This ratio is calculated as follows:
Where:
– CBDSi is the cash flow before debt service at year i (the cash remaining in the
project company after operating costs and taxes are paid).
– DSi is the debt service remaining at year i (principal and interests).
The project may be considered viable for lenders when ADSCR is greater than one for
every year of the project life. This means that if project revenue is below what was
forecast in the financial model at year i, the project company should still be able to
repay debt. Generally, the minimum ADSCR should be greater than 1.1 or 1..
  |oan ||fe |ebt Serv|ce Cover |at|o (||C|)
This ratio shows, for any one operating year, the ability of the project company to
accommodate an occasional shortfall of cash, leading to its inability to repay the debt
during the last years of the project. This ratio is calculated as:
||  ||
(1+r)
i
= 0
A|SC|| -
 C8|S|
|S|
Introduction  ´9
Where:
– NPV(CBDSi-end) is the net present value of the cash flow before debt service from
year i to the end of the debt repayment period.
– DSi-end is the total of debt service remaining at year i (principal and interests).
The project is estimated viable for the lenders when the LLCR is high for every year of
the project life. This means that the project company should be able to repay the debt
despite a period of cash shortfall.

Net |resent va|0e (N|v) of S0bs|d|es
If a project is subsidized over several years, the net present value of these payments
gives the real amount of subsidies as if they were paid in a lump sum at present year,
neutralizing the effects of inflation. Calculating an NPV requires a parameter called
"actualization rate" or discount rate, which has a considerable effect on the result. The
actualization rate must be chosen carefully.
. Uses of the Financial Model: The financial model simulates the financial results of the
project by demonstrating anticipated cash flow under different scenarios. The model reflects
assumptions made about risks (and the associated cost of capital) and allocation of risks.
It enables decision makers to make informed choices about the project structure and the
operating environment, including the impact of different tariff (price) and subsidy levels
and different coverage targets. The information yielded by a financial model allows decision
makers to understand how lenders, partners, and consumers may perceive the project.
The model can simulate overruns in construction costs, changes in operating costs, changes
in projected demand, or changes in inflation or interest rates. The financial model is used
throughout the PPP process (see chart on the PPP project sequence) to continually assess
the impact of different pricing, financing, and service scenarios; and to update or ratify
decisions about project structure.
The financial model is also used frequently to evaluate proposals made by potential private
partners and can be used to monitor performance once the project is underway.
The model should be accompanied by a manual that sets out the structure and how to use
the model, and lists the assumptions used in the model.
Economic considerations relate to the overall cost/benefit analysis of the proposed PPP and its
projected impact on the sector. While this analysis begins in the diagnostic stage, it continues
throughout the PPP process as an iterative analysis of the PPP structure as it evolves.
Structuring a PPP: Sector Diagnostic and Sector Road Map 19
||C|| -
 N|v (C8|S|    end) 
          |S|     end
0 Public-Private Partnership Handbook for ADB Staff
There should be analysis of the financial flows within the sector, the financing gaps, and
the commercial results. Where the sector is falling short of government and consumer
expectations, an agreement should be reached to establish realistic financial expectations
of stakeholders.
Relevant questions in diagnosing the issues and strategy for the sector include:
• To improve the financial health of the sector, is the immediate priority to increase
operational efficiency or to attract funding?
• Does the government commit to recover costs in the sector? Is government prepared
to allow tariffs to increase to achieve this, or is financing available for subsidies?
• How is cost recovery to be defined and over what time line is it to be achieved?
• Is the sector willing and able to provide subsidy to the consumer or operator for a
certain period?
• Is it confirmed that consumers are willing and/or able to pay more?
• Is there a fundamental flaw in the tariff structure and levels that needs to be
addressed?
• Are tariffs being adjusted prior to PPP?
• Are the commercial procedures in the sector prudent (i.e., is there an accurate customer
database? Are bills correct and timely? Are bills easily understood and promptly paid?
Are illegal connections/theft a problem?)
This analysis pinpoints the critical constraints to creating a financially sustainable sector and helps
identify the activities and interventions that might be required to remove those constraints.
3.6 StakeholderConsultation
Despite the long experience with PPPs, they remain controversial among a range of stake-
holders. This is partly attributable to the diverse range of stakeholders involved in the proc-
ess and the difficulty in reconciling their interests and concerns. In addition, too often the
stakeholders have not been properly consulted or engaged in the process. Consultation is
increasingly seen as important for several reasons:
• Inadequate consultation or communication with stakeholders increases the danger of
opposition, potentially late in the process, leading to delays or even cancellation.
• Furthermore, the stakeholders are critical to the sustainability of a PPP. Even if the
contract is awarded despite opposition, the difficulty and risk of the project increase
drastically if public support is not present.
• Stakeholders provide valuable input to the design and practicality of an approach.
Allowing stakeholders to comment on PPP strategies allows for a sense of buy-in and
can lead to innovative approaches.
• Broad public support and understanding of the reform agenda encourage politicians
to stay committed.
• Dissemination of information leads to increased credibility of project partners.
Despite these compelling reasons, some governments see risk in public consultation either
through the danger of raising expectations that may not be met, through losing control of the
flow of information, through the danger of being unable to reconcile differences, or because
information might fuel opposition. These risks are easily outweighed by the benefits of com-
munication and the crucial role it plays in building support for, and understanding of, PPP.
Each role is critical, yet specific stakeholders will have different interests that influence how
they approach their role. There must be a consultation process to reconcile and prioritize
issues, leading to broad agreement on the objectives of PPP. Table lists the roles of the
PPP process stakeholders and Figure illustrates their interests.
Structuring a PPP: Sector Diagnostic and Sector Road Map 1
Table2:RoleofDifferentStakeholdersinthePPPProcess
Stakeholder Role
Political decision makers Establish and prioritize goals and objectives of PPP and
communicate these to the public
Approve decision criteria for selecting preferred PPP option
Approve recommended PPP option
Approve regulatory and legal frameworks
Company management Identify company-specific needs and goals of PPP
and staff Provide company-specific data
Assist in marketing and due diligence process
Implement change
Consumers Communicate ability and willingness to pay for service
Express priorities for quality and level of service
Identify existing strengths and weaknesses in service
Investors Provide feedback on attractiveness of various PPP options
Follow rules and procedures of competitive bidding process
Perform thorough due diligence resulting in competitive and
realistic bidding
Strategic consultants Provide unbiased evaluation of options for PPP
Review existing framework and propose reforms
Act as facilitator for cooperation among stakeholders
Source: Heather Skilling and Kathleen Booth. 007.
Public–Private Partnership Handbook
For stakeholders to play an active role in the PPP process, they must be given not only a
forum for participation but also the information they need to participate effectively.
The appropriate forum to communicate and build support for PPP is through an iterative
dialogue with stakeholders. Each communications program must be tailored to the local
context and PPP, but would include some or all the components below:
• Opinionresearch: Opinion research gathers data on stakeholders, their perceptions, and
behaviors with respect to the issues concerning a specific PPP. The research influences the
content and media of the communications program as well as the reforms themselves. The
research is conducted on a relatively formal basis through questionnaires, polling, etc.
• Stakeholder consultation: Consultation is a less formal process through which
themes and policies of interest are discussed within or across stakeholder groups. It is
intended to gather information and build an understanding among the reformers as
to current perceptions and understanding and the basis of those opinions. A key part
of stakeholder consultation is to manage expectations with respect to how feedback
will be incorporated into the reform process; that is, the feedback may not translate
into direct change in the PPP design or process but will be one stream of influence.
This might be accomplished through focus groups or stakeholder discussion groups.
- Ensure fair treatment of present
employees
- Provide career opportunities
- Improve productivity, efficiency,
and morale
- Ensure stable, transparent
regulatory process
- Enable organizational
restructuring and asset
allocations that favor efficient
operations
- Provide trained human resources
- Generate more investment
opportunities
- Maximize revenue
- Provide universal access to service
- Ensure affordable basic service
- Promote fair competition
- Attract investors
- Improve public welfare
Government
- Ensure fair pricing
- Improve quality and
reliability of service
- Increase accountability
and responsiveness
-
Consumers
Investors
Stakeholder
Interests
Employees
Examples of
Stakeholder
Interests
Figure3:TheRangeofStakeholderInterestsinPPPs
Source: Heather Skilling and Kathleen Booth.007.
Introduction  2J
• Publicawareness: Public awareness efforts are aimed at a broad range of stakeholders
and designed to increase general awareness of an issue. This is a proactive distribution
of information that will help inform public reaction to PPP. This might be done through
TV, radio, town meetings, and newspapers. See Box as an example.
• Publiceducation: Public education is the process of providing stakeholders with the
tools and information required to increase understanding of an issue or to take on a
new role. This is a more specific and detailed program than public awareness.
Communication activities have to begin early in the process and continue through to closure
and even during implementation. The project structure should incorporate mechanisms to
ensure ongoing communication with the public and customers.
The communication program associated with PPP has to occur not only at all stages of PPP, but
on several levels: at the policy or key decision-makers’ level, the level of the enterprise, among
the stakeholders specifically affected by a PPP, and among the public at large as needed.
Structuring a PPP: Sector Diagnostic and Sector Road Map
Box2:PromotingTransparency—TheCaseofManilaWater(Philippines)
To build support for introducing Private Participation in Infrastructure (PPI) in water and
wastewater services in Metro Manila, the Government of the Philippines embarked on a
comprehensive strategic communications program that included among its objectives the
promotion of transparency in the PPI transaction. To educate the public on the measures
being taken to ensure transparent procurement, the Government launched a media cam-
paign months before the bidding process to explain the process and the precautions being
taken. Because public procurements in the Philippines are commonly subject to protests,
congressional inquiries, and graft investigations, the media campaign focused strongly on
the elaborate security measures used to protect the integrity of the bids. In addition, it
highlighted the objective nature of the evaluation process, which did not award points for
the quality of the technical approach. To ensure that media was informed about the bid
process, the Government also prepared a video presentation regarding the rules for bidding
and the procedure for opening bids, which was open to the public.
The high-profile communications and public relations efforts of the Government resulted
in strong media coverage of the bid process. It did not produce the controversy or opposi-
tion experienced during prior public procurements. The Philippine Government attributes
the project’s success largely to the design of a transparent procurement process and to
the perception among stakeholders (developed because of the media campaign) that the
process was transparent.
Source: Dumol, Mark. 000. 1|e Man||a Water Concess|on. A rey Government Off|c|a|’s ||ary of t|e Wor|d’s 
|arçest Water |r|vat|zat|on. Washington, DC: World Bank.
Public–Private Partnership Handbook
3.7 ClearSectorStrategyandRoadMap
The diagnostic assessment of the sector yields information to develop and inform targeted,
specific, and realistic sector strategy and road map to achieve improvements, through PPPs
and other interventions. The strategy and road map provide clarity and certainty about the
operating environment to private sector operators—a prerequisite for sizable investments and
long payback periods inherent in infrastructure projects. Sector strategies may rely on break-
ing down service functions, e.g., between power generation and distribution—resulting in
complex linkages that need to be defined before a PPP can realistically be implemented.
The resulting comprehensive sector strategy and road map will set out the initial timetable
and action plan for:
• strategic planning,
• organizing and managing the process,
• collecting additional information,
• defining objectives,
• resolving constraints,
• defining scope,
• selecting options,
• identifying partners,
• financing for investment,
• cost recovery strategy,
• regulatory strategy,
• finalizing the terms of the partnership,
• tendering and procurement,
• negotiating and contracting,
• managing the contract,
• monitoring and evaluation,
• managing disputes, and
• managing transitions.
Using the results of the analysis outlined in sections .1–.5, the PPP road map will more
specifically describe the high-level action plan for:
• Technical
– defining and documenting the desired technical outcomes of the partnerships,
– defining the correct metrics for measuring improvement,
– defining the necessary investments for achieving improvement,
– developing the procurement plan and process for achieving the investments, and
– defining and documenting the expected improvements which do not require major
investment.
Introduction  25
• Legal, regulatory, and policy frameworks
– creating a policy framework for PPP activity and regulation;
– establishing a process to make the legal reforms needed to reduce impediments to
improved/expanded service such as assignment of responsibility for development,
control, financing, regulating, and managing infrastructure assets;
– establishing a process to make any realistic legal reforms needed to overcome
potential constraints to PPP including limits on assets ownership or management,
repatriation of resources, and barriers to cost recovery;
– establishing a process to enact the regulatory requirements of the PPP including
monitoring of service obligations, compliance with service conditions, consumer
protection, tariff regulation, and asset management;
– developing a PPP process that is consistent with the legal and regulatory regime; and
– developing PPP legislation that seeks to address perceived gaps in the legal and
regulatory frameworks.
• Institutional and capacity status
– assigning the appropriate level of authority to each institution in the sector;
– creating new institutions such as regulators, which might be required;
– educating each institution on new roles and training staff to perform new functions;
– developing the manuals, procedures, standards, and other tools required to imple-
ment new functions; and
– providing technical assistance for transition periods.
• Commercial, financial, and economic issues
– agreeing with stakeholders on the economic balance of costs and benefits to be
achieved in sector reform,
– designing a PPP plan to achieve these sector results, and
– developing a financing plan for PPP that is realistic for the market and is commer-
cially viable and sustainable.
The road map provides the context, sets out how a proposed PPP is expected to help achieve
sector goals, and describes the steps to be taken to prepare for and implement PPP. A
well-defined road map and a well-managed process provide a degree of certainty and reas-
surance to all participants. The road map and PPP process will incorporate a timetable that
should be adhered to as closely as possible. Decision makers and participants must be made
aware of key dates and milestones. The PPP process as implemented against the road map
is described in the subsequent chapters.
The road map and the activities it encompasses must be subject to continual updating. As
the transaction evolves and is further defined, the specific requirements for implementation
become clearer and required activities can be outlined in detail.
Structuring a PPP: Sector Diagnostic and Sector Road Map 5
6 Public–Private Partnership Handbook
3.8 ClearGovernmentCommitmentandaDesignatedChampion
The private sector will expect government to be a competent partner in discharging its
obligations in terms of policy and reform planning, project development, and contract
oversight. It will also expect that the government has established the appropriate legal
and other frameworks to set targets, monitor progress, evaluate progress, report progress,
enforce the contract provisions, and handle disputes. A detailed road map helps manage
expectations in that regard, and allows the actual performance of the government to be
monitored and measured.
The government’s commitment to the strategy is demonstrated in several ways: through
a public statement of the reform strategy and expectations of PPP; through stakeholder
consultation and transparency of process; through the provision of adequate funding and
support for the process; and through the appointment of a powerful champion, or driver,
for the process. The champion is an individual or unit that is accountable for progress, is a
focal point for public communication and information, ensures that appropriate attention is
given to the main issues, works with various parties to achieve cooperation/ consensus, and
leads the government toward decisions. The standing, credibility, and strength of mandate
of the PPP champion are strong indications of the true commitment of the government to
the PPP project.
Political changes and powerful vested interests can all constrain the PPP process. The govern-
ment has to set out the case for PPP in a convincing and transparent manner, anticipating
concerns and questions. In this way, broader support for PPP can be earned, able to with-
stand shorter-term political pressures.
Of course, popular support for PPPs is ultimately gained through results—in terms of improved
service and reasonable costs. Government has to be seen as advocating the process that
will be accountable to the people and provide benefits.
Introduction  27
4 StructuringaPPP:
AvailablePPPOptions
This chapter discusses the main PPP options available for consideration. Each presents dif-
ferent characteristics to be assessed against the sector reform objectives. The basic PPP
contract types are:
• service contracts;
• management contracts;
• affermage or lease contracts;
• build–operate–transfer (BOT) and similar arrangements;
• concessions; and
• joint ventures.
As can be seen in Figure , all forms are currently in place in Asia.
Each PPP option implies varying levels of responsibility and risk to be assumed by the private
operator, together with differences in structures and contract forms as discussed in the sub-
sequent sections and summarized in Table . Increasingly, contracts are becoming hybrids,
adopting features of several contracts to reflect the best local requirements.
Figure4:ReportedOperationsPublic-PrivatePartnershipsinAsiaby
ContractType,Including(4.1)andExcluding(4.2)ServiceContract
BOO = build-operate-own, BOT = built-operate-transfer, DBO = design-build-operate, ROT = rehabilitate-operate-transfer.
Source: Weitz, Almud, and Richard Franceys, editors. 00.  8eyond  8o0ndar|es,  |xtend|nç  Serv|ces  to  t|e  Orban 
|oor. Manila: ADB.
Services
Contract
BOT
Concession
Management
Contract
ROT
Partial
Divestiture
BOO
DBO
Figure 4.1
BOT
Concession
Management
Contract
ROT
Partial
Divestiture
DBO
Figure 4.2
8.57%
17.14%
26.67%
33.33%
1.90%
2.86%
5.71%
3.81%
45.79%
27.10%
12.15%
10.28%
2.80%
1.87%
8 Public–Private Partnership Handbook
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Introduction  29
This chapter provides an overview of the key features of each option as well as some inher-
ent advantages and disadvantages. In addition, decision makers should consider carefully the
local capacity available to implement options that are more complex. PPPs with complicated
financial structures and/or extensive contractual or monitoring requirements will necessitate
hiring and/or training staff, a process that has to be accomplished in advance of the need.
Finally, it should be noted that different PPP forms are more readily adapted to particular
sectors or project types and have been used more extensively in these contexts. As part of
the selection process outlined in chapter 5, decision makers should note the prior depth of
experience in using a particular type of PPP in a particular sector.
4.1 ServiceContract
Under a service contract, the government (public authority) hires a private company or
entity to carry out one or more specified tasks or services for a period, typically 1– years.
The public authority remains the primary provider of the infrastructure service and contracts
out only portions of its operation to the private partner. The private partner must perform
the service at the agreed cost and must typically meet performance standards set by the
public sector. Governments generally use competitive bidding procedures to award service
contracts, which tend to work well given the limited period and narrowly defined nature
of these contracts.
Under a service contract, the government pays the private partner a predetermined fee for
the service, which may be based on a one-time fee, unit cost, or other basis. Therefore,
the contractor’s profit increases if it can reduce its operating costs, while meeting required
service standards. One financing option involves a cost-plus-fee formula, where costs such
as labor are fixed, and the private partner participates in a profit-sharing system. The private
partner typically does not interact with the consumers. The government is responsible for
funding any capital investments required to expand or improve the system. Box shows
Malaysia’s experience with service contracts for water leak reduction.
Potentialstrengths
Service contracts are usually most suitable where the service can be clearly defined in the
contract, the level of demand is reasonably certain, and performance can be monitored easily.
Service contracts provide a relatively low-risk option for expanding the role of the private sector.
Service contracts can have a quick and substantial impact on system operation and efficiency,
and provide a vehicle for technology transfer and development of managerial capacity.
Service contracts are often short term, allowing for repeated competition in the sector. The
barriers to entry are also low given that only a discrete service is up for bid. The repeated
Structuring a PPP: Available PPP Options 9
0 Public–Private Partnership Handbook
Box3:ServiceContractforLeakReductioninMalaysia
Sandakan is a city of about 50,000 inhabitants in the Malaysian state of Sabah. The State
of Sabah has had one of the highest levels of nonrevenue water (NRW) in Malaysia. In the
1990s, the level was calculated at almost 60% of system input volume.
In the spring of 00, Jabatan Air Sabah (Sabah Water Board) let an NRW reduction con-
tract that was aimed at reducing real or physical losses from two directions, improving and
expanding the current active leakage control activities, and replacing the mains with the
highest burst frequencies. This contract was for a period of 0 months and was undertaken
by Halcrow Water Services in partnership with a Malaysian company, Salcon Engineering.
In July 005, the project was successfully ended.
During the course of the project, about ,100 leaks were located and repaired. At the end
of June 005, physical losses have been reduced by almost 17.5 million liters per day (Mld)
against the target of 15 Mld. About 11 Mld have been saved through active leakage control
and 6.5 Mld by replacement of mains. This represented a savings of 0% of the total volume
of treated water produced.

The physical activities were paired with a training program to ensure sustainability of the efforts.
In 006, Salcon signed a contract for phase two of the contract. The scope of work includes
providing core NRW team and technical personnel to carry on with the NRW reduction work,
such as pipe replacement, setting up of district metered zones, active leakage detection, leak
repairs, consumer meter replacement, pressure management, and network modeling.
Source: Pilcher, Richard. 005. A  |ract|ca|  Approac|  to  |eve|op|nç  a  S0sta|nab|e  Water  |oss  |ed0ct|on 
Strateçy  |n  Sanda|an,  Saba|,  Ma|ays|a. Halcrow Water Services, Rocfort Road, Snodland, Kent ME6 5AH,
United Kingdom.
bidding maintains pressure on contractors to maintain low costs, while the low barriers to
entry encourage participation in the competition.
Potentialweaknesses
Service contracts are unsuitable if the main objective is to attract capital investment. The
contracts may improve efficiency and thus release some revenue for other purposes, but
the contractor is not under an obligation to provide financing. The effectiveness of the
contractor may, in fact, be compromised if other sources of financing (from government or
donors, for instance) do not materialize. The fact that the contractor’s activities are discrete
and segregated from the broader operations of the company may mean that there is no
broader or deeper impact on the system operations, only discrete and limited improvements.
The public sector remains in charge of tariff setting and assets, both of which are politically
vulnerable and critical to sustain the system.
Introduction  J´
4.2 ManagementContracts
A management contract expands the services to be contracted out to include some or all
of the management and operation of the public service (i.e., utility, hospital, port authority,
etc.). Although ultimate obligation for service provision remains in the public sector, daily
management control and authority is assigned to the private partner or contractor. In most
cases, the private partner provides working capital but no financing for investment. Figure
5 illustrates the typical structure of a management contract.
Structuring a PPP: Available PPP Options 1
The private contractor is paid a predetermined rate for labor and other anticipated operating
costs. To provide an incentive for performance improvement, the contractor is paid an ad-
ditional amount for achieving prespecified targets. Alternatively, the management contractor
can be paid a share of profits. The public sector retains the obligation for major capital invest-
ment, particularly those related to expand or substantially improve the system. The contract
can specify discrete activities to be funded by the private sector. The private partner interacts
with the customers, and the public sector is responsible for setting tariffs. A management
contract typically, however, will upgrade the financial and management systems of a company
and decisions concerning service levels and priorities may be made on a more commercial
basis. Box describes Cambodia’s experience with management contracts in the primary
health care sector.
Figure5:StructureofManagementContract
Source: Heather Skilling and Kathleen Booth. 007.
Government
PublicServiceProvider
PrivateOperator
Regulation:
Tariff setting
Service standards
Environmental monitoring
Investment
& Subsidy
Reporting
Approvals
Tariff
Management
Public–Private Partnership Handbook
Box4:Cambodia—ContractingOutPrimaryHealthCaretoNongovernment
Organizations
In addition to their uses in infrastructure, management contracts are used for other municipal
services such as health care. In Cambodia, -year management contracts with nongovernment
organizations were put in place in primary health care facilities in 1 districts. The contractor
has full-line management responsibility and must respond to performance targets including
achievements in immunization, antenatal care, family planning, and services to the poor.
The contractor must provide certain services free of charge (emergency obstetrical care,
minor surgery, inpatient treatment of serious illnesses). Compared with publicly managed
facilities, the Government found that private management was more effective than public
management in terms of performance and coverage achievements, and improvement in
working conditions for staff.
Sources: Loevinsohn, Benjamin. 000. Contract|nç for t|e |e||very of |r|mary |ea|t| Care |n Cambod|a. |es|çn 
and |n|t|a| |xper|ence of a |arçe |||ot 1est. World Bank Institute Flagship Program Online Journal. Available:
www.worldbank.org/wbi/healthflagship/ journal/index.htm; Bhushan, Indu, Sheryl Keller, and Brad Schwartz.
00. Achieving the Twin Objectives of Efficiency and Equity: Contracting Health Services in Cambodia. |conom|c 
and |esearc| |epartment |o||cy 8r|ef No. 6. Manila: ADB.
Potentialstrengths
The key advantage of this option is that many operational gains that result from private sector
management can be made without transferring the assets to the private sector. The contracts
are less difficult to develop than others are and can be less controversial. The contracts are
also relatively low cost as fewer staff are dispatched to the utility from the private opera-
tor. Management contracts can also be seen as interim arrangements, allowing for modest
improvements while more comprehensive contracts and structures are developed. Similarly,
a management contract can be structured to phase-in increasingly extensive involvement of
the private sector over time and as progress is demonstrated.
Potentialweaknesses
The split between the obligation for service and management, on the one hand, and financing
and expansion planning, on the other, is a tricky one. There is a risk that the management
contractor does not enjoy the autonomy or the authority (over the labor force, for instance)
required to achieve deep and lasting change. If the operator is paid a portion of profits or
given an incentive payment, safeguards are required to prevent inflation of reported achieve-
ments or deficient maintenance of the system to increase profits.
Introduction  JJ
4.3 AffermageorLeaseContracts
Under a lease contract, the private partner is responsible for the service in its entirety and
undertakes obligations relating to quality and service standards. Except for new and replace-
ment investments, which remain the responsibility of the public authority, the operator
provides the service at his expense and risk. The duration of the leasing contract is typically
for 10 years and may be renewed for up to 0 years. Responsibility for service provision is
transferred from the public sector to the private sector and the financial risk for operation
and maintenance is borne entirely by the private sector operator. In particular, the operator
is responsible for losses and for unpaid consumers' debts. Leases do not involve any sale of
assets to the private sector. Figure 6 shows the lease contract’s typical structure.
Structuring a PPP: Available PPP Options
Under this arrangement, the initial establishment of the system is financed by the public
authority and contracted to a private company for operation and maintenance. Part of the
tariff is transferred to the public authority to service loans raised to finance extensions of
the system. See Box 5 on leasing in the ports sector.
An affermage is similar, but not identical, to a lease contract. Unlike a lease where the private
sector retains revenue collected from customers and makes a specified lease payment to
the contracting authority, an affermage allows the private sector to collect revenue from
the customers, pays the contracting authority an affermage fee, and retains the remaining
revenue. The affermage can be more appealing to the private partner as it reduces some
risks associated with low-cost recovery in sales. The affermage fee is typically an agreed
rate per every unit sold.
Figure6:StructureofLeaseContract
Source: Heather Skilling and Kathleen Booth. 007.
Government
Regulation:
Tariff setting
Service standards
Environmental monitoring
Investment Approvals
AssetCompany
Fermier/Lessee
Affermage/Lease contract
• Performance targets
• Variable Fees
Planning
Reporting
Public–Private Partnership Handbook
Potentialstrengths
Under lease and affermage contracts, the private partner’s profits depend on the utility’s sales
and costs. The key advantage of this option is that it provides incentives for the operator to
achieve higher levels of efficiency and higher sales. The principal drawback is the risk of manage-
ment reducing the level of maintenance on long-lived assets, particularly in the later years of
the contract, in order to increase profits. Further, the private partner provides a fee to cover the
cost of using the assets although the private partner does not provide investment capital.
Potentialweaknesses
The key issue in moving from service and management contracts to a lease is that the con-
tractors’ revenues are derived from customer payments and, hence, the question of tariff
levels becomes increasingly sensitive. This may require structuring and revising complex
tariff arrangements. In addition, the responsibility for capital investment remains with the
government and no private investment capital is mobilized.
4.4 Concessions
A concession makes the private sector operator (concessionaire) responsible for the full delivery
of services in a specified area, including operation, maintenance, collection, management, and
construction and rehabilitation of the system. Importantly, the operator is now responsible for
all capital investment. Although the private sector operator is responsible for providing the
assets, such assets are publicly owned even during the concession period. The public sector is
responsible for establishing performance standards and ensuring that the concessionaire meets
them. In essence, the public sector’s role shifts from being the service provider to regulating
the price and quality of service. Table and Box 6 are samples of infrastructure concessions.
The concessionaire collects the tariff directly from the system users. The tariff is typically
established by the concession contract, which also includes provisions on how it may be
Box5:LeasinginthePortsSector
In Asia, lease contracts are usually used in operating airport terminals or seaport container
terminals. Both India and Thailand have ongoing lease contracts to operate container termi-
nals at the seaports of Bangkok and Cochin, Karala State. The Indian contract is for 8 years
and involves private participation from the United Arab Emirates. The Thai contract involves
local companies and is to run for 7 years. In the People’s Republic of China, the Guangzhou
Baiyun Airport Terminal is operated under a lease contract with the Keppel Group of Singapore
which has a 15-year contract and 5% ownership of the project company.
Source: World Bank. 006. Private Participation in Infrastructure database.
Introduction  J5 Structuring a PPP: Available PPP Options 5
Table4:ExamplesofInfrastructureConcessionsinDevelopingand
TransitionalEconomies
Telecommunications Electricity
People’s Republic of China (PRC), PRC, Cote d’Ivoire, Guinea, Hungary,
Cook Islands, Guinea-Bissau, Hungary, Mexico
Indonesia, Madagascar, Mexico
NaturalGasTransportandDistribution Railways
Argentina Argentina, Brazil, Burkina Faso, Chile,
Cote d’Ivoire, Mexico
WaterDistribution
Argentina, Brazil, Chile, PRC, Colombia,
Cote d’Ivoire, Guinea, Hungary, Indonesia,
Macao, Malaysia, Mexico, Philippines,
Senegal
Source: Resides, Ioannis N.. 00. |eform|nç |nfrastr0ct0re. |r|vat|zat|on, |eç0|at|on and Compet|t|on. A Wor|d 
8an| |o||cy |esearc| |eport. Washington, DC: World Bank.
Box6:RepublicofKorea’sFirstAirportRailway
The first railway concession project is underway in the Republic of Korea (ROK). The 61.7
kilometer (km) line from Seoul city center to Incheon International Airport will offer both
commuter and express service. The 1-km first phase of a new commuter and express rail
air link in ROK opened in 007 between Incheon International Airport and Gimpo domestic
airport. It will be extended by 0.7 km .5 years later to take the line into the heart of the
capital at Seoul central station.
The project is strongly supported by the national and regional governments as a means of
linking the Incheon hub to Seoul and the recently opened KTX high-speed railway, which runs
from Seoul Central station to Busan. It is the first railway concession project in ROK. Incheon
International Airport Railroad Company (Iiarco), a special purpose company incorporated in
March 001, has a 0-year operating concession from the end of construction.
Iiarco has 11 shareholders, led by Hyundai Engineering and Construction (HDEC) with 7%,
Posco Engineering and Construction (11.9%), Daelim Industrial (10%), Dongbu Corporation
(10%), Korea Rail Network Authority (9.9%), and six other Korean companies. Bechtel is
providing support for project management to Iiarco and a Korean consultant, Kortech, is
also assisting the concessionaire.
Source: Knutton, Mike. 00. |nternat|ona| |a||way Io0rna|. May.
6 Public–Private Partnership Handbook
changed over time. In rare cases, the government may choose to provide financing support
to help the concessionaire fund its capital expenditures. The concessionaire is responsible for
any capital investments required to build, upgrade, or expand the system, and for financ-
ing those investments out of its resources and from the tariffs paid by the system users.
The concessionaire is also responsible for working capital. A concession contract is typically
valid for 5–0 years so that the operator has sufficient time to recover the capital invested
and earn an appropriate return over the life of the concession. The public authority may
contribute to the capital investment cost if necessary. This can be an investment “subsidy”
(viability gap financing) to achieve commercial viability of the concession. Alternatively, the
government can be compensated for its contribution by receiving a commensurate part of
the tariff collected. A concession contract’s typical structure is shown in Figure 7.
Potentialstrengths
Concessions are an effective way to attract private finance required to fund new construction
or rehabilitate existing facilities. A key advantage of the concession arrangement is that it
provides incentives to the operator to achieve improved levels of efficiency and effectiveness
since gains in efficiency translate into increased profits and return to the concessionaire. The
transfer of the full package of operating and financing responsibilities enables the conces-
sionaire to prioritize and innovate as it deems most effective.
Potentialweaknesses
Key drawbacks include the complexity of the contract required to define the operator's activi-
ties. Governments also need to upgrade their regulatory capacity in relation to tariffs and
Figure7:StructureofConcessionContract
Source: Heather Skilling and Kathleen Booth. 007.
Government
Regulation:
Tariff setting
Service standards
Environmental monitoring
Reporting
Concession contract
Revenues
Concessionaire
Consumers
Services
Lenders
Shareholders
Finance/Equity
Introduction  J7 Structuring a PPP: Available PPP Options 7
performance monitoring. Further, the long term of the contracts (necessary to recover the
substantial investment costs) complicates the bidding process and contract design, given the
difficulty in anticipating events over a 5-year period. This drawback may be countered by
allowing a periodic review of certain contract terms in the context of the evolving environ-
ment. There is additional risk that the operator will only invest in new assets where it expects
payback within the remaining period of the contract unless provisions for these events are
set out in the contract. Because of the long-term, comprehensive nature of the contracts,
they can be politically controversial and difficult to organize. It is argued that concessions
provide only limited competition given the limited number of qualified operators for a major
infrastructure network. There is also concern that concessions not set out monopoly terms
but provide room for additional operators where this is in the best interest of certain groups
of consumers and the concessionaire cannot provide equivalent service.
4.5 Build–Operate–TransferandSimilarArrangements

BOT and similar arrangements are a kind of specialized concession in which a private firm
or consortium finances and develops a new infrastructure project or a major component
according to performance standards set by the government. Figure 8 illustrates the BOT
contract structure.
Source: Heather Skilling and Kathleen Booth. 007.
Figure8:StructureofaBuild–Operation–Transfer(BOT)Contract
Government/PublicUtility
Capital Investment
PrivateDeveloper
BOT
Consumers
(Directly or
through
Distributor
Services
Tariffs
Revenues
Eventual Return of
Investment
8 Public–Private Partnership Handbook
The variations of BOT-type contracts include those cited in Table 5. Several of these are
discussed in this section.
Under BOTs, the private partner provides the capital required to build the new facility. Importantly,
the private operator now owns the assets for a period set by contract—sufficient to allow the
developer time to recover investment costs through user charges.
The public sector agrees to purchase a minimum level of output produced by the facility,
sufficient to allow the operator to recover its costs during operation. A difficulty emerges
if the public sector has overestimated demand and finds itself purchasing output under
such an agreement (“take–or–pay”) when the demand does not exist. Alternatively, the
distribution utility might pay a capacity charge and a consumption charge, thus sharing the
demand risk between the public and private partners. BOTs generally require complicated
financing packages to achieve the large financing amounts and long repayment periods
required. (See Box 7).
At the end of the contract, the public sector assumes ownership but can opt to assume
operating responsibility, contract the operation responsibility to the developer, or award a
new contract to a new partner.
The distinction between a BOT-type arrangement and a concession—as the term is used
here—is that a concession generally involves extensions to and operation of existing systems,
whereas a BOT generally involves large "greenfield" investments requiring substantial outside
finance, for both equity and debt. However, in practice, a concession contract may include
Table5:BasicProjectDeliveryOptions
Operation& Financial
Own Conceive Design Build Maintenance Responsibility
Design–Bid–Build Public Public Private by fee contract Public Public
Design–Build Public Public Private by fee contract Public Public
Build–Operate– Public Public Private by fee contract Public
Transfer (BOT)
Design–Build– Public Public or Private by fee contract Public,
Finance–Operate Private Public/Private,
(DBFO) or Private
Build–Own– Private Public or Private by contract (concession)
Operate (BOO) Private
Source: United States Department of Transportation, Federal Highway Administration. Available: www.fhwa.
dot.gov/ppp/options.htm
Introduction  J9 Structuring a PPP: Available PPP Options 9
Box7:Build–Operate–TransferfortheConstructionandOperationofaSolid
WasteTransferFacilityinHongKong,China
Hong Kong, China issued a build–operate–transfer for constructing and operating its solid waste
transfer facilities, which include a transfer station and fleet of transfer trucks. The Government
prequalified several firms based on their experience in designing and operating transfer sta-
tions, and then held a competitive tendering process to select the winning firm. The bidding
documents laid out technical and environmental performance requirements, maintenance
requirements, and equipment replacement schedules. The station has been built and is cur-
rently in operation. The Government conducts regular inspections of the transfer facilities to
verify that the specified requirements are being met.
Source: Public–Private Cooperation in the Delivery of Urban Infrastructure Services (Options & Issues). |0b||c–
|r|vate |artners||ps for Orban |nv|ronment Wor||nç |aper |. United Nations Development Programme (UNDP).
Available: www.undp.org/pppue/gln/publications
the development of major new components as well as extensions to existing systems, and
BOTs sometimes involve expansion of existing facilities.
There are many variations on the basic BOT structure including build–transfer–operate (BTO)
where the transfer to the public owner takes place at the conclusion of construction rather
than the end of the contract and build–own–operate (BOO) where the developer constructs
and operates the facility without transferring ownership to the public sector. Under a de-
sign–build–operate (DBO) contract, ownership is never in private hands. Instead, a single
contract is let out for design, construction, and operation of the infrastructure project.
The questions of ownership and the timing of the transfer are generally determined by local law
and financing conditions, and the number of possible permutations is large. (See Box 8).
With the design–build–finance–operate (DBFO) approach, the responsibilities for designing,
building, financing, and operating are bundled together and transferred to private sector
partners. DBFO arrangements vary greatly in terms of the degree of financial responsibility
that is transferred to the private partner.
Potentialstrengths
BOTs have been widely used to attract private financing to the construction or renovation
of infrastructure. BOT agreements tend to reduce commercial risk for the private partner
because there is often only one customer, the government. The private partner must be
confident however that the purchase agreement will be honored.
0 Public–Private Partnership Handbook
Box8:Build–Own–OperateandTransferContracttoDevelop,Operate,and
MaintainaTollRoadinGujarat,India
The contract for this -kilometer toll road facility includes the design and completion of the
project road, including the pavement, cross-drainage works, bridges, toll facilities, medians,
and separators. It also covers management, and operation and maintenance, including toll
collection, operation of the toll plaza, traffic regulation, and maintenance of the facility.
The contractor has relative autonomy to determine its work methods and plan its maintenance.
Toll rates are based on a fixed formula and increase annually in line with an escalation formula
linked to the consumer price index. For a higher toll increase than approved in the contract, a
toll review committee is constituted to provide a recommendation to the Government.
An independent engineer and independent auditor are hired to oversee the contract agree-
ment and report to the Government and the contractor.
Risks are mitigated as follows:
•Land acquisition risk: the Government bears all responsibility for completion.
•Revenue risk: Borne by contractor but tolls are automatically revised every year through
an agreed indexation formula.
•Inflation risk: Borne by the contractor but this is transferred to the contractor because
of the fixed price nature of the contract.
•Risk of shortfall in traffic: provision to extend the contract in case of nonachievement of
a 0% return over the 0-year period. Additional revenue is also possible at the discretion
of the Government.
•Force majeure risks: comprehensive insurance coverage and a temporary toll review
provision to mitigate loss of revenue for a short period due to force majeure.
Source: World Bank. Tool Kit for Public-Private Partnership in Highways. Available: http://rru.worldbank.org/
Documents/Toolkits/Highways/_carac//_.htm
An advantage to DBFO projects is that they are financed partly or completely by debt, which
leverages revenue streams dedicated to the project. Direct user fees (like tolls) are the most
common revenue source. However, other sources of finance in the road sector, for instance,
might include lease payments, shadow tolls, and vehicle registration fees.
Potentialweaknesses
BOTs have a project-specific application so they are potentially a good vehicle for a specific
investment, but with less impact on overall system performance. It can be difficult to link
the increases in production brought about by a BOT with commensurate improvements on
the demand side. While initial capital construction costs may be reduced through the private
sector’s experience, private debt may be an expensive substitute for public financing where
a take–or–pay agreement is in place.
Introduction  4´ Structuring a PPP: Available PPP Options 1
The benefit of competition is limited to the initial bidding process and these contracts are
often renegotiated during their life. The tender documents and processes require careful
design and adequate time.
4.6 JointVenture
Joint ventures are alternatives to full privatization in which the infrastructure is co-owned
and operated by the public sector and private operators. Under a joint venture, the public
and private sector partners can either form a new company or assume joint ownership of
an existing company through a sale of shares to one or several private investors. The com-
pany may also be listed on the stock exchange. A key requirement of this structure is good
corporate governance, in particular the ability of the company to maintain independence
from the government. This is important because the government is both part owner and
regulator, and officials may be tempted to meddle in the company’s business to achieve
political goals. From its position as shareholder, however, the government has an interest in
the profitability and sustainability of the company and can work to smooth political hurdles.
The private partner assumes the operational role and a board of directors generally reflects
the shareholding composition or expert representation. Box 9 highlights joint venture ar-
rangements in the PRC.
Box9:EnergyExpansionthroughJointVenturesinthePeople’sRepublicof
China
General Electric (GE) Energy has been active in the People’s Republic of China (PRC) for
more than 90 years, supplying 70 steam turbines, 165 gas turbines, 97 wind turbines, 180
hydropower units, and 00 compressors as well as total engineering solutions to help the
country improve the reliability and availability of its energy production and transmission
equipment.
GE Liming is an $18.9-million joint venture formed on 8 August 00 between GE Energy
(51%) and Shenyang Liming Aero-Engine Company, Ltd. (9%), one of the PRC’s primary
manufacturers of aero-derivative gas turbines and jet engines. The joint venture manufactures
combustion components, buckets, and nozzles to contribute to the assembly of GE’s Frame
9FA and 9E gas turbines in the PRC.
GESTT, a $1.7 million joint venture, was formed on 8 January 00 between GE Energy
(75%) and Shenyang Blower Works (SBW) (5%), a major state-owned enterprise in cen-
trifugal compressors, blowers, and gear manufacturing in the PRC. The joint venture brings
to the Chinese oil and gas industry a wide range of GE Energy’s oil and gas service offerings,
coupled with strong local capability.
Source: GE Energy. 005. G| |nerçy |xpands |o|e |n C||na. 5 August. Available: www.gepower.com/about/
press/en/005_press/08505.htm
Public–Private Partnership Handbook
The joint venture structure is often accompanied by additional contracts (concessions or
performance agreements) that specify the expectations of the company. Joint ventures also
take some time to develop and allow the public and private partners considerable opportunity
for dialogue and cooperation before the project is implemented.
Under the joint venture structure, both public and private partners have to be willing to invest in
the company and share certain risks. Figure 9 is the typical joint venture contract’s structure.
Potentialstrengths
Joint ventures are real partnerships of the public and private sectors that match the advan-
tages of the private sector with the social concerns and local knowledge of the public sector.
Under a joint venture, all partners have invested in the company and have an interest in the
success of the company and incentives for efficiency.
Potentialweaknesses
Government’s dual roles as owner and regulator can lead to conflict of interest. Joint ven-
tures also have a tendency to be directly negotiated or to follow a less formal procurement
path, which can lead to concern for corruption.
Source: Heather Skilling and Kathleen Booth. 007.
Figure9:StructureofJointVentureContract
Government
Regulation:
Tariff setting
Service standards
Environmental monitoring
PrivateOwner/Operator
Consumers
Reporting
Asset Ownership
(full or partial)
Services Revenues
Introduction  4J Structuring a PPP: Available PPP Options
4.7 HybridArrangements
Contract arrangements that incorporate different characteristics of a range of contract types can
also be developed. Called “hybrid arrangements”, these bring together the attributes most suit-
able to a particular project’s requirements and the operating conditions. Hybrid arrangements
provide a tailored solution in terms of scope, risk sharing, and/or scope that is most directly
suitable to the project at hand. Obviously, the variations are endless, but examples include:
• A “management contract plus” arrangement, in which the performance-related element
of the management contract is substantial enough to transfer real risk. For instance, the
payment of bonuses to the management contractor might be linked to achievement
to increases in the operating cash flow of the utility by a predetermined amount. To
achieve the bonus (if sufficiently large), the contractor may put additional inputs at risk
to achieve the cash flow outputs.
• A private contractor, LEMA, through a management contract, is responsible for water
distribution and wastewater collection in Amman, Jordan. The contract provided LEMA
with a fixed-fee and a bonus based on the improved performance of the utility. Simi-
larly, LEMA faced penalties for not achieving improvements. Under this structure, the
management contract in Amman was one of the first to adopt risk-sharing mechanisms
more typically associated with deeper forms of PPP.
• In Gabon, a concession contract was offered for a vertically and horizontally integrated
national utility, providing both water and electricity. The Government decided to keep
water and electricity services together in the scope to permit continued cross-subsidies
from electricity to water. This contract design yielded several benefits, including cost
reductions through the sharing of human, financial, and technical resources and crea-
tion of a platform for investment planning that is more integrated.
• An “affermage–lease plus” arrangement has the ability to share responsibility for
investments. Under a standard affermage/lease, the contracting authority retains full
responsibility for undertaking and financing new investment even though the operator
may be in a better position to manage new construction and some other investment
obligations.
In some cases, the operator is given a limited investment responsibility, such as extension
of network service coverage in certain areas. Alternatively, the operator and contracting
authority may reach an agreement to cofinance investments.
Introduction  45
5 StructuringaPPP:
SelectingtheOption
As previously mentioned, PPP should be implemented within an overall reform strategy. The
objectives of a PPP project will be a subset of the objectives for the overall sector reform.
Selecting an appropriate PPP option is based on a diagnosis of:
• PPP options available (as described in chapter ),
• technical constraints and goals of the sector (as identified in the diagnostic),
• legal and regulatory constraints (as identified in the diagnostic),
• institutional issues (as identified in the diagnostic),
• commercial, financial, and financing requirements and constraints (as identified in the
diagnostic),
• interest of the market (local and international as described below), and
• special requirements of the sector based on characteristics of the system or
population.
The list of reform objectives should be compared with the results of the diagnostic and
features of each contract type, its advantages and disadvantages, likely outcomes and
prerequisites. From this analysis, it is possible to determine which option is most likely to
succeed at meeting the greatest number of (or the most critical) objectives.
Priorities for a PPP might include increased coverage, improved services, efficiency improve-
ments with associated reduction in government subsidy, or customer satisfaction. The
government and its advisors would use cost/benefit analysis and would consult with a wide
range of possible private partners (operator survey) to gain insight on the appeal, or lack
of appeal, of the options under consideration.
Particular PPP forms are used more widely and are more readily applied to particular sectors.
For instance, BOTs are more often employed in the development of toll roads and wastewater
plants while management contracts might be seen in health-care or water services.
That said, no PPP option could be applied without tailoring it to the local context. The options
provide a menu of contract types that can be modified to suit specific project requirements.
Incorporating different components of different contract types or using several contracts
in combination may be necessary. Additional modifications may be necessary to facilitate
the financing of the transaction, to respond to concerns of potential partners, to improve
low-income service provision, and to address labor issues.
6 Public–Private Partnership Handbook
GovernmentobjectivesforthePPPprocess: Selecting a PPP option is influenced by the
government’s specific objectives. For instance, is it government’s priority to reduce the costs
of service? On the other hand, is there a limited goal to improve billing and collection? Or
is the priority to expand coverage? Depending on the objectives, different options may be
more suitable to delivering them in a project.
PrerequisitestoimplementingaparticularformofPPP:The diagnostic analysis deter-
mines the status of the sector undergoing reform. Each form of PPP has a set of prerequisites
for successful implementation. For instance, deeper forms of PPP that transfer greater risk
to the private sector will require more sophisticated legal and regulatory structures, as well
as availability of local skills to implement and monitor the transactions.Other constraints
may be low-cost recovery levels, lack of system information, or poor technical performance.
If prerequisites are not in place as determined through the diagnostic, it may be prudent to
start with a less extensive form of PPP. An alternative would be to achieve PPP prerequisites,
see Table 6, during the preparatory phase by implementing legal and regulatory reforms,
ensuring key investments are made, and/or putting new institutions in place.
Theprivatesector’sinterestintheoption: A particular option such as a concession may
best meet the objectives of the government, but the level of risk may be unacceptable to
potential private investors. The likely level of interest can be assessed through analysis of pre-
vious investments in the region, country, and sector, and by assessing the market interest.
Before the formal procurement process, potential bidders are often invited to comment on
a proposed project structure. The comments are based on a pre-bid road show, a briefing,
or a project paper, which is shared. Often, the opportunity is described in an “Information
Memorandum”, a summary of the key attributes of the project, the operating environment,
Table6:PrerequisitesofPPPOptions
Government
Capacity
Cost forContracting,
Political Recovery Regulatory Information Management,
Option Commitment Tariffs Framework Base andAnalysis
Service Contract Low Low Low Low Moderate
Management Contract Moderate Moderate Moderate Low Moderate
Lease Moderate High High High High
Concession High High High High High
Build–Operate–Transfer High Variable High High High
and variations
Source: Heather Skilling and Kathleen Booth. 007.
Introduction  47
and anticipated financing. These discussions also generate market interest in an opportunity
and may broaden the pool of potential bidders. Collecting this market feedback from po-
tential private partners during the design/preparatory phases ensures that the bid package
attracts interest.
Based on these three criteria, the available options can be ranked and the government can
take an informed decision on the PPP strategy to be adopted. The road map will then be
updated to reflect the PPP option selected and preparatory work can start.
Structuring a PPP: Selecting the Option 7
Introduction  49
6 PPPPreparatoryWork
The sector strategy and road map (updated based on the PPP option selection) outline the
work to be done to create the enabling environment and structure the PPP transaction. In
general, the preparatory work falls within the same categories as the sector diagnostic, and
addresses the constraints identified through sector analysis:
• legal, regulatory, and policy frameworks;
• technical issues;
• institutional and capacity building; and
• commercial, financial, and economic issues.
The preparatory stage culminates in the achievement of an environment conducive to sus-
tainable reform and in a well-defined, documented, and agreed-upon PPP process.
6.1 EstablishingAppropriateLegal,Regulatory,andPolicyFrameworks
The potential PPP project will exist with a public policy framework, which includes specific
legal and regulatory settings.
The legal analysis will have resulted in an inventory of existing laws, regulations, contracts,
and other legal documents that define the characteristics of PPP or those that have to be
changed. Gaps are also identified where new legal instruments are required. These may relate
directly to PPP (privatization law, sector licensing, etc.)—or be of more broad and general
relevance (company law, labor laws, environmental laws, foreign exchange regulations,
etc.). It may be possible to change the “direct” ones to facilitate the PPP, but the “general”
ones typically simply need to be recognized and followed.
As such, the PPP structure has to reflect the prevailing tax regime, concession rights, dispute
resolution procedures, public service laws, labor laws, etc. Corporate structures have to
adhere to company laws and other legal requirements. To the extent that laws have to be
changed to accommodate the desired PPP, the timetable should reflect a realistic period for
this. The legal work continues as the PPP process progresses.
Similarly, the regulatory regime including oversight arrangements for pricing, customer serv-
ice, operations, and market structure may need to be changed or newly created. The desired
PPP option has to be contrasted with the existing regulatory arrangements and capacity
and regulatory gaps should be filled or the PPP structure should be changed. The gaps may
include the need for (i) more explicit regulations and requirements of the operator (to be
50 Public–Private Partnership Handbook
embedded in contract, regulations, or statute); (ii) developing actual regulatory institutions
(such as an independent regulator, a regulatory unit within government, and contracting
of regulatory capacity); (iii) training regulators; and (iv) developing procedures whereby the
regulator requests and receives information.
The roles of each entity involved in performance monitoring (boards, ministries, auditors,
monitors) and regulation (ministries, regulators) should be described and justified by as-
signed authorities.
6.2 TechnicalPreparation
The technical specifications of the proposed PPP project need to be defined and documented
in the terms of reference, and ultimately enshrined in the PPP contract. The preparation
stage is the time to develop the preliminary specifications. Development of the final technical
specifications of a project is an iterative process which builds on feedback from the market
and the affordability of the project at each design stage.
The technical design of a project starts with identification of desired coverage targets and
service standards. From these starting points, estimating the cost of these desired services
(factoring in presumed efficiency gains) and cost recovery tariffs is possible. Government
has the option of putting these cost recovery tariffs in place, subsidizing cost-recovery, or
revisiting the initial targets and service standards. Figure 10 illustrates the balancing of
service and costs.
Specify
Service
Estimate
Costs
Set Tariffs and
Subsidies
No
Satisfied?
Yes
Implement
Figure10:BalancingServiceandCosts
Source: World Bank and PPIAF. 006. Approac|es to |r|vate |art|c|pat|on |n Water. A 1oo|||t.
Introduction  5´ PPP Preparatory Work 51
The technical preparation builds on (and refines) the analytical work that has been done
in preparing the sector analysis and road map, including demand analysis, asset inventory,
and investment analysis.
Technical terms of reference need to strike a balance between being too narrow/restric-
tive and too loose. Technical specifications that are too narrow may mean that a bidder is
prohibited from using the most economical technical solution. Too loose terms may lead to
proposals that diverge significantly from each other and are hard to compare and rank. A
strategy for dealing with this dilemma is to focus on defining the technical outputs expected
rather than dictating the inputs to be employed, thus allowing the bidders some reasonable
latitude to determine the most efficient way to achieve outputs.
The technical terms of reference enable bidders to understand required outputs, quantify
necessary investment, and estimate resulting operating performance.
Below are two samples, Boxes 10 and 11, of the type of specifications that might be con-
tained in the technical portion of a request for proposals:
Box10:ExampleofPerformanceSpecificationsinRailwayPPPs
PerformanceSpecifications–RailwayPPPs
Key technical specifications to be detailed in a railway PPP might include:
Availabilityofservice:
• Stations: locations, opening hours, passenger throughout
Trains:
• Journey time, frequency, passenger capacity
System:
• reliability, safety, degraded mode operation
Ambience–qualityofjourney:
• Quality of finishes, seat/standing ratio, lifts and escalators, customer information, fare
collection
Capability:
• system architecture, external interfaces
Transfer:
• return conditions, maintenance manuals and records, final years issues
Source: Dr. Higton, Nick. Os|nç  |0b||c  |r|vate  |artners||p  to  |e||ver  S0ccessf0|  |a||  |rojects. Ove Arup &
Partners Ltd.
5 Public–Private Partnership Handbook
6.3 InstitutionalStructuresandCapacityBuilding
When restructuring sector roles is part of the PPP process, the private sector is engaged to un-
dertake activities that were in the public domain and the public sector becomes a regulator or
monitor, playing a limited role in actual service provision, if any. Most countries initially lack the
institutions and institutional capacity required to organize, manage, and implement a PPP process.
Existing institutions need to build capacity to be able to take on new roles and new institutions
often have to be created. Some key institutional arrangements used to support PPP are:
• PPP units,
• project implementation office/project implementation unit, and
• technical assistance.
6.3.1 PPPUnit
A PPP unit is established as a point of coordination, quality control, accountability, and
information related to PPPs either within a single sector or across a range of sectors. These
units are created as a new agency or within a ministry such as the finance ministry, which
is seen to be at arms’ length from the sector to be reformed. For private proponents, the
units provide transparency and consistency. For public stakeholders and the public at large,
the units are able to disseminate information and provide specialized management of a
specialized process. (See Box 1 for PPP units in Australia and the Philippines.)
Box11:ExampleofPerformanceSpecificationsinWaterPPPs
PerformanceSpecifications–WaterServicePPPs
Key technical specifications to be detailed in a water and sanitation PPP might include:
CoverageTargets:
• Number of new direct household connections, or the percentage of households to be
connected
• Percentage of roads with tertiary pipes
• Geographic area to be served through direct connections, kiosks, standpipes, or other
nonpiped delivery systems (for water services), and public latrines or other improved
sanitation options (for sanitation services).
QualityStandards:
• Availability of service
• Pressure
• Water quality
• Effluent treatment
• Customer service
Source: World Bank and PPIAF. 006. Approac|es to |r|vate |art|c|pat|on |n Water. A 1oo|||t.
Introduction  5J PPP Preparatory Work 5
Box12:Public–PrivatePartnership(PPP)UnitsinAustraliaand
thePhilippines
Australia—StateofVictoria
State governments in Australia are mainly responsible for most infrastructure sectors. In
the State of Victoria, individual government departments are ultimately responsible for
concession design and award. Project responsibility is assigned to a single minister in each
case. This minister is then responsible for facilitating consultation with the other govern-
ment departments involved in the project. The minister will also work with the Department
of Treasury and Finance. To guide and promote consistency in analysis and procedures,
the Victorian government has formulated an Infrastructure Investment Policy for Victoria,
a description of which was published in June 199 by the Department of Treasury and
Finance. That department also acts as a reference center when guidance is required by
other government entities.
Source: www.treasury.vic.gov.au/
TheBOTCenterofthePhilippines
The Government of the Philippines created an institutional structure to support the coun-
try’s large private infrastructure program. Each sectoral agency has a specialist build–oper-
ate–transfer (BOT) unit responsible for coordinating the design and implementation of its
projects. National, provincial, and municipal authorities select and award projects under the
framework. The authorities prepare a list of priority projects, which must be approved by
either the Investment Coordination Committee of the National Economic and Development
Authority (NEDA), the NEDA Board, or by local or regional councils. As part of its program,
the government created a BOT Center to perform the following tasks:
• Keeping an updated national inventory of all nominated projects eligible for develop-
ment under the BOT framework,
• Providing general advice to foreign investors doing business in the Philippines,
• Developing infrastructure projects,
• Providing technical assistance and training to central and local government officials on
the design and implementation of projects, and
• Spearheading promotional activities for the Philippine BOT program and specific projects
through brochures and road shows.
Initially, the Center was mainly involved in marketing the BOT concept to private investors.
It now spends more time training national and local government officials.
Source: www.botcenter.gov.ph/
5 Public–Private Partnership Handbook
The units serve to ensure that the key stakeholders relevant to a PPP adhere to a consistent
methodology and agreed guidelines:
• project identification and prioritization,
• encouraging competition,
• due diligence of opportunities,
• adherence to transparent bidding processes,
• ensuring the appropriate treatment of employees and government assets, and
• ensuring the most effective use of government resources.
PPP units have typically focused on the identification, development, and bidding of projects.
However, focus is increasing on the potential role units may play in the oversight of a
contract once launched. This may include ensuring that the proper systems are in place for
monitoring and reporting.
There is also increased attention to the structure and location of these units. Specifically,
the units should command the right level of authority and should be led by a well-respected
and competent executive. Further, there is increased support for the establishment of these
units as akin to project developers with a pay structure that is linked to successful transac-
tions. The units need not be large; in fact, large units can be seen to undermine the intent
of PPPs to promote efficiency. The units often require initial or ongoing technical assistance
from PPP specialists.
A final consideration is of the links between the PPP unit and the line ministries and, possibly,
other levels of government. PPP activity may occur on a national or subnational level and the
location of the PPP units should correlate to the market activity.
There must also be coordination with the sector ministry associated with a particular PPP,
particularly the project implementation unit (PIU).
6.3.2 ProjectImplementationUnit
A PIU is a vehicle to plan and implement a project or projects. At times, it is linked with a
line ministry, but it can also be quasi-independent of the ministry. Most PIUs are established
to support large capital investment projects (typically donor-funded) and the life span of the
PIU is linked with the project life cycle. The precise structure and role of a PIU will depend
on the requirements of the funding agency and the executing agency, the type of project,
and the local context.
PIUs have been used as a vehicle to dedicate staff to important projects. They are staffed
with internal government staff, with external resources or a mixture of both. Recent analysis
Introduction  55
has questioned whether PIUs have been effective in the broader development of project
management capacity within governments, particularly when staffing is external.
The advantages to developing a PIU are the creation of a central point of accountability and
management. The PIU typically monitors and reports on project progress, performs financial
management and accounting, and handles project procurement.
Where both PIU and PPP units exist, close and regular coordination is needed.
6.3.3 TechnicalAssistance
Unless the government is deeply experienced in contracting PPPs, there will be occasion
to hire transaction advisors and/or specialist advisors such as lawyers, financial analysts,
financiers, economists, sociologists, and sector specialists to support the government. These
advisors can be procured as a team or recruited individually, in which case coordination
among the team members should be ensured. Advisors will pay an important role in main-
taining momentum, developing strategies for government consideration, helping develop
public messages and information, performing analysis of PPP options, and supporting the
bidding and negotiation processes.
The specialist advisors should be brought into the process early and should be paired with
government counterparts. As PPP is considered, government should be identifying potential
local counterpart staff, developing a PPP unit or PIU, and should be training staff to take
on new responsibilities. The local capacity building should be supported through working
relationships with any advisor.
Ideally, technical advisors would continue support through to contract signing and possibly
beyond. The bid and negotiation process involves repeated clarifications and iterations of
the bid documents, often occurring swiftly. The process must be well organized, politically
defensible, and must lead to a good outcome. If external support (financial, legal, and tech-
nical) to the government is not available at this stage, key government officials must have
received training in negotiation and be completely familiar with the content and intent of
the bid package (the contract, bid documents, and bid forms).
Similar technical assistance may also be necessary to build capacity at the entity charged
with monitoring contract compliance and progress targets.
6.4 Commercial,Financial,andEconomicPreparation
In designing and preparing PPP, there must be a process to balance service levels with the
tariff levels, creating a package of price and service which is acceptable to customers and
PPP Preparatory Work 55
56 Public–Private Partnership Handbook
sustainable for the utility. Critical to this analysis is the structure of payments to and revenues
for the private partner, including any subsidies that might be required.
This iterative process will encompass:
• technical analysis—to determine the cost of service;
• market and social research—to determine what people are willing and able to pay for
certain service levels;
• financial analysis and modeling—to determine the cost recovery tariff required to sup-
port the desired coverage targets and service levels; and
• consultation and trade-offs—to agree any transitional subsidies until cost recovery is
achieved or ongoing subsidies, e.g., to low-income customers. If the subsidies are not
available, coverage and service targets may need to be reduced.
As described in section .5, the financial model must be flexible enough to accommodate a
range of variables, allowing for an iterative process between the financial modeling and the
PPP design. A key objective will be to ensure the financial sustainability of the utility through
efficiency gains and through balancing of income and expenses. The financial model is a tool
that helps achieve the right balance of affordability, cost recovery, and investment. The model
will help prioritize investments and inform decisions on who should pay for investments, depend-
ing on the respective cost of capital. Some countries also find it useful to use a public sector
comparator (PSC) model which helps government test whether a private investment proposal
offers value for money compared with the most efficient form of public provision.
In preparing the transaction, three important considerations will be (i) the source of financ-
ing, (ii) the design of the appropriate tariff structure and tariff levels, and (iii) design and
application of subsidies.
6.4.1 ProjectFinancing
Infrastructure PPP’s typically require financing; that is, external funds are required for the initial
investment costs that are recovered over time from future revenue streams. The funds may
be sourced from the public sector or the private sector. Regardless of the source of finance,
such funds have a cost and, therefore, impact the project’s economics and required tariffs
(and thus affordability). Fundamental to the question of project financing is the correlation
between perceived credit risk (resulting from various technical, commercial, and other risks
associated with the project) and the cost of finance.
A government’s cost of funding is typically lower than that of a private operator even of
the same originating country. Providing private financing may therefore increase the finan-
cial costs of PPP. However, the efficiency gains from PPP are expected to outweigh this
Introduction  57
additional cost and result in net savings and efficiency gains, with an ultimate benefit to
consumers. In addition, public sector financing is usually scarce, creating one of the initial
drivers for PPP.
The operator will typically establish a project company for implementing the contract, often
called special purpose vehicle (SPV). The company owners may be a consortium of companies
or a single large company. The company owners will not usually finance all project require-
ments; instead, they will provide a proportion as equity and borrow the remainder of the
required financing from financial institutions or place debt securities in the capital market.
The creditworthiness (“bankability”) of a project depends on a number of factors, some of
which are within the control of the government when designing PPP. They include commer-
cially attractive project design and tariffs (shorter payback and, hence, financing periods) as
well as strong off-take arrangements to reduce market/revenue risk (predictability of cash
flows), together with the level of certainty and transparence of regulatory settings, which
affect future cash flows.
Infrastructure project financing in general, whether from banks or bond markets, faces a
number of challenges including (i) long-term debt maturities to match project cash flows,
(ii) limits to the availability of local currency debt financing to match local currency revenue
steams, (iii) limited available equity and resulting high degree of leverage, and (iv) no secu-
rity/guarantee except for project assets available (“nonrecourse financing”).
As a result, project finance is a specialized activity and, depending on prevailing market
conditions, may or may not be available at any time. To make financing possible or to se-
cure better borrowing rates, the operator may seek credit enhancement through insurance
or guarantees. These might include (partial) credit guarantees (e.g., from the government
itself or from a development finance institution) or political risk guarantees (from insurers
or development finance institution) against the government or regulator not adhering to
agreements (e.g., take-or-pay off-take agreement, concession agreement, etc.).
To determine the amount of debt finance the project can sustain, lenders perform their own
calculations related to project performance and cash flow. These include debt service cover
ratios, loan life coverage ratios, and project life coverage ratios. Project financing requires
a very thorough appraisal process because of the sole reliance on project cash flows. Lend-
ers will undertake due diligence exercises to get comfort that the project assumptions and
risks are reasonable.
It is critical to understand that the bidders may not fully know the prospective financing
arrangements until the last stage of the contracting process. The bidders will have potential
financiers lined up, but the final arrangements and risk allocations will only be put in place
PPP Preparatory Work 57
58 Public–Private Partnership Handbook
when the contract is near certain. At this late stage, the lenders may impose their require-
ments on the project. This creates the risk that a winning bidder fails to complete financing
and may have to withdraw. This highlights the importance of critically assessing the financial
resources and borrowing capacity of potential bidders during prequalification. A useful tool
is the imposition of a bid bond or a deposit payment by the bidder that is forfeited in case
the winning bidder withdraws.
6.4.2 TariffDesign
Tariffs need to balance a number of objectives: (i) stipulated service standard and associated
costs, (ii) customers’ willingness and ability to pay, (iii) resulting cost recovery, (iv) required
economics (return on investment) for private operator, and (v) need for/availability of subsi-
dies. The right combination of factors must be determined through an iterative optimization
process using the project model (see Figure 11).
Cost recovery
Service
Standard
Level (& structure)
of tariffs
Willingness
Ability to pay
Subsidy
Operational Efficiency
Figure11:TheIterativeProcessofDesigningTariffs
Source: Heather Skilling and Nils Janson. 006.
This process is made more complex if differentiated/complex tariff structures (e.g., unit price
as a function of consumption to help low-income users) or tariff adjustment mechanisms
(e.g., for input cost changes, exchange rate changes) are used. It is critical to employ quali-
fied and experienced specialists for this modeling and optimization task.
The following objectives provide an appropriate starting point for designing tariffs:
• cost recovery/return on investment,
• incentives for efficiency,
• fairness and equity, and
• simplicity and comprehensibility.
Introduction  59
Costrecovery/returnoninvestment
The combination of service standards (costs) and tariffs (revenues) determines the com-
mercial viability of a project. Beyond that, the private operator has the chance to improve
the ultimate financial outcome by being particularly efficient in investment and operations.
Therefore, a private operator will only get involved in a project if it sees a fair chance to
make a profit given a predetermined set of service standards and tariffs.
The internal rate of return (IRR) and return on equity (RoE) are the most commonly used
measures to assess the financial attractiveness from a private operator’s perspective (as
described in section .5). A private operator will assess the potential IRR of a project against
its own cost of equity, adjusted for the perceived risk of the project. A private operator may
be willing to accept a lower IRR if some risks are reduced or mitigated through govern-
ment actions or otherwise. Revenues are considered adequate if they enable an operator
to maintain, replace, modernize, and expand its services and assets. (See Box 1 for Chile’s
experience in electricity pricing.)
Incentivesforefficiency
Tariffs should give incentives to private operators and investors to achieve efficiency in operations
(supply-side efficiency) and make necessary and/or desired investments. A “cost-plus” pricing
regime, which guarantees the operator recovery of all costs plus a profit, does not provide an
incentive for efficiency and too low a tariff may not be sufficient to entice new investment.
Prices also need to send the correct signal to customers to use the service with appropriate
economy as a scarce resource (demand management or demand-side efficiency). Price–demand
elasticity should also be taken into account and optimized (e.g., for toll road usage).
Pricing structures should also reflect variations of marginal costs (investment, operation) by
location, customer type, period, etc. This can be achieved by effectively charging different
rates to different customers or by prescribing coverage and service levels and allowing overall
tariffs to cross-subsidize more costly customers.
Fairness
As a starting point for determining fairness, tariffs should reflect costs and different customer
groups/classes should observe tariffs that reflect the cost of supplying them. For example,
people in similar circumstances pay similar amounts or people accepting lower quality of
services should have their bills lowered. However, some services, like water and wastewater
services, are often considered a public service, and no customer should be denied access
to water on the grounds of poverty (see section 6.. on Subsidies). Specific subsidies or
cross-subsidies built into the tariff system can address this situation.
PPP Preparatory Work 59
Box13:ElectricityPricingInChile
Chile's method of electricity pricing is distinctive because of the innovative approach to rate
of return regulation. The price system includes regulated rates for consumers with peak
demand of less than megawatts and freely negotiated rates for the rest. The final price to
regulated consumers has two components: a node price at which distribution companies buy
power from generators and from the transmission grid, and the value-added of distribution.
The value-added of distribution is calculated every years. The procedure involves determin-
ing the costs of an optimally operated firm and setting rates that provide a 10% real return
over the replacement value of assets. These rates are then applied to the real companies to
ensure that the average return falls between rates of return on assets of 6% and 1%. If
the average actual return falls outside this range, the rates are adjusted to reach the upper
or lower limit, depending on whether they fall above or below. The operating costs of the
benchmark "efficient firm" and the replacement value of assets are based on a weighted
average of estimates made by the industry and the regulatory agency.
Source: Kerf, Michel. 1998. |nfrastr0ct0re Concess|ons. A G0|de to 1|e|r |es|çn and Award—|r|vat|zat|on 1oo| 
r|ts. Washington, DC: World Bank.
60 Public–Private Partnership Handbook
Simplicityandcomprehensibility
The objective of simplicity and comprehensibility means that tariffs should be easily ac-
cessible and understandable to employees and consumers of the utility. For example, if a
tariff structure is too complex, customers may not understand the implication of changes
in consumption for their bills or the range of options available to them. However, over sim-
plification may result in incentives being lost or a negative impact on fairness.
Balancingtheobjectives
There is a need to balance these above objectives against one another. For example, the
objective of incentives may conflict with the objective of simplicity at times because on cost
grounds it may make sense to have a very complex tariff structure. A similar conflict could
arise with the fairness objective. There is a further requirement that certain fundamentals
be in place including a definition of a reasonable rate of return, an understanding of how
assets will be valued, and whether any additional returns are to be allowed.
After evaluating these factors and determining the appropriate allocation of risks in PPP, the
initial tariff rates and tariff structure are set in place until an adjustment is warranted.
6.4.3 TariffAdjustments
To expect one set of tariffs, or even a tariff structure or regime, to remain viable and ap-
propriate over the typical life of a PPP project is unrealistic. It is therefore essential to define
practical rules for adjustments. This requires defining:
• The triggers or drivers for a price adjustment, such as changes in raw material prices
(such as oil prices for power), inflation, and exchange rate fluctuations (where the
operator had to assume unhedged foreign currency exposure);
• The mechanisms by which the adjustment will be made, including cost plus and price-
cap regulation; and
• The frequency of adjustments including cost pass-throughs, tariff indexation, tariff
resets, and extraordinary tariff adjustments.
Mechanisms
There is a difference between the regulatory requirements of utilities, such as waste manage-
ment, electricity, water, and telecommunications, and other forms of public infrastructure,
such as roads.
Introduction  6´
Tariff adjustment mechanisms for utilities are discussed below within two basic categories:
cost-plus mechanisms and price-cap mechanisms.
Costp|0s or rate of ret0rn mechanisms permit regulated firms to pass all operating expenses
and capital costs on to the consumer, including an after-tax return on investment. Under
this system, there is no adjustment unless the operator applies to the regulatory authority
and requests a review and reset.
The regulator reviews the operator’s overall cost base in response to any proposal that higher
(or lower) prices are needed to cover their full costs. In theory, this approach provides the
best match of prices to incurred costs, but delivers weaker incentives for efficient operation
and development since the recovery of a rate of return is assured.
Cost-plus regulation has the potential to encourage firms to inflate operating costs, rather
than pursue efficiency. It nevertheless has a strong element of certainty from an investment
perspective, which may mitigate risk.
|even0e or pr|cecap reç0|at|on, on the other hand, provides a more direct incentive for
efficiency. Revenue or price caps are put in place to control the quantum of revenue over
a period or specific prices, but the firms are given leeway to increase earnings through
performance improvements. Under this mechanism, a firm can change its price level and
its tariff structure according to an index that typically includes an inflation measure and a
“productivity offset” (commonly called the X factor). This approach may provide a stronger
incentive to improve efficiency and reveals the true costs of providing services.
The choices of regulatory approach is driven by many factors, including the economic exper-
tise available, the accounting and auditing system, investment requirements of a sector, and
motivation for efficiency. During the early stages of development when regulatory capacity is
being developed, price caps may be a better choice. Prices can be set high enough to attract
capital. At a more mature stage of regulation, cost-plus mechanisms might be appropriate
to attract large-scale investment.
Many regulatory systems encompass aspects of revenue or price-cap and cost-plus mechanisms
in a hybrid, tailored approach, as well as methodological approaches to sector-specific issues.
Nevertheless, the form of regulatory system should be subject to detailed analysis and
consideration, which takes account of country, sector, industry, and infrastructure capital
investment profiles.
PPP Preparatory Work 61
6 Public–Private Partnership Handbook
Regulation of nonutility infrastructure PPPs takes a slightly different form and is typically articu-
lated through the PPP contract. Under an infrastructure PPP, the fundamental goal of regulation
is to allocate risks rationally and maintain stability between risk and expected return.
FrequencyofAdjustments
There are different procedures for enacting adjustments in tariffs. In some cases, there is
agreement that the costs of certain inputs (energy, for instance, or bulk water) are to be
immediately reflected, passed-through, in the tariff charged to and collected from consum-
ers. In this way, the risk of the input price increase is immediately passed on to consumers.
Other pass-throughs might include a change in tax rates, or a change in the quality standards
imposed by government. The mechanism is appropriate when the service provider has no
control over the input. The pass-through may reduce the service provider’s incentive to use
the input more efficiently, yet the provider is also wary of increasing tariffs beyond what
consumers are willing and able to pay.
Tariff indexation. This mechanism is similar to a cost pass-through but uses a different
tool to make the adjustment. Rather than the actual costs of the service, the tariffs are
adjusted to reflect a change in an index of prices (such as the consumer price index), on a
regular timetable. While indexation may protect the provider from price increases that are
predictable and within normal limits, the provider is still vulnerable to changes outside the
norm or outside the index. In some cases, the indexation formula is based on a basket of
prices most relevant to the service being provided.
Tariffresetorperiodictariffadjustment. A more tailored mechanism for adjusting tariffs
is the tariff reset. For a long-term PPP, an indexation or pass-through will likely be insufficient
to accommodate all sector changes over the life of the contract. Therefore, the rules for
tariff resets are defined before PPP is implemented and will be a topic of discussion among
all parties relevant to the discussion of allocating risk.
The discussion of tariff resets has to cover:
• the objectives of the reset,
• the methodology for the reset, and
• triggers for a review and potential reset.
The objectives of the adjustment can include allowing a reasonable rate of return to the
operator, encouraging efficiency through a rate of return, or restoring the financial position
of the operator who has confronted an unanticipated (and uncontrollable) change in the
operating environment such as an exchange rate change.
Introduction  6J
Depending on the objective of the reset, different methodologies may be used. For instance,
there might be an attempt to determine what the most efficient operating costs would be
through benchmarking or obtaining expert advice. If the reset is to restore financial standing
to the operator, only key cost variables may require review.
Such a tariff adjustment might be triggered by a request for a review or by a specified event. Typi-
cally, these adjustments are allowed on a predetermined periodic basis, such as every 5 years.
In some cases, highly unusual circumstances such as strife or bankruptcy might trigger an
extraordinary price review.
6.4.4 SubsidyDesign
Government subsidies can be used to make a project commercially viable from the perspec-
tive of the private operator even if the desired combination of service and tariff levels does
not result in sufficient cost recovery. This will only make sense if the aggregate cost to the
government under PPP (including subsidy) is lower than the cost to the government of
operating the service fully under the public sector or the cost of not providing the service
at the required service levels.
Government subsidies can be “general”, i.e., applying to the overall project, or “specific”, in
which case they are tied to service provision to deserving (low-income) consumer segments.
Some subsidies are designed as community service obligations and mandated in regulatory or
license standards or paid for by direct and indirect public sector transfers to beneficiaries.
Cross-subsidies do not involve government payments but are a compensation mechanism
built into the tariff structure. They serve as a means of reducing average tariff charged to
one group of customers by increasing the average tariff charged to another group of cus-
tomers. The most common forms of cross-subsidies include subsidies from nonhousehold to
household customers, and subsidies from high-volume customers to low-volume customers,
through rising block tariff structures. Subsidies can be established for access (connection
charges) or for consumption.
Governments typically provide subsidies to reduce tariff levels for the purposes of helping
the poor, addressing public health issues, addressing environmental issues, and/or because
of political constraints on raising tariffs.
In many cases, the subsidy is already effectively in place before PPP, though hidden. To
the degree that unprofitable service activities are provided by a public sector institution
are loss making, they are reliant on budget support, essentially a public subsidy. As such,
implementing an efficient PPP with short- or medium-term subsidies may still result in a net
PPP Preparatory Work 6
6 Public–Private Partnership Handbook
improvement relative to the status quo. However, the subsidies enhance the overall value
of the project and do not remove incentives for efficiency or serve to perpetuate services
of limited value.
Different types of subsidies can be used to address different issues. Options are cash subsidies,
including output-based aid, unremunerated bearing by the government of business risks,
cheap capital, and in-kind grants and tax exemptions. Each of these options is described
further below.
Cashsubsidies,includingoutput-basedaid
Cash subsidies involve cash payments by the government to the private operator or project
company. Payments may be made to cover a portion of investments or can be related to
service delivery. Clearly, subsidies should be designed to ensure that the private operator has
an incentive to achieve the desired public policy outcome. This is not always easy as subsidies
may create perverse incentives for inefficient operations or other undesirable outcomes.
Where there are political constraints to increasing tariffs, a general cash subsidy could be
paid to the private service provider to reduce the average tariff required from customers to
cover the utility’s operating expenses. In this case, setting the size of the subsidy in advance
is essential. Not doing so will ensure that the private operator has little incentive to minimize
operating expenses. In setting the size of the subsidy in advance, provision might be made
for a gradual phasing out of the subsidy, through annual reductions in its size, as operating
efficiencies are realized and tariff increases are phased in.
Where the rationale for the subsidy is to increase service coverage, rather than cushion the
impact of increased tariffs, it may be more appropriate to link payment of the subsidy to
an indicator, such as the number of new connections.
A fixed subsidy for each new connection, however, might be expected to provide the opera-
tor with an incentive to connect those premises, which would maximize the sum of expected
revenues, less connection costs. Such a structure may limit the incentive to connect the poorest
households. An alternative would be to subsidize the cost of new connections only in certain
areas, such as in areas where poor households are concentrated.
Cheapcapital
This refers to a reduction in the required rate of return on equity or a lowering of the ef-
fective cost of borrowing for the private operator. Governments can subsidize the cost of
debt to a utility by lending it money at concessional rates (i.e., below its own debt servicing
costs). Subsequent write-offs of these loans by government may represent a further subsidy
Introduction  65
to a utility although this is likely to cause significant problems later when further borrowing
may be required. Governments may also subsidize the cost of debt to the utility by provid-
ing guarantees or by taking responsibility for exchange rate risk, which can be a significant
cost to utilities in developing countries.
In-kindgrantsandtaxexemptions
Governments may also provide subsidies to privately operated utilities through in-kind grants
and tax exemptions. In-kind grants may take a variety of forms, such as water abstraction
rights, which would otherwise be subject to some form of charging regime, or land grants.
Tax exemptions are commonly applied to publicly operated utilities and these may be ex-
tended once the utility is privately operated.
Again, these subsidies are not targeted to service delivery outcomes or to those custom-
ers most in need of assistance. As a result, there will be a leakage of benefits to nonpoor
households, assuming that these benefits are passed on to customers and are not captured
by the operator itself in the form of offsetting cost increases.
In case subsidies are necessary, these forms of subsidy should be evaluated by making
comparable estimates of the benefits and costs of each subsidy and assessing how well
they achieve their stated objectives, such as targeting the poor.
6.5 LaborConsiderations
Public sector workers often oppose projected PPP arrangements. There should be early and
constant dialogue among the government, the labor unions, and public employees to set
out the objectives and strategy for PPP. Information on worker issues should be proactively
shared to allay speculation and unfounded concerns. Workers need to be dealt with fairly
and either provided with employment opportunities in the new company or given accept-
able severance packages.
In working through the labor issues associated with PPP, a legal review is critical. This includes
public service acts and regulations, laws specific to the sector and the enterprise, collective
bargaining agreements, and any precedents in other sectors.
For employees and unions, the key issues will be:
Redundanciesorseverancepayments. This would include the terms under which employees
would be laid off and the opportunity to join a new company if one is being created. Public
service employees should be advised whether they are to be transferred to any new entity
(and thus, potentially ineligible for severance), whether all employees are eligible for severance
PPP Preparatory Work 65
66 Public–Private Partnership Handbook
and possible rehiring, or whether only certain employees will be eligible for severance and/or
opportunity with the new company.
Termsofemploymentwithanewcompany. Employees will need to know the employ-
ment terms, including salary, reporting lines, benefits, security of tenure, and whether
accrued pensions and benefits will be transferred.
Retraining. Whether an employee is severed or retained, there will be questions about
training opportunities being offered. As soon as possible, an explicit program to retrain
severed workers, allow for spin off of certain functions, and/or improve the capacity of
retained staff should be implemented.
The way in which worker issues are handled depends almost entirely on local labor law and
local precedent. There should be an attempt to clarify, early in the process, what the law
does and does not provide for. Otherwise, speculation will be considerable. Workers should
be represented in the process as soon as possible and information should be proactively dis-
seminated.
6.6 IncludingLocalPartners
From the government’s perspective, including local private and public partners in the PPP proc-
ess as much as possible is generally desirable. There are a variety of ways to achieve this:
• Localprivatepartners. Local companies are often qualified to be the private partner in
PPPs and to develop, improve, and operate infrastructure. Contracts with local partners
can range from service contracts to BOTs and may apply to big and small projects. Lo-
cal partners may be particularly effective for smaller, localized projects, e.g., to reach
small towns and peri-urban areas, which demonstrate a viable market, but which are
remote from the core infrastructure. Competent utilities or construction firms may enter
into competitive tenders to perform discrete services or to construct new facilities. To
encourage and regulate local participation, government should predetermine a policy
on the inclusion of local companies, ensuring against unfair access to procurement
officials, safeguarding against corruption, and setting appropriate and realistic evalua-
tion criteria to enable local companies to compete, while assuring appropriate project
quality.
• Localsubcontractors. In sectors such as water and energy where small-scale service
providers are prevalent and necessary to fill gaps in the service provided by the dominant
utility at least for the short to medium term, PPP partners may be encouraged to integrate
such providers into their strategies. This would not replace intentions to ultimately provide
service through formal arrangements, but would prevent the PPP from displacing small-
scale providers until such time as replacement services are available.
Introduction  67
• Localgovernmentunits. Many joint venture arrangements include municipal or other
local public partners. This can be an effective way to bring government decision mak-
ers and local stakeholders into corporate governance of the company, transforming
their role into one of ownership. There are also conflicts of interest possible in such
arrangements, which need to be recognized and mitigated against.
6.7 StakeholderInvolvement
The early involvement of all stakeholders in the PPP process helps develop an enabling
environment. The stakeholders provide valuable information on the points of concern, the
performance expectations, and potential risks. This input is also critical to assess whether
key business assumptions of the proposed PPP (in particular tariffs/fees) are realistic and
enforceable. Avoiding consultation invites the risk of later opposition, which slows or derails
the process. Ongoing consultation with stakeholders is important at every stage.
Consultation with potential bidders and partners is also critical to ensure that the proposed
PPP design meets their requirements. Otherwise, there is a risk that the PPP design includes
an unrealistic combination of (politically) desirable features (high-level service, low prices, no
redundancies, no subsidies, and short concession periods) that will make the project unat-
tractive to bidders or unsustainable. Collecting informal feedback from the market during
the preparation stage is therefore critical. More formal consultations can take place during
project implementation as described in section 7.1.
PPP Preparatory Work 67
Introduction  69
7 ImplementingPPPs
This chapter discusses some key activities related to implementing PPPs. The discussion fo-
cuses on the bid package, the contract, the procurement evaluation and process, and the
award and negotiation. Not every stage of the procurement process is described in detail;
highlights are discussed and more information is available through the resource materials
listed in chapter 10. The PPP Project Sequence is outlined in Figure (see page 15). Note
that not all steps are strictly sequential, but have a degree of overlap.
7.1 CollectingFeedbackfromPotentialBidders
Once PPP has been structured and the preparatory work is underway, the transaction man-
ager, responsible for ensuring that the process runs smoothly, transparently, and timely,
should be in place.
During the transaction stages, it is important to have more formal interaction with potential
bidders on the specifics of the transaction as designed. During these interactions, the govern- During these interactions, the govern-
ment needs to guard against potential manipulation of the PPP design and process by the
bidder to its advantage. Likewise, bidders should not enjoy any advantage (e.g., additional
information) in the bidding process through such consultations. Discussions must avoid
any bias toward a particular bidder and should be broadly held with sector stakeholders as
well. The government may find it useful to be supported by PPP advisors in its interactions
with potential bidders.
Two specific points of interaction with the potential bidders are:
Bidconference.During the bid conference, the government presents an outline of the project
and bidders are invited to react and question. However, in a formal setting surrounded by
competitors, some bidders may withhold concerns, be unwilling to share good ideas, or
may collude with other bidders to push for a particular change.
Bid document consultation. Alternatively (or in addition to a bid conference), bidders
may be invited to individually comment on the draft bidding documents, including the draft
contract. This approach allows the government to identify issues of concern across the range
of bidders. Government should send each bidder a full set of the responses to all questions
raised, thus avoiding any semblance of favoritism.
A bidder will expect to have a clear understanding of the time line, the sequence of activities,
the decision points, and the decision makers. This information should be given to bidders in
70 Public–Private Partnership Handbook
writing and should be regularly reviewed and reconfirmed. This clarity is necessary to provide
bidders with a sense of confidence in the transparency and reliability of the process.
7.2 NotificationandPrequalification
The bid package, contracts, and any marketing documents as well as protocols for com-
municating with the public and potential bidders need to be developed. The starting point
in the actual procurement process is the public notification of the opportunity and the
prequalification of bidders. As seen in section 7., different procurement methods entail
different activities, but a prequalification process is common to many PPPs.
Under this process, an official notification is placed in local and international print and elec-
tronic media, advising the public of an opportunity to participate in the project. The content
of the advertisement depends on applicable procurement rules. Companies are invited to
request a prequalification package and seek access to further information.
An important aspect of information dissemination is the establishment of a data room (see
Box 1 for a sample index). Prequalified bidders are invited to use this centralized repository
of all information related to the PPP project, which is to be available to potential bidders. The
information should be organized according to topics and as detailed, and granted equally and
fairly to bidders. During a transaction, the room will be staffed by an attendant and bidders
must sign and submit to data room rules (e.g., regarding access times, making photocopies,
using other technical equipment, etc.). The amount of time and effort required to populate
a data room should not be underestimated. Although the accuracy and completeness of
the data in the data room are normally not guaranteed, the process organizers and the
government nevertheless need to ensure that the data are not false or misleading. Bidders
typically apply a degree of skepticism to the veracity of the data; nevertheless, they will
question the seriousness of the process if very little data are available.
Prequalification ensures that only bidders with the minimum required expertise and financial
strength are able to bid for the opportunity. This saves the government from the need to elimi-
nate more rigorously from an overly large pool of bidders later in the process. It also encourages
bidders that they will be included among a smaller number of equally capable competitors.
The prequalification documents usually contain:
• project information, such as the key characteristics of the project and the operating
context (such as an information memorandum);
• instructions to bidders outlining the anticipated bid process and evaluation criteria; and
• a list of the documents required of the prospective bidders to demonstrate their suit-
ability for the project.
Introduction  7´ Implementing PPPs 71
General
I.1 Economic Data (time series)
I.1.a Gross domestic product
(per capita)
I.1.b Inflation index
I.1.c Wholesale price index
I.1.d Real and nominal interest
rates
I.1.e Census or population data
and growth Rates
I. Institutional
I..a Annual reports (time series)
I..b Donor and consultants’
reports
I. Geographical
I..a Map of country
I..b Maps of service areas
LegislationandRegulations
II.1 National
II.1.a Constitution
II.1.b Civil Law
II.1.c Public Health Ordinance
II.1.d Food and Drug Act
II.1.e Planning Act
II.1.f Lands Act
II. Resources Management
II..a Environmental Protection Act
II..b Others
II. Corporate/Commercial
II..a Companies Act
II..b Income Tax Act
II. Infrastructure Specific
Box14:SampleDataRoomIndex
CommercialContracts
III.1 Outsourcing Agreements
HumanResources
IV.1 Staff Breakdown Chart by Region
and Function
IV. Current Staff Salary Levels
IV. Collective Bargaining Agreements
EngineeringandTechnicalDocuments
V.1 Operations and Maintenance
V. Investment Programs
V. Demand
V. Fixed Assets & Technical Audits
V.5 System Files and Drawings
V.6 Others
Financial
VI.1 Financial Statements
VI. Budgets
VI. Debt
VI..a Profile of loans/grants
VI..b Loan disbursements,
repayments,
and interest
VI. Commercial
VI..a Billings
VI..b Collections
VI..c Breakdown of consumers by
category
Tariffs
VIl.1 Approved Tariff Structure
VIl.. Tariff Adjustment Proposals
SpecialMatters
Vlll Subsidies, Community Service
Obligations, etc.
In response, the prospective bidders submit information including:
• legal status of bidding entity;
• experience on comparable projects (including any relevant subcategories in terms of
size of project, region, particular expertise);
• financial status/resources of bidder;
• ability to raise financing; and
• staff and resources to be directed toward the project.
Source: Kathleen Booth and Heather Skilling. 007.
7 Public–Private Partnership Handbook
A predetermined scoring matrix should facilitate assessment of the prequalification applica-
tions. The matrix sets out each criterion to be scored, the score assigned to each, and the
respective weighting. The matrix can include special criteria such as expertise in servicing
low-income customers or may prioritize local bidders if desired. It is important to be realistic
about the potential pool of bidders and set the threshold sufficiently high to discourage
nonserious or unqualified bidders, while maintaining a pool of bidders large enough for ef-
fective competition. The prequalification results in a short list of bidders invited to respond
to the bidding package. Generally, a short list of between and 5 companies is a manage-
able and competitive size.
7.3 DefiningtheProcurementProcess
Some initial decisions need to be made regarding the procurement and the bid evaluation
process. The choice of procurement method will depend on the government’s budget,
capacity, desire to encourage innovation, need for high-level inputs, vulnerability to corrup-
tion, and objectives of the PPP project. Three main options, distinguished by the level of
competition they create, are available: (i) unsolicited proposals or direct negotiations (“sole
sourcing”), (ii) competitive negotiations, and (iii) competitive bidding.
7.3.1 UnsolicitedProposalsorDirectNegotiations
When confronted with an unsolicited proposal, the government has three options:
• direct negotiations to the offeror;
• purchase the project concept then competitively tender among a range of bidders;
or
• offer original proponent a predefined advantage in recognition of the value of the
original proposal (bonus system) and open-up bidding.
Entering into a sole-source process can save government time and money and may alert
government to an unrealized opportunity for PPP. However, sole sourcing can encourage
corruption through lack of transparency, and the cost benefits to competitive bidding are
lost. Government has to be confident of its negotiation skills and its information to ensure
that a sole-source deal is advantageous.
The government needs to ascertain that procurement laws and/or rules permit it to award
such a contract based on direct negotiations. There is also an elevated risk that the fairness
of the contract award will be challenged at a later stage, e.g., by disappointed potential
bidders or by the political opposition. As such, a strategy of direct negotiations could be
considered politically risky. Box 15 shows the strategy for dealing with unsolicited proposals
in the Philippines.
Introduction  7J
7.3.2 CompetitiveNegotiations
Competitive negotiations entail inviting a small group of bidders to a structured negotiation.
The bidders are aware of the presence of other bidders and there is pressure to obtain the
best price. This arrangement is quicker and less expensive than full competitive process and
can yield good prices. The selection of bidders to participate can be nontransparent and may
not yield the best bidder pool. There is also an elevated risk of corruption. A time-consuming
procurement process may be seen as an opportunity cost to the private sector. This needs
to be weighed against the degree of and value to transparency.
7.3.3 CompetitiveBidding
Most governments have rules requiring some form of competitive bidding for procuring
any private sector good or service. In addition, most international lending institutions and
assistance organizations require the use of competitive bidding procedures as a condition of
any associated loan or technical assistance. Competition is expected to provide transparency
in the process and avoid corruption, and provide a mechanism for selecting the best-value
proposal based on criteria set.
Implementing PPPs 7
Box15:UnsolicitedProposals
Under the Philippines’ Build–Operate–Transfer (BOT) Law, national or local authorities were
able to accept unsolicited proposals for BOT projects on a negotiated basis if:
• The project involves a new concept or technology and is not already listed in the roster
of priority projects identified by the government.
• No direct government guarantee, subsidy, or equity is required.
• The project is submitted to a price test or “Swiss challenge” from competitors.
The price test works as follows: the agency awarding the project must invite comparative
proposals to any unsolicited proposal it has received. The invitation to tender must be pub-
lished in a newspaper of general circulation for at least weeks. The published invitation must
inform potential bidders where to obtain tender documents; however, proprietary information
contained in the original proposal is confidential and may not be disclosed in the tender docu-
ments. Competitors have 60 days to submit competitive proposals. If a lower-priced proposal
is received, the original proponent has 0 days to match it and win the contract. Otherwise,
the award goes to the lower bidder. This challenge has been used, for example, in the case
of a New Zealand developer who submitted a proposal to the National Power Corporation to
rehabilitate and maintain a 50-megawatt hydro plant, challenging an unsolicited proposal
by an Argentine company.
Source: Republic of the Philippines. 199.
7 Public–Private Partnership Handbook
Of course, the advantages of competition are seen only if there is sufficient interest to
generate multiple bidders. A failed auction is highly visible and an embarrassment to the
government—another reason careful preparation is important.
The typical competitive bid process has the following activities:
• Public notification of tender
• Contacting/marketing to potential bidders
– preliminary information memorandum
– road show
– pre-bid conference
– bid document consultation
• Preselection
• Shortlisting or Prequalification
• Tendering
– selection of bid and evaluation process
– distribution of bid documents and draft contract
– interactions with bidders
– evaluation and selection
– negotiations and award
• Transition
– transition/handover strategy
– worker rights and payments.
The competitive bid process can either be one stage or two stages. In the single-stage
process, technical and financial bids are submitted simultaneously in response to a request
for proposals. In the two-stage process, a technical response is submitted first and com-
ments are provided. In the second stage, a revised technical bid is submitted together with
a financial bid.
Communication between the public and private sectors may be strictly limited or a degree
of open (although structured) communication may be important to the success of a large-
scale PPP.
Competitive bidding for basic operation, maintenance, and service contracts can be relatively
straightforward as the scope of services is readily defined and often quantifiable. More
complex PPPs like BOTs, concessions, and joint ventures are more challenging procurement
processes because both the starting information and the result are often unclear. The typical
information gaps, the length of time over which the contract is implemented, and the range
of externalities all conspire to make it difficult to set finite targets and predict outcomes.
Introduction  75
An example of a competitive bidding was the construction of Sydney’s Orbital Motorway,
see Box 16.
7.4 DefiningtheBidEvaluationProcess
7.4.1 InitialDecisions
The evaluation process and criteria should be transparent. Transparency is achieved by supplying
as much information about the process as possible, and by drawing up procedures that explicitly
ensure that all parties are treated equally. Nevertheless, confidentiality during a bid process is
also needed so as not to compromise the legitimate commercial interests of the parties.
Bids are typically evaluated in two broad categories: technical and financial. The relative
importance of each should reflect the importance in achieving the specified objectives. The
project objectives, project design, information in the bid documents, and evaluation criteria
should also be consistent.
A first decision point is whether the technical evaluation will be on a pass–fail basis (with the
deciding evaluation reserved for the financial) or whether both the technical and financial
information will be evaluated and assigned weighted scores:
• Decision 1: Weighted technical and financial or pass/fail technical?
– If weighted, what will the weights be?
– If pass/fail, what will the minimum qualifying technical score be?
• Decision : How to divide points between technical categories and subcategories.
Box16:M7SydneyOrbitalMotorway(Australia)
The M7 Motorway is a 0-kilometer (km) toll road that circulates western Sydney and intercon-
nects a number of other motorways and major roads. As a public–private partnership (PPP),
its development involved three tiers of government (federal, state, and local), together with
extensive community consultation and a competitive bid process against specified design
criteria. A specific agency, the Roads and Traffic Authority, managed the PPP process.
The road was constructed and is operated on a -year concession by a consortium which
includes Transurban, Macquarie Infrastructure Group, and Leightons Holdings. Following
the concession period, the motorway reverts ownership to the Government. The $.-billion
project was delivered 8 months ahead of schedule and incorporates full electronic tolling
technology. A parallel 0-km pedestrian and cycling facility was also constructed as part of
the development. The motorway project included full environmental impact assessment as
well as defined criteria for safety and maintenace performance.
Source: www.infrastructure.org.au.
Implementing PPPs 75
76 Public–Private Partnership Handbook
The technical and financial responses are presented in separate envelopes to ensure a
discrete evaluation of each component. There are four variations on how the technical
response might be presented:
• Option 1: Contains legal certification and bid bond. These are confirmed, financial
envelopes are opened, and contract awarded to lowest price bid.
• Option : Contains technical and financial information used to substitute prequalifica-
tion. Financial envelopes of surviving bidders are opened, and contract awarded to
lowest price bid.
• Option : Contains technical proposal, which is scored as pass or fail. Passing bidders’
financial envelopes are opened and contract awarded to lowest price bid.
• Option : Contains technical proposal, which is numerically scored. Contract awarded
to best weighted average technical/financial score.
Likewise, there are four typical variations on the possible presentation of the financial
response:
• Option 1: Bids based on price of shares or assets being sold;
• Option : Bids based on up-front payment combined with future concession fees;
• Option : Bids based on future tariff; and
• Option : Bids are for service fee—with or without incentive component.
7.4.2 TechnicalandFinancialEvaluation
Evaluation criteria should be stated up-front on the bid data sheet. The technical evaluation
typically takes into account:

• Quality of the work plan
– services to be provided
– methodology and approach
– meeting performance standards and optimizing incentive compensation
– innovations and improvements
– training
• Quality of staffing plan
– detail of staffing plan
– appropriate experience reflecting required services in staffing plan
– professional qualifications and experience of key staff as shown in curricula vitae.
Introduction  77 Implementing PPPs 77
The financial evaluation is based on:
• Bid prices as readout (currencies, amounts, and modifications or comments)
• Corrections for:
– computational errors
– provisional sums
• Corrected bid price
• Exchange of bids to single currency
• Formula for scoring bids if weighted technical/financial evaluation.
7.5 BidPackage
Depending on the type of contract and the local requirements, a bid package can range
from several volumes of material to a concise document. The elements listed below are the
basic components of a generic bid package:
• Invitationforbids: This is a short (one to two pages) document that provides an over-
view of the opportunity, specifies the deadline for bids to be submitted, and provides
information for bidders to use in obtaining the full-bid package. An invitation for bids
is typically published in relevant national and international journals. The invitation for
bids will be reprinted as part of the bid package.
• Instructiontobidders: This provides general instructions to bidders regarding the opportu-
nity, the content of the bidding documents, preparation and submission of bids, bid opening
and evaluation, the bidder’s conference or pre-bid meeting, and award of contract.
• Biddatasheet: The bid data sheet expands on the information provided in the instruc-
tion to bidders, indicating any special circumstances or conditions that the bidders must
keep in mind. The data sheet also provides the bidders with specific details on where
to submit bids, request clarifications, and who to contact regarding negotiations; the
number of copies of the bid to be submitted; any special instructions regarding certifica-
tions or powers of attorney; the amount of bid security; and the evaluation criteria.
• Draft form of contract: The bid package includes a copy of the draft contract to
provide the bidders an opportunity to comment on or mark up the contract. Such a
process reduces the amount of time required for contract negotiations by ensuring
that bidders agree to the form of contract prior to contract award.
• Sampleformsandprocedures: The package includes standard forms, which may in-
clude but shall not be limited to bid forms and price schedules, a bid security form, form
of contract agreement, performance security forms, and bank guarantee forms.
78 Public–Private Partnership Handbook
In addition to the contents above, and depending on the requirements of any donors involved
in a project, the package may include information on restrictions governing eligibility to bid
on the opportunity and governing procurement using donor funds.
7.6 TheContract
Regardless of the option selected, the essential elements to be included in a contract are:
• The parties to the agreement;
• Interpretation: Sets forth the definitions of important terms and providing guidance
on the interpretation of the contract’s provisions;
• The scope, territorial jurisdiction, and duration of the agreement;
• The objective of the contract;
• Circumstances of commencement, completion, modification, and termination of
contract;
• The rights and obligations of the contractor;
• The rights and obligations of the government;
• The requirement for performance bonds to provide security for government if the
construction and/or the service delivery falls below standards;
• Insurance requirements to provide security for the insurable matters;
• Government warranties;
• Private sector warranties;
• Consequences to a change in law;
• Service quality, and performance and maintenance targets and schedules;
• The identification of regulatory authorities, if any, and the extent of their roles and
authority;
• The responsibilities of the contractor and the government with regard to capital
expenditures;
• The form of remuneration of the contractor and how it will be covered, whether from
fixed fee, fixed fee plus incentives, or another arrangement;
• How key risks will be allocated and managed;
• The contractor’s rights and responsibilities with regard to passing through or entering
public or private property;
• Reporting requirements;
• Procedures for measuring, monitoring, and enforcing performance;
• Procedures for coordinating investment planning;
• Responsibility for environmental liabilities;
• Procedures for resolving disputes;
• Delay provisions describing what is and is not an excuse for a delay in construction or
operations;
• Force majeure conditions and reactions;
Introduction  79
• Procedures to be followed when either party to the PPP contract wishes to change any
material portion (variation) of the contract;
• Indemnification circumstances;
• The rights of each party to any intellectual property brought to the project or created
during the project, including the steps to be taken to protect the intellectual property
of third parties, such as information technology software manufacturers;
• Conflict of interests and dispute resolution;
• Description of the conditions under which either party may terminate the contract, the
processes to be undertaken in that regard, and the consequences to each party of a
termination;
• The circumstances that may permit either the government or any financial institution
to “step in” to the contract to protect its rights under the PPP contract;
• Consequences of a change in the ownership or key personnel of the private partner;
• Mechanisms whereby the parties to the PPP contract will interact with each other going
forward;
• Requirement that each party comply with all laws pertaining to the project, including
obtaining environmental, zoning, planning, and other permits;
• Conditions by which public sector employees are employed by the private sector contractor,
including any restrictions on terminations or redundancies for operational reasons; and
• Conditions precedent: Describes any conditions precedent to be fulfilled by either party
before the contract takes effect.
This list is illustrative and does not capture every clause required in a contract. The final
content of the contract will depend on the project scope, local legal requirements and
precedent, and advice of legal advisors.
7.7 NegotiationsandContractStart
Ideally, the bulk of issues should be sorted out during the bid process. However, negotia-
tions present the last opportunity to work through contractual issues and both sides may
have saved issues to be dealt with at this last stage. The government side is often the less
experienced of the parties at the negotiation table and it is vital that it be supported by
appropriate advisory expertise, a clear negotiating strategy, and a fallback plan (which may
be the second-place bidder).
Only critical personnel should attend negotiations and minutes of the issues covered must be
kept. Negotiations have to be scheduled with sufficient time for preparation, and conducting
negotiations in several rounds may be necessary.
Negotiations should not reopen items previously dealt with or should not undermine the
integrity of the bidding process by deviating from the original proposal.
Implementing PPPs 79
80 Public–Private Partnership Handbook
Part of the negotiations will focus on conditions precedent, i.e., the conditions to be met
by both sides to declare the contract operational. The timetable and process for transition
should also be discussed. These discussions will cover:
• Registration actions such as the legal incorporation or registration of any joint ventures
or project specific companies,
• Payment of bonds and guarantees, and
• Worker transitions
– terminal benefits
– collective bargaining agreements
– transfer of terms of service
– redundancies.
7.8 KeyImplementationIssues
Moving into implementation, several key considerations for the project partners will help
ensure success:
• Stakeholder management during implementation. The need for effective com-
munication with stakeholders does not end with contract award. Instead, the early
stages of a project are a critical time for the winning bidder to establish the trust of
the communities facing development. As the PPP moves into implementation, the
selected bidder should have a well-detailed plan for ongoing communication with the
community, including an appointed liaison.
• Ensuretherightpeopleonbothsidesoftherelationshipareinplace.The key
staff should have the right technical and managerial skills and an established protocol
for working together. Both parties should be well familiar with the details of the contract
and both should strive for an atmosphere of mutual respect.
• Abilitytomanagevariations.The management of PPP contracts requires some flex-
ibility on both sides and a means to adapt the terms of the contract to reflect inevitable
changes in the operating environment that could not have been anticipated or dealt with
in the contract. Contracts should be capable of change (terms, requirements, scope,
etc.) and the relationship should be strong and flexible enough to facilitate it. Good
contract management is not reactive, but aims to proactively anticipate and respond
to the business needs of the future.
Introduction  8´
8 SpecificPro-PoorActivities
inPPPs
The private sector is seen as a potential source of the expertise, efficiency, and capital, which
are required to improve and expand service, but which are often lacking in the public sector.
In many cases, the private sector has been able to successfully partner with public utilities to
the advantage of consumers. However, experience has shown that many private operators
were unable or unwilling to improve or expand services to low-income groups (LIGs), at
least in the short to medium term. The underlying cause is that the private sector may have
little incentive to extend services to low-income areas due to the high cost of providing the
service and low profits due to lack of a payment culture, lack of tenure, low consumption,
and low-cost structures for those customers.
The concerns voiced by consumers, NGOs, and representatives of civil society have translated
into new, targeted approaches to the needs of LIGs within the rubric of PPP structures. The
most explicit of these approaches is a new approach called output-based aid or OBA. However,
there are other ways in which the PPP process and the basic forms of PPP can be approached
from a pro-poor perspective. When this approach is combined with tailored interventions to
alleviate service constraints, PPPs can provide adequate incentives to the private sector, involve
the LIGs, and balance the financial and social risks and rewards to all stakeholders.
8.1 Pro-PoorCharacteristicsofPPPOptions
Reexamining the range of options and any inherent advantages or disadvantages in terms of
service to the poor is important. Then it is possible to consider specific pro-poor interventions
that might be attached to a process. As a component of a reform package, a PPP can be
tailored to address specific reform objectives. The PPP process and contract can therefore
be tailored, more or less, to the requirements of LIGs to the degree desired and feasible.
Serviceandmanagementcontracts
The operator has no responsibility to finance operations orto invest in the system and pay-
ment is not fully tied to the amount of tariff revenue collected. All resources apart from
specific expertise are provided by the public sector, and the operator can only make best
use of those resources provided.
As the operator has no responsibility to invest in the system, these contracts, by their very
nature, cannot require the operator to extend or provide service to low-income areas. How-
8 Public–Private Partnership Handbook
ever, the contracts can require expertise in social issues and in developing and implementing
any funded low-income strategies.
Leaseandaffermagecontracts
It is possible to structure compensation incentives into a lease that encourages providing service
to LIGs within the served area. However, extension of the system into unserved areas remains
with the public sector (or as negotiated) and may not be a priority for either public or private
sector. If the low-income areas fall within the existing service area, the operator may be mo-
tivated to provide service for the sake of increasing tariff revenue or remuneration. However,
these areas may be a lesser priority than other consumer groups within the service area.
Concessions
Concessions provide the operators with an inherent incentive to provide service to as many
customers as possible. Under the compensation scheme of a concession, the operator is
allowed to keep most or all of tariff revenues at an agreed rate (or formula) for a unit of
water. The operator thus is motivated to sell as much water as possible, potentially to LIGs
as well as to others. However, the operator also has an incentive to keep operating costs
as low as possible to maximize the profit margin. The operator will thus seek low-cost ways
to provide service and may be reluctant to expand the network, particularly into areas that
are geographically challenging or where the culture of payment is uncertain.
Related to the compensation issue is the scope of a concession. Under this contract type, the
operator typically has the obligation to finance and operate not only the existing system, but
also any expansion of the system. Relevant to LIGs, the operator would have to determine
through cost-benefit analysis that expansion to unserved areas will generate a sufficient
return on investment. If the government wants a concessionaire to prioritize expansion to
low-income areas, this should be specified in the contract or an incentive should be provided.
Box 17 highlights Peru’s incentives for rural telephony expansion.
8.2 Pro-PoorInterventionsintheContextofPPPs
To encourage the operator to serve LIGs under PPP, it is vital to consider low-cost mechanisms
of providing service, pricing structures that encourage customer payment, low-cost financing
for system extension, and other contract mechanisms relevant to the specific characteristics
of the low-income population.
PPP arrangements might be made more responsive to the requirements of low-income
consumers in many ways. These include both contract provisions or content and changes
in the overall approach to the reform agenda. Specifically:
Introduction  8J
Reformframework
• The policy commitment to LIGs must be clarified and strengthened.
• There needs to be common agreement on which segments of the population constitute
LIGs, as well as which institutional entity is responsible for updating the definition of
LIGs and monitoring their access to service.
• Current data should be collected on LIGs in terms of service, preferences, and access.
These data would be used to inform strategies and coverage targets and set a baseline
for measuring progress. Consultation within the LIG community should be ongoing to
understand current service levels, constraints, and preferences.
• There should be a frank consideration of the role of existing or potential small-scale
providers or informal service providers and the potential to use those providers for the
short to medium term to fill gaps in service until coverage through PPP is expanded.
• The existence of any legal prohibitions against serving informal settlements or to tailor-
ing service standards to the constraints of a community should be reexamined.
Financialconsiderations
• The government’s policy on subsidies should be reexamined in the context of cost
recovery goals under PPP.
• There should be consideration of whether connection fees are a greater disincentive
to network service than the ongoing payments for service. If so, the connection fee
should be reexamined in terms of level and application.
• Mechanisms to facilitate payment, such as prepaid meters, increased paypoints, frequent
billing, and others should be considered.
Box17:IncentivesforRuralTelephonyExpansioninPeru
As an incentive for private telecommunications operators to expand service to rural areas of
the country, the Government of Peru has structured public–private partnership (PPP) arrange-
ments that award a subsidy for pay phones installed in predefined target areas. The program
uses a “least subsidy” approach to achieve the desired results for minimal cost. Operators bid
for the right to provide services to rural areas, and the winning bidder is that who offers to
install the phones for the least subsidy. Payment of the subsidies is linked to performance, with
part paid upon award of the contract, part once the pay phone has been installed, and the
remainder in semiannual installments over the life of the contract, with these payments tied
to the operator’s achievement of key performance indicators. This structure not only provides
incentives to operators to extend service to low-income areas, but places equal priority on the
maintenance of infrastructure and the quality of service to low-income customers.
Source: Cannock, Geoffrey. 001. Telecom Subsidies: Output-Based Contracts for Rural Services in Peru. v|ewpo|nt 
Note No. .Washington, DC: World Bank, Finance, Private Sector, and Infrastructure Network.
Specific Pro-Poor Activities in PPPs 8
8 Public–Private Partnership Handbook
ThePPPcontract
• The contract should include the flexibility to implement the right level of service ap-
propriate to the financial capability of the LIGs, with potential to upgrade.
• Likewise, the technology and construction standards should be appropriate but low
cost.
• The potential for LIGs to contribute in-kind through labor should be considered.
• The contract should allow for partnership or coexistence with small-scale providers or
communities where appropriate to reach a particular LIG.
ThePPPbidprocess
• If bidders were to have obligations in terms of LIG service, they require reliable data
on LIGs and site visits.
• Bidders can be required to present their past experience in serving LIGs and to explain
their present strategy under the PPP contract at hand.
8.3 Output-BasedAidContracts
OBA provides a way in which international financial institutions (such as the Asian Develop-
ment Bank) can directly structure its financing to benefit poor people, even when the service
provider is a private company.
OBA is the use of explicit, performance-based subsidies funded by the donor to complement
or replace user fees.
8
It involves the contracting out of basic service provision to a third
party—such as private companies, NGOs, CBOs, and even public service providers—with sub-
sidy payment tied to the delivery of previously specified outputs. This means that targeted
and valuable subsidies to disadvantaged populations are funded through donor funds. The
private partner, meanwhile, can only recover this funding by achieving specific performance
outcomes. A global multi-trust fund was created in 00, the Global Partnership for Output
Based Aid, to provide increased access to reliable basic infrastructure and social services to
the poor in developing countries through the wider use of OBA approaches (see Box 18
for information).
Generally, OBA schemes finance three types of subsidies:
• Onetime. These would include subsidies for connections with the collected user fees
covering longer-term operation and maintenance costs. These have been the most
common under OBA schemes to date.
• Transitional. Transitional subsidies are used to ease the transition to full cost recovery
tariffs.
Introduction  85
• Ongoing. Ongoing subsidies are linked to a sustainable source of funding such as
general tax revenues, earmarked tax revenues, or explicit cross-subsidies. These subsi-
dies are used to complement the existing funding source. This has been less used and
requires longer disbursement periods.
OBA also transfers risk to the operator in several ways. First, OBA links payment of the
subsidy to performance outcomes, maintaining pressure on the operator to reach agreed
upon service and commercial targets. Second, OBA schemes determine and pay the total
level of subsidy ex post. Thus, the operator runs some risk that payment will not be made
by government as agreed.
Typically, OBA payments relevant to pro-poor service would be linked to outcomes related
to consumption and coverage expansion, but OBA schemes are also applied to BOT projects
that might have an indirect, positive impact on the poor.
For OBA to work, there has to be a process for monitoring and verifying delivery of the
specified outputs, to pay out an accurate subsidy.
Specific Pro-Poor Activities in PPPs 85
Box18:TheGlobalPartnershipforOutput-BasedAid
The Global Partnership on Output-Based Aid (GPOBA) is a multi-donor trust fund created
in 00 and administered by the World Bank, with funding support from the World Bank,
the United Kingdom’s Department for International Development, the International Finance
Corporation, and the Netherlands Government. The goal of GPOBA is to provide increased
access to reliable basic infrastructure and social services to the poor in developing countries
through the wider use of OBA approaches. GPOBA will demonstrate and document OBA
methods of supporting the sustainable delivery of basic services (water, sanitation, electric-
ity, telecommunications, transportation, health, and education) to those least able to afford
them and to those currently without access. Currently, GPOBA funds are eligible to support
the following:
• Funding of output-based payments under OBA schemes to facilitate the piloting of in-
novative, small-scale projects;
• Studies and other inputs to assist in the design, implementation, and evaluation of
particular schemes intended to pilot the application of OBA approaches to the delivery
of eligible services; and
• Publications, workshops, and conferences to help identify and disseminate emerging
knowledge on issues relating to the role and application of OBA approaches.
For more information on OBA, visit the GPOBA website at www.gpoba.org.
Introduction  87
9 FrameworkforMeasuring,
Monitoring,andReporting
onResults
A successful PPP depends in large part on the capacity of the government to keep the
contract on track. This entails setting clear requirements of the partnership, monitoring
the performance of all parties to the contract, reporting on results, and enforcing contract
provisions that are not met.
Different entities are available to support, or to take on full responsibility, for monitoring
progress against the targets specified in a contract. These entities include:
Contractmonitoringunit. In some cases, a separate regulator does not exist or is not re-
quired. In this case, a unit can be developed within government to receive and verify reports
on progress against the contract terms. This unit may be located within the sectoral ministry,
a more independent ministry such as finance, or may be the PPP unit. To accomplish contract
monitoring, the contract has to contain explicit details on the targets, acceptable procedures of
measuring performance results, and the reporting regime. The unit, in addition, has to develop
a procedures manual for verifying performance against the contract and for responding to
any contract deviations. Where incentive payments are to be rendered, the unit should also
have a method for ascertaining the basis for such payments, making payment, and reporting
on and accounting for payments made.
Regulator. Where a regulator is present, there is approximately the same process as above,
but the monitoring is against the provisions of sector regulations. This means overarching
principles and methodologies are set out in regulations and the implementation detail is
contained in the contract and a license (if applicable).
The regulator has the mandate to monitor compliance against the regulations and the
license, publishes reports on performance, and enforces any penalties for nonperformance.
Like a contract monitoring unit, the regulator must have procedure manuals to dictate the
application of its responsibilities. In Papua New Guinea, for example (Box 19), created the
Independent Consumer and Competition Commission to be an independent regulation
body on contracts covering electricity, telecommunications, ports and harbors, and postal
services.
88 Public–Private Partnership Handbook
Box19:IndependentRegulation:TheIndependentConsumerandCompetition
CommissionofPapuaNewGuinea
The Independent Consumer and Competition Commission (ICCC) of Papua New Guinea
(PNG) was created in 00 with jurisdiction over electricity, telecommunications, ports and
harbors, and postal services. ICCC has the power to determine market structures, tariff set-
ting, and service standards. The provisions of the ICCC Act apply to all businesses in PNG
including government enterprises. The ICCC Act also applies to business outside PNG, which
affects the PNG market.
In exercising its powers under the ICCC Act, ICCC focuses on the following primary
objectives:
• enhance the welfare of the people by promoting competition and fair trade and protect-
ing consumers’ interests;
• promote economic efficiency in industry structure, investment, and conduct; and
• protect the long-term interests of the people with regard to the price, quality, and reli-
ability of significant goods and services.
Specifically, ICCC is to:
• promote and protect the bona fide interests of consumers with regard to price, quality,
and reliability of goods and services;
• ensure that users and consumers (including low-income or vulnerable consumers) benefit
from competition and effeciency;
• promote and encourage fair trade practices;
• prevent the misuse of market power;
• promote and encourage the efficient operation of industries and efficient investment in
industries;
• ensure that regulatory decision making has regard for any applicable health, safety,
environmental, and social legislations; and
• facilitate effective competition and promote competitive market conduct.
The commission consists of three commissioners—one full-time commissioner and two
associate part-time commissioners appointed for 5 years. By March 00, ICCC was fully
operational with over 0 staff.
Sources: www.iccc.gov.pg; www.eapirf.org/MenuItems/Organization/memberprofiles/ICCC.asp
Introduction  89 Framework for Measuring, Monitoring, and Reporting on Results 89
Independent auditors. Some countries find it advantageous to procure the services of
independent technical and/or financial auditors. This may be in a addition to or instead of
the role of the contract monitoring unit or regulator. In some cases, the auditor provides
an independent assessment of the performance, which provides credibility and support
to the overall monitoring. In other cases, this contracted expertise replaces the need to
retain an ongoing regulatory function. See Box 0 for Gaza’s experience in contracting out
regulation.
An important role of any of these entities is to report on performance. This is accomplished
through websites, published reports, reports to parliament, and information made available
to customers.
While these entities initially employ international experts to strengthen capacity, the goal in
the long run is to transition to fully local staff. This can be accomplished through training
and effective twinning with regional and international peers to provide ad hoc advice, often
from a regional perspective.
Box20:ContractingOutRegulationinGaza
The Gaza Management Contract, one of the first private sector initiatives in the Middle
East water sector, used an innovative contracting out strategy to overcome the limitations
posed by weak local regulatory capacity. The contract used private “third party” technical
and financial audits to calculate the performance-linked management payment. The auditor
evaluated the operator’s declared performance against the targets set out in the management
contract, once or twice a year. The contract created a simple qualitative scale to measure
progress against target. If the operator earned “excellent” in the performance variables, its
weighted average composite score would be 1 and this would allow it to earn 100% of the
allotted annual performance linked fee of $750,000. In the opinion of the Palestinian Water
Authority (PWA), the use of an external auditor helped increase pressure on the operator to
perform. The auditor was also able to bridge the stark information asymmetry gap between
the operator and PWA. This example highlights the potential for using external auditors for
formulating binding recommendations and addressing issues of lack of competence and
limited independence in nascent regulatory agencies.
Source: Contracting Out Utility Regulatory Functions, Environmental Resources Management. January 00.
Introduction  9´
10ResourcesandTools
Organization
African Development Bank Group (AfDB)
Asian Development Bank (ADB) – Private
Sector Development Section
Business Partners for Development
East Asia and Pacific Infrastructure
Regulatory Forum (EAPIRF)
Global Partnership on Output-Based Aid
Inter-American Development Bank (IADB)

International Finance Corporation (IFC)
website on Asian Infrastructure investment
Organisation for Economic Co-operation
and Development (OECD)
Public–Private Infrastructure Advisory
Facility (PPIAF)
United Nations Development Programme
(UNDP) Tools for pro-poor municipal PPP
United States Agency for International
Development (USAID) Economic Growth
and Development
World Bank
• Papers, websites, and case studies on
public–private partnership (PPP)
• Toolkits
• Public Policy interventions
• World Bank Privatization Database
10.1 Websites—GeneralPPPs
Website
www.afdb.org
www.adb.org/PrivateSector/default.asp
www.bpdweb.org
www.eapirf.org/
www.gpoba.org/index.html
www.iadb.org/topics/subtopics.cfm?subto
picID=APP&language=English&topicID=PS&
parid=&item1id=8
www.ifc.org/ifcext/eastasia.nsf/Content/
Infrastructure
www.oecd.org
www.ppiaf.org/
http://pppue.undp.org/toolkit/MOD11.
html
www.usaid.gov/our_work/economic_
growth_and_trade/eg/privatization.htm
http://rru.worldbank.org/PapersLinks

http://rru.worldbank.org/Toolkits/
http://rru.worldbank.org/PublicPolicy
Journal
http://rru.worldbank.org/Privatization
9 Public–Private Partnership Handbook
Organization
B-O-T Center (Philippines)
Cabinet Office (Japan)
Canadian Council for PPPs
Industry Canada: |0b||c|r|vate  
Comparator
Infrastructure Partnerships Australia
Irish Government PPP Unit
Ministry of Finance (Thailand)
Ministry of Planning and Budget
(Republic of Korea)
National Council for Public-Private
Partnerships (United States)
Partnership Victoria (Australia)
Public-Private Partnership Office (Canada)
Public-Private Partnerships: A Canadian
Guide (001)
South African National Treasury PPP Unit
Federal Highway Administration, Depart-
ment of Transportation (United States)
World Bank
• Performance-based Contracting for
Roads
• PPP in Infrastructure
• PPP Toolkit in Highways
• Toolkits for Private Participation in
Water and Sanitation
World Bank Institute
• Learning materials related to PPP in
Infrastructure
Website
www.botcenter.gov.ph
www.cao.go.jp/index-e.html
www.pppcouncil.ca
http://strategis.ic.gc.ca/pics/ce/ic_psc.pdf
www.infrastructure.org.au
www.ppp.gov.ie
www.mof.go.th
www.mpb.co.kr/english.html
www.ncppp.org
www.partnerships.vic.gov.au
http://strategis.gc.ca/epic/site/pupr-bdpr.
nsf/en/Home
http://strategis.ic.gc.ca/pics/ce/pguide_
e.pdf
www.ppp.gov.za

www.fhwa.dot.gov/ppp/dbb.htm



www.worldbank.org/transport/roads/
resource-guide/index.html
http://ppi.worldbank.org/
http://rru.worldbank.org/Toolkits/
PartnershipsHighways/
www.worldbank.org/html/fpd/water/
wstoolkits
http://web.worldbank.org/WBSITE/EXTER-
NAL/WBI/WBIPROGRAMS/PPPILP,,menuPK:
611~pagePK:61561~piPK:615155~t
heSitePK:6110,00.html
10.3 Websites—Sector-SpecificInfrastructure
10.2 Websites—PPPOrganizationsandUnits
Introduction  9J
10.4 Literature—GeneralPPPs
Estache, Antonio. 00. Argentina’s 1990s utilities privatization: a cure or a disease. Draft.
World Bank.
European Commission. 00. G0|de||nes for S0ccessf0| |0b||c–|r|vate |artners||ps. Brus-
sels. March. Available: http://ec.europa.eu/regional_policy/sources/docgener/guides/
ppp_en.pdf
Industry Canada. 00. |0b||c Sector Comparator—A Canad|an 8est |ract|ces G0|de.
Kikeri, Sunita. 1998. Privatization and Labor: What Happens to Workers When Governments
Divest. Wor|d  8an|  1ec|n|ca|  |aper No. 96. Washington, DC: World Bank. Available:
http://info.worldbank.org/etools/docs/library/718/winter00/proceedings/pdfpapers/
modsk.pdf
Leigland, James. 00. Is the Public Sector Comparator Right for Developing Countries?
Gr|d||nes Note No. . Washington, DC: Public–Private Infrastructure Advisory Facility (PPIAF).
Available: www.ppiaf.org/Gridlines/africa.pdf
Quiggin, John. 00. Risks, PPPs and the Public Sector Comparator. A0stra||an Acco0nt|nç 
|ev|ew, 1(): 51–6. Available: www.uq.edu.au/rsmg/docs/quigginausaccrev0.pdf
Smith, Warrick. 1997. Utility Regulators: The Independence Debate. |0b||c |o||cy for t|e 
|r|vate Sector Note No. 17. October. Washington, DC: World Bank. Available: http://rru.
worldbank.org/Documents/PublicPolicyJournal/17smith.pdf
United Kingdom Department of Finance and Personnel. ||| |rojects and |roc0rement |ss0es.
Available: www.dfpni.gov.uk/economic_appraisal_guidance/projects.htm
United Kingdom Office of Government Commerce. 000. A Competence |ramewor| for 
Creat|nç |ffect|ve ||| |rojects.
10.5 Literature—InfrastructurePPPs
Andrew, Doug, and Silviu Dochia. 006. The growing and evolving business of private par-
ticipation in airports new trends, new actors emerging. Gr|d||nes Note No. 15. September.
Washington DC: PPIAF. Available: www.ppiaf.org/Gridlines/15ppiairport.pdf
Resources and Tools 9
9 Public–Private Partnership Handbook
ADB, Japan Bank for International Cooperation, and World Bank. 005. Connect|nç |ast 
As|a—a new framewor| for |nfrastr0ct0re. Washington, DC: World Bank. Available: http://
web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/EASTASIAPACIFICEXT/EXTEAPINFRA
STRUCT,contentMDK:070077~menuPK:1806~pagePK:61685~piPK:616809~t
heSitePK:85516,00.html
Bakovic, Tonci, Bernard Tenenbaum, and Fiona Woolf. 00. Regulation by Contract: A New
Way to Privatize Electricity Distribution? Wor|d 8an| Wor||nç |aper No. 1. Washington,
DC: World Bank. Available: http://rru.worldbank.org/Documents/PapersLinks/55.pdf
Berg, Sanford. 001. Infrastructure Regulation: Risk, Return, and Performance. G|oba| Ot|||t|es
1(May): –10. Public Utility Research Center, University of Florida. Available: http://bear.
cba.ufl.edu/centers/purc/PRIMARY/berg/RiskRegArticle.pdf
Bellier, Michel, and Yue Maggie Zhou. 00. Private Participation in Infrastructure in China:
Issues and Recommendations for the Road, Water, and Power Sectors. Wor|d 8an| Wor||nç 
|aper No. . Washington, DC: World Bank. Available: http://info.worldbank.org/etools/
docs/library/0079/PRIVAT%7E1.PDF
Besant-Jones, John E. 006. Reforming Power Markets in Developing Countries: What Have
We Learned? |nerçy and M|n|nç Sector 8oard ||sc0ss|on |aper No. 19. September. World
Bank and Energy and Mining Sector Board. September. Available: http://siteresources.
worldbank.org/INTENERGY/Resources/Energy19.pdf
Crampes, C., and A. Estache. 1998. Regulatory Trade-Offs in Designing Concession Contracts
for Infrastructure Networks. Ot|||t|es |o||cy 7(1):1–1. March.
David, Newbery M. 000. |r|vat|zat|on, |estr0ct0r|nç, and |eç0|at|on of Networ| Ot|||t|es.
Cambridge, Massachusetts: MIT Press.
Department of Treasury and Finance. 001. |artners||p v|ctor|a G0|dance Mater|a|. |ract|t|oners’
G0|de. June. Victoria, Australia. Available:www.partnerships.vic.gov.au/CA570850005EB6/
0/6D96175BAEF08CA570C0001966C?OpenDocument
Dumol, Mark. 000. 1|e  Man||a  Water  Concess|on.  A  rey  Government  Off|c|a|’s  ||ary 
of t|e Wor|d’s |arçest Water |r|vat|zat|on. July. Washington, DC: World Bank. Available:
http://rru.worldbank.org/Documents/PapersLinks/50.pdf
Felzer, Sharon. 005. |ast As|a & |ac|f|c |r|vate |nvestors |n |nfrastr0ct0re |ercept|on S0rveys.
World Bank Infrastructure Vice Presidency, World Bank.
Introduction  95 Resources and Tools 95
Fraser, Julia. 005. Lessons from the Independent Private Power Experience in Pakistan.
|nerçy and M|n|nç Sector ||sc0ss|on |aper No. 1. May. Washington, DC: World Bank.
Available: http://info.worldbank.org/etools/docs/library/08/Lessons%0from%0the
%0Independent%0Private%0Power%0Experience%0in%0Pakistan.pdf
Gómez-Ibáñez, José A., and John R. Meyer. 199. Go|nç |r|vate. 1|e |nternat|ona| |xper|ence 
w|t| 1ransport |r|vat|zat|on. Washington, DC: The Brookings Institution Press.
Guasch, J. Luis. 00. Granting and Renegotiating Infrastructure Concessions—Avoiding the
Pitfalls. Draft. World Bank.
Harris, Clive. 00. Private Rural Power—Network expansion using an output-based scheme
in Guatemala. Wor|d 8an| v|ewpo|nt Note No. 5. Washington, DC: World Bank.
Harris, Clive. 00. Private Participation in Infrastructure in Developing Countries: Trends,
Impacts, and Policy Lessons. Wor|d  8an|  Wor||nç  |aper No. 5. Washington, DC: World
Bank. Available: http://rru.worldbank.org/Documents/PapersLinks/181.pdf
Harris, Clive, John Hodges, Michael Schur, and Padmesh Shukla. 00. Infrastructure Projects:
A Review of Canceled Private Projects. |0b||c |o||cy for t|e |r|vate Sector Note No. 5.
January. Washington, DC: World Bank. Available: http://rru.worldbank.org/Documents/
PublicPolicyJournal/5Harri-0100.pdf
Head, Chris. 000. Financing of Private Hydropower Projects. Wor|d 8an| ||sc0ss|on |aper
No. 0. Washington, DC: World Bank. July. Available: http://info.worldbank.org/etools/
docs/library/05/Financing%0of%0Private%0Hydropower%0Projects..pdf
Hodges, John. 00. Unsolicited Proposals—The Issues for Private Infrastructure Projects.
|0b||c |o||cy for t|e |r|vate Sector Note No. 57. March. Washington, DC: World Bank. Avail-
able: http://rru.worldbank.org/Documents/PublicPolicyJournal/57Hodge-0110.pdf
Hodges, John. 00. Unsolicited Proposals—Competitive Solutions for Private Infrastructure.
|0b||c  |o||cy  for  t|e  |r|vate  Sector  Note No. 58. March. Washington, DC: The World
Bank.
Hoskote Mangesh, Adil Marghub, and Steven Ostrover. 000. An Analysis of Electricity Distri-
bution Privatization in Developing Countries. Presentation. Washington, DC: World Bank.
Izaguirre, Ada Karina. 00. Private Infrastructure: Review of Projects with Private Participa-
tion, 1990–001. |0b||c |o||cy for t|e |r|vate Sector Note No. 50. Washington, DC: World
Bank.
96 Public–Private Partnership Handbook
Kessides, Ioannis. 00. |eform|nç |nfrastr0ct0re. |r|vat|zat|on, |eç0|at|on, and Compet|
t|on. A World Bank Policy Research Report. Oxford University Press.
Klein, Michael. 1996. Competition in Network Industries. |o||cy |esearc| Wor||nç |aper
1591. April. Washington, DC: World Bank. Available: www-wds.worldbank.org/servlet/
WDSContentServer/WDSP/IB/1996/0/01/00000965_9610117/Rendered/PDF/
multi0page.pdf
Krishnaswamy, V., and Gary Stuggins. 001. Private Sector Participation in the Power Sec-
tor in ECA Countries: Lessons learned from the last decade. 1ec|n|ca| |aper. Washington,
DC: World Bank.
Kumar, Dr. Sasi, and C. Jayasankar Prasad. 00. Public–Private Partnerships in Urban
Infrastructure. rera|a Ca|||nç. February. Available: www.kerala.gov.in/keralacallfeb0/p6-
7.pdf
Lamech, Ranjit, and Kazim Saeed. 00. What International Investors Look for When Invest-
ing in Developing Countries: Results from a Survey of International Investors in the Power
Sector. |nerçy and M|n|nç Sector 8oard ||sc0ss|on |aper No. 6. May. Washington, DC:
World Bank. Available: www.globalregulatorynetwork.org/PDFs/InvestorsPaperNo6.pdf
Levy, Sidney. 1996. 80||d, Operate, 1ransfer. |av|nç t|e Way for 1omorrow’s |nfrastr0ct0re.
New Jersey, USA: Wiley Publishing Group.
Marin, Philippe, and Ada Karina Izaguirre. 006. Private participation in water toward a new
generation of projects? Gr|d||nes Note No. 1. September. Washington, DC: PPIAF. Available:
http://info.worldbank.org/etools/docs/library/0096/Private%0participation%0in%0
water%0%0toward%0a%0new%0generation%0of%0projects.pdf
Newberry, David M. 000. |r|vat|zat|on, |estr0ct0r|nç, and |eç0|at|on of Networ| Ot|||t|es.
Cambridge, Massachusetts: MIT Press.
Plane, Patrick. 1999. Privatization, Technical Efficiency and Welfare Consequences: The Case
of the Cote d’Ivoire Electricity Company (CIE). Wor|d |eve|opment 7 (): –60.
PricewaterhouseCoopers. 006. |ybr|d  |||s  |everaç|nç  |O  f0nds  and  pr|vate  cap|ta|.
Washington, DC: PPIAF and World Bank. January. Available: www.pwc.com/pl/eng/ins-
sol/publ/006/ppp_world_bank.pdf
Introduction  97 Resources and Tools 97
Queiroz, Cesar. 005. Launching Public Private Partnerships for Highways in Transition
Economies. Wor|d 8an| 1ransport |apers No. 9. September. Washington, DC: World Bank.
Available: http://iris7.worldbank.org/domdoc/PRD/Other/PRDDContainer.nsf/WB_ViewA
ttachments?ReadForm&ID=8556D00766CC7855709700ADAE&
Ramamurti, Ravi. 1996. The New Frontier of Privatization. In |r|vat|z|nç Monopo||es. |es
sons from t|e 1e|ecomm0n|cat|ons and 1ransport Sectors |n |at|n Amer|ca, edited by R.
Ramamurti. Baltimore, Maryland: John Hopkins University Press.
Ringskog, Klas, Mary Ellen Hammond, and Alain Locussol. 006. Using Management and
Lease-affermage Contracts for Water Supply. Gr|d||nes Note No. 1. Washington, DC: PPIAF.
Available: http://info.worldbank.org/etools/docs/library/0099/USINGM%7E1.PDF
Rivera, Daniel. 1996. Private Sector Participation in the Water Supply and Wastewater Sector:
Lessons from Six Developing Countries. Washington, DC: World Bank.
Streeter, William, Gerzan R. Zurita, John C. Dell, Michael Hermans, and Laurence Monnier.
00. |0b||c–|r|vate |artners||ps. 1|e Next Generat|on of |nfrastr0ct0re ||nance. New York,
NY: Fitch Ratings. Available: www.fitchmexico.com/ReportesEspeciales/RW_.pdf
United Nations Industrial Development Organization (UNIDO). 1996. G0|de||nes for |nfrastr0c
t0re |eve|opment t|ro0ç| 80||d–Operate–1ransfer (8O1) |rojects. New York: UNIDO.
Wallsten, Scott. 00. Does Sequencing Matter? Regulation and Privatization in Telecom-
munications Reforms. Wor|d 8an| |o||cy |esearc| Wor||nç |aper 817. Washington, DC:
World Bank.
Wellenius, Bjorn. 1997. Telecommunications Reform—How to Succeed. |0b||c |o||cy for t|e 
|r|vate Sector Note No. 10. October. Washington, DC: World Bank. Available: http://rru.
worldbank.org/Documents/PublicPolicyJournal/10welle.pdf
Wells, Louis T. 1999. Private Foreign Investment in Infrastructure: Managing Noncommercial
Risk. Presented at Private Infrastructure for Development: Confronting Political and Regula-
tory Risks on 8–10 September in Rome, Italy.
World Bank. 000. Private Sector and Power Generation in China. Wor|d 8an| ||sc0ss|on 
|aper No. 06. February. Energy and Mining Sector Unit East Asia and Pacific Region. Avail-
able: http://info.worldbank.org/etools/docs/library/015/Private%0Sector%0and%
0Power%0Generation%0in%0China.pdf
98 Public–Private Partnership Handbook
World Bank and PPIAF. 005. |||||pp|nes.  Meet|nç  t|e  |nfrastr0ct0re  c|a||ençes. Infra-
structure Sector Department East—Asia and Pacific Region. Available: http://siteresources.
worldbank.org/INTEAPINFRASTRUCT/Resources/PHInfra.pdf
10.6 Literature—Pro-PoorPPPs
Baker, Bill, and Sophie Tremolet. 00a. Utility reform—Regulating quality standards to
improve access for the poor. Wor|d 8an| v|ewpo|nt Note No. 19. Washington, DC: World
Bank.
———. 00b. Regulating quality—Let competing firms offer a mix of price and quality options.
Wor|d 8an| v|ewpo|nt Note No. 1. Washington, DC: World Bank.
Barja, Gover, and Miguel Urquiola. 001. Capitalization, Regulation, and the Poor: Access
to Basic Services and the Poor. ||sc0ss|on |aper 001/. Helsinki, Finland: United Nations
University (UNU)/World Institute for Development Economics Research (WIDER). Available:
www.wider.unu.edu/publications/dps/dp001-.pdf
Brook, Penelope, and Suzanne Smith (editors). 001. Contract|nç for |0b||c Serv|ces. O0tp0t
based A|d and |ts App||cat|ons. Washington, DC: International Finance Corporation.
Cannock, Geoffrey. 001. Telecom Subsidies: Output-Based Contracts for Rural Services in
Peru. |0b||c |o||cy for t|e |r|vate Sector Note No. . Washington, DC: World Bank. Avail-
able: http://rru.worldbank.org/Documents/PublicPolicyJournal/Banno-607.pdf
Clarke, George R.G., and Scott J. Wallsten. 00. Universal(ly Bad) Service: Providing In-
frastructure Services to Rural and Poor Urban Consumers. |o||cy |esearc| Wor||nç |aper
868. Washington, DC: World Bank. July. Available: www-wds.worldbank.org/servlet/
WDSContentServer/WDSP/IB/00/08//0000996_0081000109/Rendered/PDF/
multi0page.pdf
David, Cristina C. 000. MWSS Privatization: Implications on the Price of Water, the Poor,
and the Environment. ||sc0ss|on |aper Ser|es No.000-1. Makati City, Philippines: Philippine
Institute for Development Studies. Available: www.pids.gov.ph/ris/pdf/pidsdps001.pdf
Estache, Antonio, Vivien Foster, and Quentin Wodon. 00. Accounting for Poverty in
Infrastructure Reform: Learning from Latin America’s Experience. Wor|d  8an|  |nst|t0te 
|eve|opment  St0d|es. Washington, DC: World Bank. Available: www-wds.worldbank.
org/servlet/WDSContentServer/WDSP/IB/00/0/6/0000996_0010009/
Rendered/PDF/multi0page.pdf
Introduction  99 Resources and Tools 99
Evans, Barbara, and Clarissa Brocklehurst. 001. Serving Poor Consumers in South Asian
Cities – Private Sector Participation in Water and Sanitation. Water and Sanitation Program
India. January. Available: http://lnweb18.worldbank.org/ESSD/sdvext.nsf/81ByDocName/
ServingPoorConsumersinSouth/$FILE/sa_psp_sa.pdf
Foster, Vivian, and Osvaldo Irusta. 001. Does Infrastructure Reform Work for the Poor? A
Case Study on the Twin Cities of La Paz and El Alto. |||A| 8ac|çro0nd |aper. Washington,
DC: World Bank.
Global Partnership on Output-Based Aid (GPOBA). 005. Output-Based Aid: Supporting
Infrastructure Delivery through Explicit and Performance-Based Subsidies. O8A  Wor||nç 
|aper  Ser|es  |aper No. . March. Washington, DC: GPOBA. Available: www.gpoba.org/
docs/WorkingPaperNo__WhatisOBA.pdf
Gomez-Lobo, Andres. 001. Incentive-based Subsidies: Designing Output-based Subsidies for Water
Consumption. |0b||c |o||cy for t|e |r|vate Sector Note No. . June. Washington, DC: World
Bank. Available: http://rru.worldbank.org/Documents/PublicPolicyJournal/Gomez-51.pdf
Komives, Kristin, and Penelope J. Brook Cowen. 1998. Expanding Water and Sanitation
Services to Low Income Households: The Case of the La Paz-El Alto concession. |0b||c |o||cy 
for t|e |r|vate Sector Note No. 178. Washington, DC: World Bank. Available: http://rru.
worldbank.org/Documents/PublicPolicyJournal/178komiv.pdf
Panggabean, Adrian T.P. 006. Expanding Access to Basic Services in Asia and the Pacific
Region: Public–Private Partnerships for Poverty Reduction. |conom|c and |esearc| |epart
ment Wor||nç |aper Ser|es No. 87. November. Manila: ADB. Available: www.adb.org/Docu-
ments/ERD/Working_Papers/WP087.pdf
Rosenthal, Shane. 00. The Design of the Manila Concessions and the Implications for the
Poor. Mimeo. Available: www.ppiaf.org/conference/docs/Papers/Manila.pdf
Water and Sanitation Program—South Asia. 1999. Privatizing the Operation and Maintenance
of Urban Water Supply: The Experience of Ajmer, Rajasthan, India. Sma|| |r|vate |n|t|at|ves 
||e|d Note. December. Noida, India: PS Press Services. Available: http://unpan1.un.org/in-
tradoc/groups/public/documents/apcity/unpan00778.pdf
Weitz, A., and R. Franceys, editors. 00. 8eyond 8o0ndar|es. |xtend|nç Serv|ces to t|e 
Orban |oor. Manila: ADB.
World Bank. 001. New |es|çns for Water and San|tat|on 1ransact|ons. Ma||nç |r|vate Sector 
|art|c|pat|on Wor| for t|e |oor. Washington, DC: Water and Sanitation Program/PPIAF.
100 Public–Private Partnership Handbook
Endnotes
1
This chapter is compiled from the analysis contained in three Notes on Public Policy for
the Private Sector produced by the World Bank/International Finance Corporation (IFC).
These are: Note 16, October 000, Melissa Houskamp and Nicola Tynan; Note 50,
October 00, Ada Karina Izaguirre; Note 99, October 005, Ada Karina Izaguirre;
Note 16, and Note 0, February 006, Sunita Kikeri and Aishetu Kolo.

Privatization proceeds in this context refer to monetary receipts to government generated
by transactions such as divestment, concessions, and leases.

See endnote .

See endnote .
5
Schur, Michael, Stephan von Klaudy, and Georgina Dellacha. 006. The role of devel-
oping country firms in infrastructure: A new class of investors emerges. Public–Private
Infrastructure Advisory Facility (PPIAF) Gr|d||nes Note No. . April.
6
PPIAF is a multi-donor technical assistance facility aimed at helping developing countries
improve the quality of their infrastructure through private sector involvement. Launched
in July 1999, PPIAF was developed at the joint initiative of the Governments of Japan
and the United Kingdom, working closely with the World Bank.
7
This section is drawn from the World Bank Tool Kit on Public–Private Partnership in High-
ways which contains additional detail and simulations. Available: http://rru.worldbank.
org/Documents/Toolkits/Highways/_CARAC/index.htm.
8
From the World Bank Output-Based Aid Guidance Note for Staff.
About the Handbook
Over the past 2 decades, Public–Private Partnership (PPP) schemes have become
widely used in many countries to provide services and infrastructure. Despite
their prevalence as a policy and economic tool, there remains a continuing
interest in information on PPPs from interested stakeholders including
government, civil society, private sector, nongovernment organizations, and
academia.
This handbook is an introductory primer on PPPs in the context of
development finance. It aims to build knowledge on the key features of PPPs
as well as structuring options, implementation issues, and experience with
applying PPPs to the provision of public goods and services.
Asian Development Bank
6 ADB Avenue, Mandaluyong City
1550 Metro Manila, Philippines
www.adb.org
Publication Stock No. 071107 Printed in the Philippines
About the Asian Development Bank
ADB aims to improve the welfare of the people in the Asia and Pacific region,
particularly the nearly 1.9 billion who live on less than $2 a day. Despite many
success stories, the region remains home to two thirds of the world’s poor.
ADB is a multilateral development finance institution owned by 67 members,
48 from the region and 19 from other parts of the globe. ADB’s vision is a
region free of poverty. Its mission is to help its developing member countries
reduce poverty and improve their quality of life.
ADB’s main instruments for helping its developing member countries are
policy dialogue, loans, equity investments, guarantees, grants, and technical
assistance.
ADB’s headquarters is in Manila. It has 26 offices around the world and
more than 2,000 employees from over 50 countries.

Introduction  

Acknowledgments
The Handbook was initially drafted by Klaus Felsinger, a former staff member of the Asian Development Bank’s (ADB) Regional and Sustainable Development Department (RSDD), Special Initiative Group (RSOD-SI) and a member of the Innovation and Efficiency Initiative (IEI) Team, under the direct supervision of Juan Miranda, Director General of Central and West Asia Department (CWRD) and Head of the IEI Team. Heather Skilling and Kathleen Booth carried out research and compiled and elaborated on the information. The Handbook further benefited from relevant comments contributed by ADB staff through review of drafts. Elsie Araneta, Maria Anna Birken, Sally Pedersen, and Stephen Edwards provided helpful advice and information. Ian Woodward contributed valuable information and editorial commentary. Virginia Herrera, Majella Canzon, and Aldwin Sutarez provided their best support at the pre-publication stage. Finally, Nariman Mannapbekov of RSOD-SI painstakingly completed this Handbook.

Introduction  

Table of Contents
Introduction  vii

1 

Public–Private Partnerships (PPPs)—An Overview  1 1.1 1.2 Defining Public–Private Partnerships  1 Motivation for Engaging in PPPs  3 1.2.1 Mobilization of Private Capital  3 1.2.2 PPP as a Tool for Greater Efficiency  3 1.2.3 PPP as a Catalyst for Broader Sector Reform  5

2 

Recent Experience with Infrastructure Privatization and PPPs  7  2.1 The Level and Form of Infrastructure Privatization/PPPs from 1990–2004  7 2.2 Incorporating Local and Regional Investment Sources  8 2.3 Incorporating Social Priorities  10 Structuring a PPP: Sector Diagnostic and Sector Road Map  11  3.1 Requirements and Expectations  11 3.2 Technical Issues  12 3.3 Legal, Regulatory, and Policy Framework  13 3.4 Institutional Structures and Capacity  14 3.5 Commercial, Financial, and Economic Issues  16 3.6 Stakeholder Consultation  20 3.7 Clear Sector Strategy and Road Map  24 3.8 Clear Government Commitment and a Designated Champion  26 Structuring a PPP: Available PPP Options  27  4.1 Service Contract  29 4.2 Management Contracts  31 4.3 Affermage or Lease Contracts  33 4.4 Concessions  34 4.5 Build–Operate–Transfer and Similar Arrangements  37 4.6 Joint Venture  41 4.7 Hybrid Arrangements  43 Structuring a PPP: Selecting the Option  45 PPP Preparatory Work  49  6.1 Establishing Appropriate Legal, Regulatory, and Policy Frameworks  49 6.2 Technical Preparation  50 6.3 Institutional Structures and Capacity Building  53 6.3.1 PPP Unit  53 6.3.2 Project Implementation Unit  54 6.3.3 Technical Assistance  55

3 

4 

5  6 

1 Project Financing  56 6.2 Competitive Negotiations  73 7.3.4. Monitoring.4 Defining the Bid Evaluation Process  75 7.6.4 Subsidy Design  63 Labor Considerations  65 Including Local Partners  66 Stakeholder Involvement  67 6.1 Collecting Feedback from Potential Bidders  69 7.3.3.4 Commercial. and Reporting on Results 10 Resources and Tools 91    10.2 10.5 6.3 Tariff Adjustments  60 6.4.4.6 7.3 10.5 7.4.3 Defining the Procurement Process  72 7.4.3 Competitive Bidding  73 7.5 10. and Economic Preparation  55 6.2 Notification and Prequalification  70 7.1 Pro-Poor Characteristics of PPP Options  81 8.7 7.6 Websites – General PPPs  91 Websites – PPP Organizations and Units  92 Websites – Sector-Specific Infrastructure  92 Literature – General PPPs  93 Literature – Infrastructure PPPs  93 Literature – Pro-Poor PPPs  98 Endnotes  100  .6 6.1 10.1 Unsolicited Proposals or Direct Negotiations  72 7.4.1 Initial Decisions  75 7.2 Tariff Design  58 6.2 Pro-Poor Interventions in the Context of PPPs  82 8.4 10. Financial.7 7    Implementing PPPs  69  7.3 Output-Based Aid Contracts  84 87 9 Framework for Measuring.8 8    Specific Pro-Poor Activities in PPPs  81  8.2 Technical and Financial Evaluation  76 Bid Package  77 The Contract  78 Negotiations and Contract Start  79 Key Implementation Issues  80 7.

Introduction   Acronyms ADB BOO BOOT BOT CBO IFC IFI LIG NGO OBA ODA PIU PPIAF PPP PRC PSP Asian Development Bank build–own–operate build–own–operate–transfer build–operate–transfer community-based organization International Finance Corporation international financial institution low-income group nongovernment organization output-based aid official development assistance project implementation unit Public–Private Infrastructure Advisory Facility public–private partnership People’s Republic of China private sector participation Note In this handbook. . “$” refers to US dollars.

structure. • Chapter 8: relates “pro-poor growth” criteria to PPP design and implementation. design. design. • Chapter 3: describes the activities required to diagnose and plan for a PPP. the procurement process. This handbook is meant as an introduction or primer to the design and execution of PPP strategies and projects in the context of development finance. from policy considerations to implementation issues. and execution of PPPs for infrastructure development. • Chapter 6: describes key tasks associated with designing and preparing a PPP project that will attract bidders. this handbook addresses a range of matters associated with PPPs. • Chapter 9: highlights the monitoring and evaluation requirements of PPP projects. and contracting. • Chapter 2: gives examples of evolving PPP experience within various infrastructure sectors. • Chapter 7: covers the implementation of a PPP including bidder involvement and selection. Each of the 10 chapters focuses on a specific area of information about PPPs: • Chapter 1: introduces and defines PPPs and their context within infrastructure and development finance.Introduction   Introduction This Public–Private Partnership (PPP) Handbook is designed for the staff of the Asian Development Bank (ADB) and its developing member countries’ clients. and implementation issues. • Chapter 5: examines the issues associated with choosing the appropriate PPP structure for a project. . With inputs from policy and transaction specialists. It provides an overview of the role. due diligence. • Chapter 4: provides an overview of the major types of PPP from management and service contracts to concessions and build–operate–transfer arrangements. • Chapter 10: includes additional resources for PPP practitioners including access points for information on PPP policy.

Other terms used for this type of activity include private sector participation (PSP) and privatization. environmental awareness. . The private partner may also contribute investment capital depending on the form of contract.1 Public–Private Partnerships (PPPs)—An Overview This chapter introduces the concept of the public–private partnerships or PPPs. or other commitments or in-kind contributions that support the partnership. Increasingly. or state-owned enterprises. While the three terms have often been used interchangeably. and innovation to run the business efficiently. The government’s contribution to a PPP may take the form of capital for investment (available through tax revenue). The public partners in a PPP are government entities.1 Defining Public–Private Partnerships The term “public–private partnership” describes a range of possible relationships among public and private entities in the context of infrastructure and other services. and an ability to mobilize political support. 1. management. as well as its key characteristics and rationale. a transfer of assets. operations. there are differences: • PPPs present a framework that—while engaging the private sector—acknowledge and structure the role for government in ensuring that social obligations are met and successful sector reforms and public investments achieved. Effective PPPs recognize that the public and the private sectors each have certain advantages. and risks among the public and private partners in an optimal way. departments. local knowledge. The private partners can be local or international and may include businesses or investors with technical or financial expertise relevant to the project. The structure of the partnership should be designed to allocate risks to the partners who are best able to manage those risks and thus minimize costs while improving performance. PPPs may also include nongovernment organizations (NGOs) and/or community-based organizations (CBOs) who represent stakeholders directly affected by the project. The private sector’s role in the partnership is to make use of its expertise in commerce. relative to the other. municipalities. in performing specific tasks. The government also provides social responsibility. including ministries. obligations. A strong PPP allocates the tasks.

• Sectors in which PPPs have been completed worldwide include: • • • • • • • • • • • • • power generation and distribution. To some degree. air traffic control. pipelines. there was a slowdown in public–private contracting in infrastructure sectors. Some PSP schemes were overly ambitious and the social agenda was overlooked. and continuing operation of assets used for public services. the social backlash was rooted in confusion between PSP and privatization. it is usually accompanied by sector-specific regulatory arrangements to take account of social and policy concerns related to the sale. Privatization is most common and more widely accepted in sectors that are not traditionally considered public services. construction. Privatization involves the sale of shares or ownership in a company or the sale of operating assets or services owned by the public sector. refuse disposal. leading to legitimate public concerns. billing and other information technology systems. such as manufacturing. When privatization occurs in the infrastructure or utilities sectors. railways. which are now more commonly known as PPPs. . water and sanitation. school buildings and teaching facilities. However. PSP contracts transfer obligations to the private sector rather than emphasizing the opportunity for partnership. etc. The critical analysis of PSP experience has led to the design of a new generation of transactions. stadiums. prisons. and housing. roads. In the mid to the late 1990s. Public–Private Partnership Handbook • PSP is a term often used interchangeably with PPPs. which was largely precipitated by a social backlash against the perceived preference for the private sector over the public sector in delivering infrastructure services in developing countries. hospitals.

Governments are challenged by the demands of increasing urbanization. these pressures drive a desire to mobilize private sector capital for infrastructure investment.2 Motivation for Engaging in PPPs The three main needs that motivate governments to enter into PPPs for infrastructure are: 1. though not impossible. Injecting such incentives into an entrenched public sector is difficult. thus constituting an additional drain on public resources.2 PPP as a Tool for Greater Efficiency The efficient use of scarce public resources is a critical challenge for governments—and one in which many governments fall far short of goals. Furthermore. Combined with most governments’ limited financial capacity. the need to expand networks to new populations. the rehabilitation requirements of aging infrastructure. to attract private capital investment (often to either supplement public resources or release them for other public needs). and the goal of reaching previously unserved or underserved areas. regional.Public–Private Partnerships (PPPs)—An Overview Introduction   1. a PPP may be able to mobilize previously untapped resources from the local. incentives.1 Mobilization of Private Capital Governments face an ever-increasing need to find sufficient financing to develop and maintain infrastructure required to support growing populations. which is covered only through subsidies.2. to increase efficiency and use available resources more effectively. The goal of the private sector in entering into a PPP is to profit from its capacity and experience in managing businesses (utilities in particular).2. and accountability. The private sector seeks compensation for its services through fees for services rendered. 1. infrastructure services are often provided at an operating deficit. The reason is that the public sector typically has few or no incentives for efficiency structured into its organization and processes and is thus poorly positioned to efficiently build and operate infrastructure. . or international private sector which is seeking investment opportunities. 1. Each of these is discussed below. and to reform sectors through a reallocation of roles. as Singapore has demonstrated by developing a government-wide dedication to efficiency while maintaining many critical services within the public domain. . . resulting in an appropriate return on capital invested. Structured correctly.

by increased efficiency in investment and operations. Properly implemented. . such as regulation and supervision. Improving the efficiency of services and operations also increases the chances that those services are economically sustainable and provided at affordable rates—even after satisfying the profit requirements of the private operators. Source: http://ppi. Public–Private Partnership Handbook In 005. which are generated. Figure 1: Investment Commitments in Infrastructure Projects with Private Participation in Developing Countries by Sector. This should hold true even if the government continues to bear part of the investment or operational cost since government’s cost obligation is likely to be targeted. 1990–2005 US$ billion 10 100 80 Total Telecom 60 0 Energy 0 0 1990 1995 000 001 00 00 00 005 Transport Water The World Bank estimates that about 70% of infrastructure investment currently comes from the public sector. and structured within a rational overall financing strategy. 8% from official development assistance.worldbank. the efficiency of the infrastructure services will likely be enhanced. this approach should result in a lower aggregate cash outlay for the government.and middle-income countries grew by over 0% against 00 to almost $96 billion. enter into an investment or contracting opportunity with the clear goal of maximizing profits.pdf Private sector operators. however. in large part. investment commitments to private infrastructure projects in low. limited.org/features/sept006/currentFeatureSept006. and better and cheaper service to the consumer. and % from the private sector. If the PPP is structured to let the operator pursue this goal. PPP allows the government to pass operational roles to efficient private sector operators while retaining and improving focus on core public sector responsibilities.

there is a requirement to reexamine and reallocate the roles of policy maker. as outlined above. Implementing a specific PPP transaction often forces concrete reform steps to support the new allocation of sector roles such as the passage of laws and establishment of separate regulatory bodies.2. and service provider. regulator. In essence. particularly to mobilize capital and achieve efficiency.3 PPP as a Catalyst for Broader Sector Reform Governments sometimes see PPP as a catalyst to provoke the larger discussion of and commitment to a sector reform agenda. A reform program that includes PPP provides an opportunity to reconsider the assignment of sector roles to remove any potential conflicts and to consider a private entity as a possible sector participant. . re-examination of the regulatory and policy arrangements is critical to the success of a PPP project.Public–Private Partnerships (PPPs)—An Overview Introduction  5  1. Specifically. A key issue is always the restructuring and clarifying of roles within a sector. of which PPPs are only one component.

investment flows to infrastructure projects with private participation in developing countries grew for the first time since 000 to reach $6 billion. except in water where concessions are still the preferred form. Proceeds from infrastructure privatization in developing countries grew in recent years. based on data for 1990–1999. These are the most common form of privatization/PPP across infrastructure sectors. All developing regions. The People’s Republic of China (PRC) alone accounted for nearly 90% of the proceeds in the region in 000–00. experienced increased investment in telecommunications. Greenfield projects accounted for 56% of total investment flows and 60% of projects in 2001–2004. particularly in lowestincome countries. independent mobile operators attracted about 50% of sector investment. Within the telecommunications sector. developed by The World Bank/ International Finance Corporation. However. They constituted 65% of projects in • • • • . Greenfield projects predominated in developing countries.1 • The Level and Form of Infrastructure Privatization/PPPs from 1990–2004 In 2004. compared with 50% in the 1990s. apart from Sub-Saharan Africa. and based on the infrastructure projects tracked in the World Bank’s global Private Participation in Infrastructure (PPI) Project Database. rising from 8% of the total in the 1990s to 55% in 000–00. the analysis shows that the growth was driven by the telecommunications sector which accounted for $5 billion. where divestitures are still preferred.Introduction   2 Recent Experience with Infrastructure Privatization and PPPs 1 Analysis of privatization and PPPs since the 1990s reveals several interesting trends as described in Notes on Public Policy for the Private Sector. 2. East Asia and the Pacific raised twice as much in privatization proceeds in 2000–2003 as in the 1990s ($66 billion from 420 transactions). PRC’s stock market offerings in telecommunications and energy made it the top revenue earner among all developing countries in 000–00. Greenfield projects are also the most common in developing regions—except in Europe and Central Asia.

and the primary sector (minerals and metals) in terms of revenue generated. transmission. divestitures and concessions declined as a share of both investment flows and projects. and other firms). Infrastructure (telecommunications.8 Public–Private Partnership Handbook low-income countries compared with 7% for developing countries. natural gas transmission and distribution. They grew in number in all regions and sectors. Management contracts became more common. finance. these investors accounted for more investment finance in transport across developing regions than did investors from developed countries. Proceeds are concentrated in a small group of countries. but major. The share of lease contracts remained at % of projects in both periods. and petrochemicals). Five countries —Brazil. • • • Table 1 summarizes the flow of investment to developing countries both by sector and by region. For instance in 1998–00. Fourteen lease contracts were implemented in 2001–2004. Activity peaked in 1997 then declined. In contrast. increasing from % of projects in 1990–000 to 7% in 001–00 (based on the World Bank’s PPI Project Database). generating more than $00 billion in proceeds in 1990–00. services. other hydrocarbons.2 Incorporating Local and Regional Investment Sources5 The Public–Private Infrastructure Advisory Facility6 (PPIAF) has identified developing country investors as an emerging. New divestitures were limited to East Asia and Europe and Central Asia by 00–00. and distribution. This overview of trends focuses on quantifiable outcomes and may not fully represent the additional value of the many PPPs that focus on improved operations and efficiencies. and Russian Federation—accounted for more than 0% of proceeds in 1990–00. but was reactivated in 001. Privatization/PPPs have reached nearly all developing countries. Most investment flows to divestitures in 001–00 went to projects that had reached financial closure in the 1990s. PRC. transport. electricity generation. yielding value in a different form than direct and immediate revenue and investment. India. reflecting the low starting base of infrastructure in developing countries. Poland. tourism. but most were for water projects. • After the global slowdown in PPPs in the late 1990s. and water) accounted for half of privatization/PPP proceeds in developing countries in 1990–00. source of investment finance for infrastructure projects with private participation. 2. These sectors were followed by the competitive sectors (manufacturing. The local and regional players are also taking on greater managerial and operational roles. energy (production of oil and gas. . preference for low-risk contracts increased.

6 . 9.8 15.6 1. . DC: World Bank.1 8.9 18. 10.0 11.6 .9 . 5. 1. as the investors/operators develop more expertise. 57. 8.9 9.) Source: Izaguirre. .0 10.0 1. Private Participation in Infrastructure Project Database.6 1.8 48. by Sector and Region 1995–2004 ($ billion) Sector Energy Electricity Natural Gas Telecommunications Transport Water and Sewage Region East Asia and Pacific Europe and Central Asia Latin America and the Caribbean Middle East and North Africa South Asia Sub-Saharan Africa Total 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1.1 .8 1.0 17.1 .6 15. 5.7 .9 1. .7 0. .5 5.1 72. Developing country investors can be anticipated to take on even greater shares of infrastructure investments as developing market capital markets deepen and expand.9 .5 57. 9.0 . Private Infrastructure: Emerging Market Sponsors Dominate Private Flows.1 18.5 0.6 5.8 8.8 1.6 . political.8 17.5 7. 1. .0 .7 1.7 1. and as governments recognize the advantages (including a better understanding of social. . Ada Karina.1 1.9 19.5 17. .1 6. developing country investors contributed more than half the private investment in concessions (5%) in 1998–00. (World Bank and Public–Private Infrastructure Advisory Facility [PPIAF].6 15. and economic risks) of these firms and structure transactions (particularly prequalification and evaluation criteria) to be more inclusive of local participants.8 6. 71.5 8. 6. Developing country investors accounted for as much as 5% of the private investment in transport and 6% in telecommunications in 1998–00. 71.1 . 8. Washington. . 8. 8.1 5.3 1.7 18. slightly less than half in greenfield projects (%). 19.0 1.1 114.5 . 7.1 . 005.8 0. . . and a smaller share in divestitures (0%). . . 8.1 100.5 1. but only about 7% in energy and 19% in water.6 .7 5.9 Note: Date refers to projects reaching financial closure in 1990–00.7 90.7 19.7 6. 6.Recent Experience with Infrastructure Privatization and PPPs 9 Introduction   Table 1: Investment in Infrastructure Projects with Private Participation in Developing Countries. Public Policy for the Private Sector Note No.1 1.9 9.0 .6 17.5 .8 17. 99.0 1.2 . According to PPIAF’s analysis.7 16.1 9.8 9. 5.1 8. .9 64.0 7. 0.6 5. 6.7 .1 51.1 0.1 .6 72. 1.9 .0 .0 9.0 10.7 1.0 .5 .7 1. 8.6 6. 1. 9. .7 6.

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Public–Private Partnership Handbook

South Asia had the largest share of domestic investment at 55% of the region’s total investment in 1998–00. Local investors were also active in East Asia and Pacific, accounting for % of private investment in 1998–00 and acting as the main sponsors in 6% of projects. Telecommunications was again a predominant object of investment (local investors invested 65%) with transport at 8%.

2.3

Incorporating Social Priorities

A further trend of note, discussed in chapter 8, relates to the restructuring of PPPs to be more focused on the requirements of low-income consumers. When a primary goal of developing countries is improved access to infrastructure (as a driver of economic growth) and when a predominant characteristic of these countries is a high incidence of poverty, developing strategies that fit the goal of universal service with the reality of poverty is sensible. A concrete example of this shift has been the growing incorporation of output-based aid (OBA) strategies to transaction design. OBA strategies design the complementary use of donor and government financing to target social priorities specifically within the framework of a PPP transaction.

Introduction  11

3 Structuring a PPP: Sector Diagnostic and Sector Road Map
3.1 Requirements and Expectations
PPPs can follow a variety of structures and contractual formats (which are described in chapter ). However, all PPPs incorporate three key characteristics: • • • a contractual agreement defining the roles and responsibilities of the parties, sensible risk-sharing among the public and the private sector partners, and financial rewards to the private party commensurate with the achievement of prespecified outputs.

PPP is one tool available to decision makers in reforming infrastructure or service delivery. It is most effective when it is accompanied by other reform activities to underpin and reinforce the PPP and to support sustainable improvement. A successful PPP is designed with careful attention to the context or the enabling environment within which the partnership will be xt implemented. Where the operating environment can be reformed to be more conducive to the goals of PPP, this should be accomplished. Where elements of the operating context cannot be changed, the PPP design must be tailored to accommodate existing conditions. Thus, in designing a PPP process and selecting a form of PPP, it is important to consider the reform objectives; policy environment; the legal, regulatory, and institutional frameworks; financing requirements and resources of the sector; and the political constraints and stakeholder concerns. PPP will be an effective tool to address some, but probably not all, sector issues. To be successful, PPPs must be built upon a sector diagnostic that provides a realistic assessment of the current sector constraints. Specifically, the sector diagnostic will cover: • technical issues; • legal, regulatory, and policy frameworks; • institutional and capacity status; and • commercial, financial, and economic issues.

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Public–Private Partnership Handbook

The sector diagnostic helps the government assess the status quo, identify gaps and weaknesses, and develop a sector reform strategy or road map, outlining the tools and activities required for reform. In many cases, reliable or comprehensive data on performance are not available in every area, such as financial or technical areas. In those cases, it may be more efficient to focus on the collection of limited, but key, indicators which provide an overview of the overall performance of the sector. The sector diagnostic is likely to be performed with the support of a team of local and/or international engineers, lawyers, economists, financial analysts, and policy and transaction specialists. The diagnostic is critical to getting the transaction structure right, so allowing sufficient time for the process is important. Depending on the complexity of the sector, the availability of data, and the consultant procurement process, the sector diagnostic can take from 1 to  years. A critical part of the diagnostic is a process of stakeholder consultation and identification of a government champion to drive the process into preparation and implementation. As a result of the sector diagnostic, the government is able to determine to what degree an enabling environment exists for PPP and what activities are required in advance of PPP to create such an environment. The diagnostic is important to: (i) identify the strengths and weaknesses of the sector and the most promising areas for efficiency increases, (ii) regularly gauge and report on the progress of reform, and (iii) tweak the reform program as needed. The sector diagnostic leads to development of a road map and a sequence of PPP activities as can be seen in Figure , which describes the components of the sector diagnostic.

3.2

Technical Issues

Under this stream of analysis, the government should assess current technical constraints in the sector to be reformed (to the extent they are known) including system efficiency, utility operations, and responsiveness to customers. It should determine the degree to which operational issues are a result of underinvestment, poor investment planning, maintenance, ineffective management, lack of operational expertise, or other issues. Investments underway and investments planned, as well as existing assets, should be catalogued—to the degree that this information is relevant to the reform and can be obtained in a cost-effective manner. The analysis needs to take into account connectivities, links, and interdependencies of various infrastructure elements (e.g., electricity generation vs. distribution, connectivity of

). and existing regime for assigning authority and setting performance standards. 3. 007.Structuring a PPP: Sector Diagnostic and SectorIntroduction  1 Road Map Figure 2: Generic PPP Project Sequence Decision to Enter PPP Process Determine the Priority Projects Sector Diagnostic and Sector Road Map Define Project Team Internal and External Advisors Select and Assign Transaction Advisory Team Underperforming sector Assess sector constraints Identify sector goals Set tasks & timetable Identify expertise needed Identify Gov’t champion Review options vis a vis sector constraints and goals Enabling environment for PPP in terms of policy and operating environment. Regulatory. and Policy Frameworks The diagnostic should cover the existing legal. . Determine project design Ensure feasibility and sustainability Assign risks Identify and train for new roles Solicit market interest/feedback on project S T A K E H O L D E R C O N S U L T A T I O N Select PPP Option PPP Preparation/Feasibility Legal/Regulatory Technical Institutional Commercial/Financial/Economic Procurement Process Publication/Announcement PPP Prequalification Prepare Bidding Package Terms of Reference Draft Contract Bidding Requirements Refine bid package Develop draft contract Final definition of process Train staff in procurement Transparent process Conduct Procurement Bid Evaluation and Award Put financing in place Start transition arrangement Negotiation and Contract Signing Source: Heather Skilling.3 Legal. technical standards to be followed. and policy frameworks including: • applicable laws. etc. transport modes. validity of tickets/billing across transport modes. regulatory.

performance targets. i. The basic principle is that the level of service demanded and the costs of those services must be equitably balanced. It can also be effective to embed regulatory principles within the contract and the external capacity required is limited to an effective monitoring capacity and audit of performance outcomes. The legal environment has to minimize the likelihood of corruption and must be sufficiently reliable as to encourage private participation and investment. Highly specific contract terms that establish duties. and  limitations on foreign ownership/sector participation. foreign exchange restrictions. a regulatory unit within a part of government. In particular.e. major sector institutions and government entities related to the sector. Often. investors and project participants will see the project as unpredictable and highly risky. See Box 1 for the case in the PRC. while creating incentives for improved efficiencies in the system.1 Public–Private Partnership Handbook • • • • • oversight arrangements. tariff and subsidy policies and arrangements. if necessary. Enabling legal. • environmental and health regulations. new entities are created. the regulatory regime may have to be reformed and/or regulatory bodies created to facilitate a shift from purely government-provided services to the private provision of services. 3. Equally. regulations. At a baseline level. rules for changing tariffs. natural resource safeguards and management requirements important to sector performance. The framework for economic regulation must be equally explicit. or another form of regulatory capacity. foreign investment laws.. existence and applicability of legally mandated service quality standards. and limitations on repatriation of profits.4 Institutional Structures and Capacity PPPs require a range of stakeholders within and outside government to take on new roles or perform existing roles in improved ways. such as regulators . allow the private sector to better predict the profitability of the venture and decide what the contract is worth bidding for. a legal environment that can support private sector involvement in critical services is needed.  relevant labor laws and regulations. possible investors must have confidence that the laws and the contract will be respected and can be enforced in the courts or through arbitration. To the degree that the legal and judicial environment is not defined. regulatory. and dispute resolution procedures. regulatory bodies. and policy environments are critical to a sustainable PPP. This may entail creating an independent regulator. tariff level and structure.

from investment mechanisms to taxation. was based on the paper prepared by Lijin Zhong from Tsinghua University’s Department of Environmental Science and Engineering and Tao Fu from Wageningen University’s Environmental Policy Group. the People’s Republic of China does not have overarching privatization legislation. These questions might include: • Are the institutional and legislative frameworks in place to support sector improvement and PPP.Structuring a PPP: Sector Diagnostic and SectorIntroduction  15 Road Map 1 Box 1: Impact of Legal and Regulatory Uncertainty on Build–Own–Transfer Wastewater Schemes in the People’s Republic of China At this stage. 007. its build–own–transfer (BOT) schemes and other public–private partnership (PPP) reform strategies are governed by a series of government policy papers. requiring consideration of issues ranging from land use to the management of water companies. accounting systems to credit policies of development banks. in particular? What are the impediments according to the ministry. or PPP units. taxation. a champion—with the capacity and the political will to lead and drive the reform agenda forward? • • • • • • These institutional roles must be clarified at the latest by the time the PPP process is complete.e. This article. In the case of the 16 Foshan Wastewater Treatment Plants. and utility? Do the level of autonomy and accountability of stakeholders match their proposed obligations? Are the relevant levels of government prepared to relinquish or revise their roles? Are the relevant levels of government prepared to delegate some control to private partners within defined policy and regulatory parameters? Does each institution have the funding. Christina. Source: Dueñas. At the same time. Ma. . Government must ask a series of key questions to understand the institutional requirements of the reform strategy. However. the higher the level of perceptive risk is likely for potential investors. the greater the degree of uncertainty about institutional roles during the PPP process. Country  Water  Action:  People’s  Republic  of  China..  Private  Funds  for  Cleaner Water—BOT Applied in the Chinese Wastewater Sector. and such considerations are not geared for the sector makes things more difficult. Developing a BOT wastewater scheme is complicated. staff. Instead. users. written by the Asian Development Bank (ADB). over 50% of the projects could not be implemented because they conflict with current land use policies. training. to manage the process. And the fact that existing policies on land use. February. and equipment required to discharge its functions? Does each institution understand its role and know how to develop the procedures for accomplishing this role? Is there a key stakeholder—i.

These may be needed to understand fully or to improve the financial position of the service provider prior to entering into a PPP. Data required would include: • audited financial statements as well as any current financial reports (unaudited) and plans/budgets. Commercial considerations relate to the business orientation of the infrastructure service provider which may become a partner in the PPP. financial. operational (e. including financial as well as organizational (e. and contract compliance and monitoring..) strategies. the current commercial.5 Commercial. 3. Governments may have unrealistic expectations of the ability of their own organizations in that respect.g. Financial. customer database. encouraging use. and funding arrangements may be necessary. as decentralization takes root. and continually challenge and update critical assumptions and results through ongoing review as the transaction develops. ensure that consistent assumptions support all inputs to the model. negotiation. and Economic Issues7 As part of the diagnostic assessment. identify key points of sensitivity. The stages of the procurement process are discussed in detail in chapter 7. employment levels). etc. and technical (e. In the institutional analysis.g. . while providing the private partner with revenue sufficient for commercially viable operations. Financial considerations relate to the design of detailed and realistic pricing (including customer tariffs. A key tool to support the analysis is a financial model. and economic arrangements and outcomes of the sector should be understood and assessed. the government’s provision of financial support through investment contributions or other forms of “viability gap” support or even ongoing subsidies can achieve this balance. To develop a financial model. volumes produced and invoiced). off-take agreements. preliminary improvements to the billing system. 1. The first step in financial analysis and modeling is the collection and analysis of historical data. In preparation to a PPP.g. This understanding of the current scenario informs decisions about the desired sector outcomes and how these might be achieved. the status of receivables.. the modeler has to review available data.16 Public–Private Partnership Handbook there must be some flexibility to refine and update institutional roles as the sector evolves and matures.. The objective is to provide affordable services. Sometimes. governments have the additional burden of determining at what level of government each role is best performed. Increasingly. types and capacities of operational assets) information. it is important not to overlook the capacity to support bidding.

– financial data (such as the terms of the financing instruments). In addition to sector-specific data. investments. .). debt schedule and cost of capital.). These macroeconomic and demographic data are needed to project such key elements as demand. exchange rates.. operating costs). – Ii is the amount invested at year i. operating costs. operating.). tax levels. – Ci is the operating cost at year i. The project’s internal rate of return (r) is calculated from the following equation: Ri - Ii - Ci =0 (1 + r)i Where: – Ri is the operating revenue at year i. and interest rates) and demographic (population growth rates) information is important. employees—numbers and types (e. . These sheets demonstrate the results on the project’s cash flow of different assumptions. historical gross domestic product. credits. administrative. subsidies. . gathering critical macroeconomic (e. etc. bonds. • Results and summary sheets. – ongoing capital expenditure (both maintenance and growth related).g. etc. • Sheets with cash-flow statement. transfer prices. schedule of operating assets (information regarding production capacities. – funding levels and types (equity. – construction data (construction costs and investments coming on stream over time. etc.). and debt service. inflation rates.g. permanent. and balance sheet of the project company. revenues.. required tariff adjustments. profit and loss account. contract) database of customers. These results are typically illustrated in the form of financial indicators such as:   Project Internal Rate of Return (or Project IRR) This represents the return of the project regardless of the financing structure. and details of any ongoing and planned capital investment programs. etc. The financial model is generally constructed in a standard spreadsheet program (such as Excel) and includes worksheets for the following: • Inputs and assumptions such as: – economic data (inflation. Financial model structure. toll rate. and – operational data (operational cost.Structuring a PPP: Sector Diagnostic and SectorIntroduction  17 Road Map 1 • • • • • • tariff schedules—historical and current. historical production volumes. demand forecasts.

Generally. an Equity or Geared IRR will be used to assess their own investment case). in real terms—which takes into account country. the ability of the project company to accommodate an occasional shortfall of cash.   Loan Life Debt Service Cover Ratio (LLCR) This ratio shows.and sector.18 Public–Private Partnership Handbook An attractive IRR would be high.. the minimum ADSCR should be greater than 1.   Return on Equity (or Project ROE) This calculation shows the return to shareholders who receive dividends. (An appropriate IRR. The project may be considered viable for lenders when ADSCR is greater than one for every year of the project life. The IRR (r) on equity is calculated according to the following equation: Di - Ii =0 (1+r)i Where: – Di is the dividend at year i. the ability of the project company to repay debt. for any operating year. The project is profitable for the shareholders when r is high.1 or 1. for any one operating year. depending on countries and financial markets.   Annual Debt Service Coverage Ratio (ADSCR) This represents. – Ii is the amount invested by the shareholders at year i. preferably above 7–8% in real terms. This ratio is calculated as follows:  CBDSi ADSCRi = DSi Where: – CBDSi is the cash flow before debt service at year i (the cash remaining in the project company after operating costs and taxes are paid). – DSi is the debt service remaining at year i (principal and interests). leading to its inability to repay the debt during the last years of the project. For many potential investors in a PPP.or industry-specific factors as well as risk expectations—should be achieved. This ratio is calculated as: . This means that if project revenue is below what was forecast in the financial model at year i. the project company should still be able to repay debt.

The actualization rate must be chosen carefully. The model can simulate overruns in construction costs. it continues throughout the PPP process as an iterative analysis of the PPP structure as it evolves. The financial model is used throughout the PPP process (see chart on the PPP project sequence) to continually assess the impact of different pricing. which has a considerable effect on the result. changes in projected demand. This means that the project company should be able to repay the debt despite a period of cash shortfall. changes in operating costs. – DSi-end is the total of debt service remaining at year i (principal and interests). neutralizing the effects of inflation. It enables decision makers to make informed choices about the project structure and the operating environment. The project is estimated viable for the lenders when the LLCR is high for every year of the project life. Uses of the Financial Model: The financial model simulates the financial results of the project by demonstrating anticipated cash flow under different scenarios. . The information yielded by a financial model allows decision makers to understand how lenders. Calculating an NPV requires a parameter called "actualization rate" or discount rate. The model should be accompanied by a manual that sets out the structure and how to use the model. Economic considerations relate to the overall cost/benefit analysis of the proposed PPP and its projected impact on the sector. . and lists the assumptions used in the model. The model reflects assumptions made about risks (and the associated cost of capital) and allocation of risks. partners. the net present value of these payments gives the real amount of subsidies as if they were paid in a lump sum at present year. The financial model is also used frequently to evaluate proposals made by potential private partners and can be used to monitor performance once the project is underway. or changes in inflation or interest rates.Structuring a PPP: Sector Diagnostic and SectorIntroduction  19 Road Map 1  NPV (CBDSi    end)  LLCRi =           DSi     end Where: – NPV(CBDSi-end) is the net present value of the cash flow before debt service from year i to the end of the debt repayment period. and consumers may perceive the project. Net Present Value (NPV) of Subsidies If a project is subsidized over several years. including the impact of different tariff (price) and subsidy levels and different coverage targets. and service scenarios. financing. While this analysis begins in the diagnostic stage. and to update or ratify decisions about project structure.

too often the stakeholders have not been properly consulted or engaged in the process. Even if the contract is awarded despite opposition. the financing gaps. leading to delays or even cancellation.6 Stakeholder Consultation Despite the long experience with PPPs. • . Where the sector is falling short of government and consumer expectations. the difficulty and risk of the project increase drastically if public support is not present. This is partly attributable to the diverse range of stakeholders involved in the process and the difficulty in reconciling their interests and concerns. an agreement should be reached to establish realistic financial expectations of stakeholders.. Furthermore. potentially late in the process.e. Consultation is increasingly seen as important for several reasons: • • Inadequate consultation or communication with stakeholders increases the danger of opposition. they remain controversial among a range of stakeholders. Allowing stakeholders to comment on PPP strategies allows for a sense of buy-in and can lead to innovative approaches. or is financing available for subsidies? How is cost recovery to be defined and over what time line is it to be achieved? Is the sector willing and able to provide subsidy to the consumer or operator for a certain period? Is it confirmed that consumers are willing and/or able to pay more? Is there a fundamental flaw in the tariff structure and levels that needs to be addressed? Are tariffs being adjusted prior to PPP? Are the commercial procedures in the sector prudent (i. Stakeholders provide valuable input to the design and practicality of an approach.0 Public-Private Partnership Handbook for ADB Staff There should be analysis of the financial flows within the sector. 3. Relevant questions in diagnosing the issues and strategy for the sector include: • • • • • • • • To improve the financial health of the sector. and the commercial results. the stakeholders are critical to the sustainability of a PPP. is the immediate priority to increase operational efficiency or to attract funding? Does the government commit to recover costs in the sector? Is government prepared to allow tariffs to increase to achieve this. In addition. is there an accurate customer database? Are bills correct and timely? Are bills easily understood and promptly paid? Are illegal connections/theft a problem?) This analysis pinpoints the critical constraints to creating a financially sustainable sector and helps identify the activities and interventions that might be required to remove those constraints.

leading to broad agreement on the objectives of PPP. or because information might fuel opposition. some governments see risk in public consultation either through the danger of raising expectations that may not be met. Each role is critical. . through the danger of being unable to reconcile differences. 007. PPP. and understanding of. Dissemination of information leads to increased credibility of project partners. Table 2: Role of Different Stakeholders in the PPP Process Stakeholder Political decision makers Role Establish and prioritize goals and objectives of PPP and communicate these to the public Approve decision criteria for selecting preferred PPP option Approve recommended PPP option Approve regulatory and legal frameworks Identify company-specific needs and goals of PPP Provide company-specific data Assist in marketing and due diligence process Implement change Communicate ability and willingness to pay for service Express priorities for quality and level of service Identify existing strengths and weaknesses in service Provide feedback on attractiveness of various PPP options Follow rules and procedures of competitive bidding process Perform thorough due diligence resulting in competitive and realistic bidding Provide unbiased evaluation of options for PPP Review existing framework and propose reforms Act as facilitator for cooperation among stakeholders Company management and staff Consumers Investors Strategic consultants Source: Heather Skilling and Kathleen Booth. Table  lists the roles of the PPP process stakeholders and Figure  illustrates their interests.Structuring a PPP: Sector Diagnostic and Sector Road Map 1 • • Broad public support and understanding of the reform agenda encourage politicians to stay committed. yet specific stakeholders will have different interests that influence how they approach their role. Despite these compelling reasons. There must be a consultation process to reconcile and prioritize issues. These risks are easily outweighed by the benefits of communication and the crucial role it plays in building support for. through losing control of the flow of information.

but would include some or all the components below: • Opinion research: Opinion research gathers data on stakeholders..Improve productivity.Ensure stable. they must be given not only a forum for participation but also the information they need to participate effectively. The research is conducted on a relatively formal basis through questionnaires. etc. their perceptions.Increase accountability and responsiveness Examples of Stakeholder Interests .Maximize revenue . that is.Ensure fair pricing . The appropriate forum to communicate and build support for PPP is through an iterative dialogue with stakeholders. • .Promote fair competition .Ensure fair treatment of present employees .Attract investors . the feedback may not translate into direct change in the PPP design or process but will be one stream of influence. and morale Consumers Stakeholder Interests Investors .Enable organizational restructuring and asset allocations that favor efficient operations .Provide universal access to service .Ensure affordable basic service .Improve quality and reliability of service . It is intended to gather information and build an understanding among the reformers as to current perceptions and understanding and the basis of those opinions. A key part of stakeholder consultation is to manage expectations with respect to how feedback will be incorporated into the reform process. efficiency. Each communications program must be tailored to the local context and PPP. transparent regulatory process . For stakeholders to play an active role in the PPP process.Improve public welfare Employees . Public–Private Partnership Handbook Figure 3: The Range of Stakeholder Interests in PPPs Government . The research influences the content and media of the communications program as well as the reforms themselves.Provide career opportunities .Provide trained human resources . and behaviors with respect to the issues concerning a specific PPP.007. Stakeholder consultation: Consultation is a less formal process through which themes and policies of interest are discussed within or across stakeholder groups.Generate more investment opportunities Source: Heather Skilling and Kathleen Booth. polling. This might be accomplished through focus groups or stakeholder discussion groups.

and newspapers. but on several levels: at the policy or key decision-makers’ level. See Box  as an example. it highlighted the objective nature of the evaluation process. the Government launched a media campaign months before the bidding process to explain the process and the precautions being taken. Washington.Structuring a PPP: Sector Diagnostic and SectorIntroduction   Road Map 2 • • Public awareness: Public awareness efforts are aimed at a broad range of stakeholders and designed to increase general awareness of an issue. To ensure that media was informed about the bid process. . which was open to the public. congressional inquiries. the media campaign focused strongly on the elaborate security measures used to protect the integrity of the bids. among the stakeholders specifically affected by a PPP. This is a proactive distribution of information that will help inform public reaction to PPP. Public education: Public education is the process of providing stakeholders with the tools and information required to increase understanding of an issue or to take on a new role. Mark. Source: Dumol. Because public procurements in the Philippines are commonly subject to protests. which did not award points for the quality of the technical approach. Box 2: Promoting Transparency—The Case of Manila Water (Philippines) To build support for introducing Private Participation in Infrastructure (PPI) in water and wastewater services in Metro Manila. This is a more specific and detailed program than public awareness. The communication program associated with PPP has to occur not only at all stages of PPP. Communication activities have to begin early in the process and continue through to closure and even during implementation. and graft investigations. radio. the Government also prepared a video presentation regarding the rules for bidding and the procedure for opening bids. DC: World Bank. In addition. 000. The high-profile communications and public relations efforts of the Government resulted in strong media coverage of the bid process. The project structure should incorporate mechanisms to ensure ongoing communication with the public and customers. This might be done through TV. the level of the enterprise. and among the public at large as needed. To educate the public on the measures being taken to ensure transparent procurement. The Manila Water Concession: A Key Government Official’s Diary of the World’s  Largest Water Privatization. The Philippine Government attributes the project’s success largely to the design of a transparent procurement process and to the perception among stakeholders (developed because of the media campaign) that the process was transparent. It did not produce the controversy or opposition experienced during prior public procurements. town meetings. the Government of the Philippines embarked on a comprehensive strategic communications program that included among its objectives the promotion of transparency in the PPI transaction.

Sector strategies may rely on breaking down service functions. managing the contract. the PPP road map will more specifically describe the high-level action plan for: • Technical – defining and documenting the desired technical outcomes of the partnerships. selecting options. – developing the procurement plan and process for achieving the investments. organizing and managing the process. specific.. negotiating and contracting. financing for investment. and managing transitions. e. tendering and procurement. Using the results of the analysis outlined in sections . through PPPs and other interventions.5. . defining objectives. between power generation and distribution—resulting in complex linkages that need to be defined before a PPP can realistically be implemented. finalizing the terms of the partnership. identifying partners. cost recovery strategy. and – defining and documenting the expected improvements which do not require major investment. – defining the necessary investments for achieving improvement.7 Clear Sector Strategy and Road Map The diagnostic assessment of the sector yields information to develop and inform targeted. resolving constraints. regulatory strategy. managing disputes. Public–Private Partnership Handbook 3. – defining the correct metrics for measuring improvement. The resulting comprehensive sector strategy and road map will set out the initial timetable and action plan for: • • • • • • • • • • • • • • • • • • strategic planning. monitoring and evaluation. collecting additional information.g. defining scope.1–. and realistic sector strategy and road map to achieve improvements. The strategy and road map provide clarity and certainty about the operating environment to private sector operators—a prerequisite for sizable investments and long payback periods inherent in infrastructure projects.

repatriation of resources. regulating. . sets out how a proposed PPP is expected to help achieve sector goals. control. and – providing technical assistance for transition periods. As the transaction evolves and is further defined. – creating new institutions such as regulators. The road map and the activities it encompasses must be subject to continual updating. and managing infrastructure assets. procedures. the specific requirements for implementation become clearer and required activities can be outlined in detail. The PPP process as implemented against the road map is described in the subsequent chapters. – designing a PPP plan to achieve these sector results. The road map and PPP process will incorporate a timetable that should be adhered to as closely as possible. • The road map provides the context. – establishing a process to make the legal reforms needed to reduce impediments to improved/expanded service such as assignment of responsibility for development. financial. and economic issues – agreeing with stakeholders on the economic balance of costs and benefits to be achieved in sector reform. which might be required. Decision makers and participants must be made aware of key dates and milestones. financing. consumer protection. and describes the steps to be taken to prepare for and implement PPP. tariff regulation. Commercial. and – developing PPP legislation that seeks to address perceived gaps in the legal and regulatory frameworks. regulatory. and policy frameworks – creating a policy framework for PPP activity and regulation. – establishing a process to enact the regulatory requirements of the PPP including monitoring of service obligations. – developing the manuals. A well-defined road map and a well-managed process provide a degree of certainty and reassurance to all participants. and asset management. and – developing a financing plan for PPP that is realistic for the market and is commercially viable and sustainable. – developing a PPP process that is consistent with the legal and regulatory regime.Structuring a PPP: Sector Diagnostic and SectorIntroduction  5 Road Map 2 • Legal. and barriers to cost recovery. compliance with service conditions. and other tools required to implement new functions. standards. • Institutional and capacity status – assigning the appropriate level of authority to each institution in the sector. – establishing a process to make any realistic legal reforms needed to overcome potential constraints to PPP including limits on assets ownership or management. – educating each institution on new roles and training staff to perform new functions.

enforce the contract provisions. able to withstand shorter-term political pressures. evaluate progress. . or driver. broader support for PPP can be earned.6 Public–Private Partnership Handbook 3. monitor progress. anticipating concerns and questions.8 Clear Government Commitment and a Designated Champion The private sector will expect government to be a competent partner in discharging its obligations in terms of policy and reform planning. Of course. works with various parties to achieve cooperation/ consensus. through stakeholder consultation and transparency of process. The standing. The government has to set out the case for PPP in a convincing and transparent manner. In this way. and contract oversight. report progress. and leads the government toward decisions. The champion is an individual or unit that is accountable for progress. project development. ensures that appropriate attention is given to the main issues. A detailed road map helps manage expectations in that regard. credibility. and allows the actual performance of the government to be monitored and measured. through the provision of adequate funding and support for the process. and strength of mandate of the PPP champion are strong indications of the true commitment of the government to the PPP project. and through the appointment of a powerful champion. for the process. is a focal point for public communication and information. It will also expect that the government has established the appropriate legal and other frameworks to set targets. and handle disputes. Political changes and powerful vested interests can all constrain the PPP process. The government’s commitment to the strategy is demonstrated in several ways: through a public statement of the reform strategy and expectations of PPP. Government has to be seen as advocating the process that will be accountable to the people and provide benefits. popular support for PPPs is ultimately gained through results—in terms of improved service and reasonable costs.

86% Figure 4. 00. As can be seen in Figure . Including (4. contracts are becoming hybrids. ROT = rehabilitate-operate-transfer. build–operate–transfer (BOT) and similar arrangements. management contracts.71% 8.80% 1. Almud.33% 2. and joint ventures. concessions.79% 3. Each PPP option implies varying levels of responsibility and risk to be assumed by the private operator. all forms are currently in place in Asia.2) Service Contract Figure 4.1) and Excluding (4. editors.28% 45.Introduction  2 4 Structuring a PPP: Available PPP Options This chapter discusses the main PPP options available for consideration.67% DBO 27. . Figure 4: Reported Operations Public-Private Partnerships in Asia by Contract Type. affermage or lease contracts. DBO = design-build-operate. The basic PPP contract types are: • • • • • • service contracts.15% 17.2 Services Contract 33.1 2. Source: Weitz.87% 10. together with differences in structures and contract forms as discussed in the subsequent sections and summarized in Table . Increasingly. Extending Services to the Urban  Poor. BOT = built-operate-transfer. Each presents different characteristics to be assessed against the sector reform objectives.10% BOO = build-operate-own. Beyond Boundaries. and Richard Franceys.81% 5. Manila: ADB.57% BOT Concession Management Contract ROT Partial Divestiture DBO 1.90% BOT Concession Management Contract 12.14% ROT Partial Divestiture BOO 26. adopting features of several contracts to reflect the best local requirements.

Promotes local private sector development Management may not have adequate control over key elements. subsequent contracts usually negotiated Improves operational and commercial efficiency. Public –5 years Private Public Public Minimal/moderate Asset Ownership Public Duration 1– years O&M Responsibility Public Capital Investment Public Public–Private Partnership Handbook Commercial Risk Public Overall Level of Risk Assumed by Private Sector Fixed fee. Problems and Challenges Requires ability to administer multiple contracts and strong enforcement of contract laws Potential conflicts between public body which is responsible for investments and the private operator How to compensate investments and ensure good maintenance during last 5–10 years of contract Does not necessarily improve efficiency of ongoing operations. operations. Source: Heather Skilling and Kathleen Booth. part variable related to production parameters Initial contract only. O&M = operation and maintenance. such as a treatment plant CONCESSIONS BOT Management of entire operation or a major component SERVICE CONTRACTS Scope Multiple contracts for a variety of support services such as meter reading. staff policy. 007. Mobilizes investment finance. often negotiated without direct competition Mobilizes investment finance. Develops local staff Competition One time only. . May require guarantees BOT = build–operate–transfer.Table 3: Summary of Key Features of the Basic Forms of Public-Private Partnership (PPP) 8 MANAGEMENT CONTRACTS LEASE CONTRACTS Responsibility for management. and specific renewals Public 10–15 years Private Public Shared Moderate High Private Private Private Private Private Private High 5–0 years Varies Public/Private Public/Private Responsibility for all operations and for financing and execution of specific investments Investment in and operation of a specific major component. preferably with performance incentives Portion of tariff revenues Minimal Compensation Terms Unit prices All or part of tariff revenues Mostly fixed. etc. such as budgetary resources. contracts not usually renewed Intense and ongoing Initial contract only. etc. billing. Develops local staff One time only. subsequent contracts usually negotiated Improves operational and commercial efficiency. Develops local staff Special Features Interim solution during preparation for more intense private participation Useful as part of strategy for improving efficiency of public company.

Service contracts can have a quick and substantial impact on system operation and efficiency. where costs such as labor are fixed.Structuring a PPP: Available PPP Options Introduction  9 2 This chapter provides an overview of the key features of each option as well as some inherent advantages and disadvantages. and provide a vehicle for technology transfer and development of managerial capacity. unit cost. Service contracts are often short term. typically 1– years. Box  shows Malaysia’s experience with service contracts for water leak reduction. PPPs with complicated financial structures and/or extensive contractual or monitoring requirements will necessitate hiring and/or training staff. As part of the selection process outlined in chapter 5. the contractor’s profit increases if it can reduce its operating costs. decision makers should note the prior depth of experience in using a particular type of PPP in a particular sector. Service contracts provide a relatively low-risk option for expanding the role of the private sector. Under a service contract. a process that has to be accomplished in advance of the need. Governments generally use competitive bidding procedures to award service contracts. The government is responsible for funding any capital investments required to expand or improve the system. it should be noted that different PPP forms are more readily adapted to particular sectors or project types and have been used more extensively in these contexts. allowing for repeated competition in the sector. or other basis. Potential strengths Service contracts are usually most suitable where the service can be clearly defined in the contract. while meeting required service standards. The public authority remains the primary provider of the infrastructure service and contracts out only portions of its operation to the private partner. Therefore. The barriers to entry are also low given that only a discrete service is up for bid. The private partner must perform the service at the agreed cost and must typically meet performance standards set by the public sector. which tend to work well given the limited period and narrowly defined nature of these contracts. the level of demand is reasonably certain. One financing option involves a cost-plus-fee formula. In addition. and the private partner participates in a profit-sharing system. the government pays the private partner a predetermined fee for the service. Finally. 4. and performance can be monitored easily. the government (public authority) hires a private company or entity to carry out one or more specified tasks or services for a period. The repeated . The private partner typically does not interact with the consumers.1 Service Contract Under a service contract. which may be based on a one-time fee. decision makers should consider carefully the local capacity available to implement options that are more complex.

United Kingdom.0 Public–Private Partnership Handbook Box 3: Service Contract for Leak Reduction in Malaysia Sandakan is a city of about 50. be compromised if other sources of financing (from government or donors. and replacing the mains with the highest burst frequencies. Source: Pilcher. During the course of the project. Snodland. setting up of district metered zones. pressure management. Richard. About 11 Mld have been saved through active leakage control and 6. the project was successfully ended. active leakage detection. leak repairs.  Malaysia. such as pipe replacement. In 006. Potential weaknesses Service contracts are unsuitable if the main objective is to attract capital investment. Halcrow Water Services. only discrete and limited improvements. while the low barriers to entry encourage participation in the competition. Salcon Engineering. but the contractor is not under an obligation to provide financing. At the end of June 005. The physical activities were paired with a training program to ensure sustainability of the efforts. Salcon signed a contract for phase two of the contract. The fact that the contractor’s activities are discrete and segregated from the broader operations of the company may mean that there is no broader or deeper impact on the system operations.  Sabah. The State of Sabah has had one of the highest levels of nonrevenue water (NRW) in Malaysia.000 inhabitants in the Malaysian state of Sabah. . the level was calculated at almost 60% of system input volume. The effectiveness of the contractor may. bidding maintains pressure on contractors to maintain low costs. A  Practical  Approach  to  Developing  a  Sustainable  Water  Loss  Reduction  Strategy  in  Sandakan. This represented a savings of 0% of the total volume of treated water produced. about .5 million liters per day (Mld) against the target of 15 Mld. Jabatan Air Sabah (Sabah Water Board) let an NRW reduction contract that was aimed at reducing real or physical losses from two directions.100 leaks were located and repaired. This contract was for a period of 0 months and was undertaken by Halcrow Water Services in partnership with a Malaysian company. Kent ME6 5AH. consumer meter replacement. both of which are politically vulnerable and critical to sustain the system.5 Mld by replacement of mains. and network modeling. 005. The scope of work includes providing core NRW team and technical personnel to carry on with the NRW reduction work. improving and expanding the current active leakage control activities. in fact. In the spring of 00. The public sector remains in charge of tariff setting and assets. Rocfort Road. In July 005. for instance) do not materialize. The contracts may improve efficiency and thus release some revenue for other purposes. physical losses have been reduced by almost 17. In the 1990s.

port authority. Figure 5: Structure of Management Contract Government Regulation: Tariff setting Service standards Environmental monitoring Investment & Subsidy Approvals Reporting Public Service Provider Management Tariff Private Operator Source: Heather Skilling and Kathleen Booth. however.e. the private partner provides working capital but no financing for investment. hospital..2 Management Contracts A management contract expands the services to be contracted out to include some or all of the management and operation of the public service (i. utility. The public sector retains the obligation for major capital investment. Although ultimate obligation for service provision remains in the public sector. To provide an incentive for performance improvement. the management contractor can be paid a share of profits. 007. The contract can specify discrete activities to be funded by the private sector. Alternatively. The private partner interacts with the customers.Structuring a PPP: Available PPP Options Introduction  1 4. A management contract typically. particularly those related to expand or substantially improve the system. daily management control and authority is assigned to the private partner or contractor. The private contractor is paid a predetermined rate for labor and other anticipated operating costs. etc. will upgrade the financial and management systems of a company and decisions concerning service levels and priorities may be made on a more commercial basis. and the public sector is responsible for setting tariffs. Figure 5 illustrates the typical structure of a management contract. the contractor is paid an additional amount for achieving prespecified targets. . Box  describes Cambodia’s experience with management contracts in the primary health care sector.). In most cases.

and financing and expansion planning. The contractor must provide certain services free of charge (emergency obstetrical care.worldbank. Bhushan. a management contract can be structured to phase-in increasingly extensive involvement of the private sector over time and as progress is demonstrated. antenatal care. Similarly. family planning. Contracting for the Delivery of Primary Health Care in Cambodia: Design  and Initial Experience of a Large Pilot Test. World Bank Institute Flagship Program Online Journal. 000. inpatient treatment of serious illnesses). and Brad Schwartz.org/wbi/healthflagship/ journal/index. Management contracts can also be seen as interim arrangements. Economic  and Research Department Policy Brief No. minor surgery. and services to the poor. for instance) required to achieve deep and lasting change. Manila: ADB. 6. In Cambodia. Potential weaknesses The split between the obligation for service and management. There is a risk that the management contractor does not enjoy the autonomy or the authority (over the labor force. the Government found that private management was more effective than public management in terms of performance and coverage achievements. -year management contracts with nongovernment organizations were put in place in primary health care facilities in 1 districts. Compared with publicly managed facilities. safeguards are required to prevent inflation of reported achievements or deficient maintenance of the system to increase profits. The contracts are also relatively low cost as fewer staff are dispatched to the utility from the private operator. The contractor has full-line management responsibility and must respond to performance targets including achievements in immunization. Sheryl Keller. Indu. allowing for modest improvements while more comprehensive contracts and structures are developed. is a tricky one. and improvement in working conditions for staff. management contracts are used for other municipal services such as health care. If the operator is paid a portion of profits or given an incentive payment. Sources: Loevinsohn. Available: www.htm. . on the other. Public–Private Partnership Handbook Box 4: Cambodia—Contracting Out Primary Health Care to Nongovernment Organizations In addition to their uses in infrastructure. 00. Potential strengths The key advantage of this option is that many operational gains that result from private sector management can be made without transferring the assets to the private sector. The contracts are less difficult to develop than others are and can be less controversial. Benjamin. Achieving the Twin Objectives of Efficiency and Equity: Contracting Health Services in Cambodia. on the one hand.

Responsibility for service provision is transferred from the public sector to the private sector and the financial risk for operation and maintenance is borne entirely by the private sector operator. Part of the tariff is transferred to the public authority to service loans raised to finance extensions of the system. An affermage is similar. Under this arrangement. the initial establishment of the system is financed by the public authority and contracted to a private company for operation and maintenance. which remain the responsibility of the public authority. the private partner is responsible for the service in its entirety and undertakes obligations relating to quality and service standards.3 Affermage or Lease Contracts Under a lease contract. . Figure 6: Structure of Lease Contract Government Investment Approvals Regulation: Tariff setting Service standards Environmental monitoring Asset Company Planning Affermage/Lease contract • Performance targets • Variable Fees Reporting Fermier/Lessee Source: Heather Skilling and Kathleen Booth. 007. to a lease contract. In particular. The affermage fee is typically an agreed rate per every unit sold. and retains the remaining revenue.Structuring a PPP: Available PPP Options Introduction   4. but not identical. the operator is responsible for losses and for unpaid consumers' debts. Leases do not involve any sale of assets to the private sector. The duration of the leasing contract is typically for 10 years and may be renewed for up to 0 years. See Box 5 on leasing in the ports sector. The affermage can be more appealing to the private partner as it reduces some risks associated with low-cost recovery in sales. Except for new and replacement investments. Figure 6 shows the lease contract’s typical structure. pays the contracting authority an affermage fee. Unlike a lease where the private sector retains revenue collected from customers and makes a specified lease payment to the contracting authority. the operator provides the service at his expense and risk. an affermage allows the private sector to collect revenue from the customers.

The public sector is responsible for establishing performance standards and ensuring that the concessionaire meets them.4 Concessions A concession makes the private sector operator (concessionaire) responsible for the full delivery of services in a specified area. collection. In essence. Source: World Bank. such assets are publicly owned even during the concession period. Further. 4. 006. Table  and Box 6 are samples of infrastructure concessions. the private partner’s profits depend on the utility’s sales and costs. maintenance. Importantly. hence. Potential strengths Under lease and affermage contracts. In the People’s Republic of China. The tariff is typically established by the concession contract. Potential weaknesses The key issue in moving from service and management contracts to a lease is that the contractors’ revenues are derived from customer payments and. Karala State. lease contracts are usually used in operating airport terminals or seaport container terminals. Private Participation in Infrastructure database. in order to increase profits. This may require structuring and revising complex tariff arrangements. The key advantage of this option is that it provides incentives for the operator to achieve higher levels of efficiency and higher sales. Although the private sector operator is responsible for providing the assets. The concessionaire collects the tariff directly from the system users. including operation. The Thai contract involves local companies and is to run for 7 years. the public sector’s role shifts from being the service provider to regulating the price and quality of service. the operator is now responsible for all capital investment. which also includes provisions on how it may be . Both India and Thailand have ongoing lease contracts to operate container terminals at the seaports of Bangkok and Cochin. the Guangzhou Baiyun Airport Terminal is operated under a lease contract with the Keppel Group of Singapore which has a 15-year contract and 5% ownership of the project company. the private partner provides a fee to cover the cost of using the assets although the private partner does not provide investment capital. The Indian contract is for 8 years and involves private participation from the United Arab Emirates. management. the question of tariff levels becomes increasingly sensitive. Public–Private Partnership Handbook Box 5: Leasing in the Ports Sector In Asia. and construction and rehabilitation of the system. The principal drawback is the risk of management reducing the level of maintenance on long-lived assets. the responsibility for capital investment remains with the government and no private investment capital is mobilized. particularly in the later years of the contract. In addition.

Madagascar. Cote d’Ivoire. Guinea. May. Hungary. PRC. Bechtel is providing support for project management to Iiarco and a Korean consultant. Dongbu Corporation (10%). Malaysia. Kortech. Brazil. Mike. Macao. Senegal Source: Resides. Mexico Natural Gas Transport and Distribution Argentina Electricity PRC. has a 0-year operating concession from the end of construction. a special purpose company incorporated in March 001. Box 6: Republic of Korea’s First Airport Railway The first railway concession project is underway in the Republic of Korea (ROK). . Chile. Incheon International Airport Railroad Company (Iiarco). The project is strongly supported by the national and regional governments as a means of linking the Incheon hub to Seoul and the recently opened KTX high-speed railway. Philippines. Posco Engineering and Construction (11.5 years later to take the line into the heart of the capital at Seoul central station. Ioannis N. DC: World Bank. Mexico Water Distribution Argentina. which runs from Seoul Central station to Busan. Korea Rail Network Authority (9. Burkina Faso. is also assisting the concessionaire. Cote d’Ivoire. It will be extended by 0. Daelim Industrial (10%).7 kilometer (km) line from Seoul city center to Incheon International Airport will offer both commuter and express service.. led by Hyundai Engineering and Construction (HDEC) with 7%. Guinea. International Railway Journal. Source: Knutton. Hungary.7 km . The 1-km first phase of a new commuter and express rail air link in ROK opened in 007 between Incheon International Airport and Gimpo domestic airport. Cote d’Ivoire. Indonesia. Indonesia. Guinea-Bissau. It is the first railway concession project in ROK. Hungary. 00. Iiarco has 11 shareholders. Mexico. The 61. Mexico Railways Argentina.Structuring a PPP: Available PPP Options Introduction  5  Table 4: Examples of Infrastructure Concessions in Developing and Transitional Economies Telecommunications People’s Republic of China (PRC). Colombia. and six other Korean companies.9%). 00. Reforming Infrastructure: Privatization. Brazil. Washington.9%). Cook Islands. Chile. Regulation and Competition: A World  Bank Policy Research Report.

Governments also need to upgrade their regulatory capacity in relation to tariffs and . The transfer of the full package of operating and financing responsibilities enables the concessionaire to prioritize and innovate as it deems most effective. The concessionaire is also responsible for working capital. The public authority may contribute to the capital investment cost if necessary. the government may choose to provide financing support to help the concessionaire fund its capital expenditures. In rare cases. The concessionaire is responsible for any capital investments required to build. the government can be compensated for its contribution by receiving a commensurate part of the tariff collected. A concession contract is typically valid for 5–0 years so that the operator has sufficient time to recover the capital invested and earn an appropriate return over the life of the concession. A concession contract’s typical structure is shown in Figure 7. 007. This can be an investment “subsidy” (viability gap financing) to achieve commercial viability of the concession. or expand the system. and for financing those investments out of its resources and from the tariffs paid by the system users. Potential strengths Concessions are an effective way to attract private finance required to fund new construction or rehabilitate existing facilities. Figure 7: Structure of Concession Contract Government Regulation: Tariff setting Service standards Environmental monitoring Concession contract Reporting Concessionaire Services Revenues Lenders Finance/Equity Shareholders Consumers Source: Heather Skilling and Kathleen Booth. Alternatively. upgrade. Potential weaknesses Key drawbacks include the complexity of the contract required to define the operator's activities.6 Public–Private Partnership Handbook changed over time. A key advantage of the concession arrangement is that it provides incentives to the operator to achieve improved levels of efficiency and effectiveness since gains in efficiency translate into increased profits and return to the concessionaire.

they can be politically controversial and difficult to organize. Figure 8 illustrates the BOT contract structure. There is also concern that concessions not set out monopoly terms but provide room for additional operators where this is in the best interest of certain groups of consumers and the concessionaire cannot provide equivalent service. It is argued that concessions provide only limited competition given the limited number of qualified operators for a major infrastructure network. Figure 8: Structure of a Build–Operation–Transfer (BOT) Contract Eventual Return of Investment Government/Public Utility Private Developer Capital Investment BOT Services Tariffs Revenues Consumers (Directly or through Distributor Source: Heather Skilling and Kathleen Booth.5 Build–Operate–Transfer and Similar Arrangements BOT and similar arrangements are a kind of specialized concession in which a private firm or consortium finances and develops a new infrastructure project or a major component according to performance standards set by the government. . comprehensive nature of the contracts. the long term of the contracts (necessary to recover the substantial investment costs) complicates the bidding process and contract design.Structuring a PPP: Available PPP Options Introduction  7  performance monitoring. Because of the long-term. Further. This drawback may be countered by allowing a periodic review of certain contract terms in the context of the evolving environment. given the difficulty in anticipating events over a 5-year period. There is additional risk that the operator will only invest in new assets where it expects payback within the remaining period of the contract unless provisions for these events are set out in the contract. 007. 4.

The public sector agrees to purchase a minimum level of output produced by the facility. (See Box 7). the private partner provides the capital required to build the new facility. However.gov/ppp/options. a concession contract may include . Public/Private. Importantly. or award a new contract to a new partner. contract the operation responsibility to the developer. or Private Private by fee contract Private by fee contract Private by fee contract Private by fee contract Private Private by contract (concession) Source: United States Department of Transportation.8 Public–Private Partnership Handbook Table 5: Basic Project Delivery Options Design–Bid–Build Design–Build Build–Operate– Transfer (BOT) Design–Build– Finance–Operate (DBFO) Build–Own– Operate (BOO) Own Conceive Public Public Public Public Public Public Public Public or Private Public or Private Design Build Operation & Financial Maintenance Responsibility Public Public Public Public Public Public. Available: www. BOTs generally require complicated financing packages to achieve the large financing amounts and long repayment periods required. dot. in practice. the distribution utility might pay a capacity charge and a consumption charge. At the end of the contract. thus sharing the demand risk between the public and private partners. Federal Highway Administration. The distinction between a BOT-type arrangement and a concession—as the term is used here—is that a concession generally involves extensions to and operation of existing systems. whereas a BOT generally involves large "greenfield" investments requiring substantial outside finance.htm The variations of BOT-type contracts include those cited in Table 5. the public sector assumes ownership but can opt to assume operating responsibility. Alternatively. sufficient to allow the operator to recover its costs during operation. the private operator now owns the assets for a period set by contract—sufficient to allow the developer time to recover investment costs through user charges. Under BOTs.fhwa. A difficulty emerges if the public sector has overestimated demand and finds itself purchasing output under such an agreement (“take–or–pay”) when the demand does not exist. for both equity and debt. Several of these are discussed in this section.

maintenance requirements. China issued a build–operate–transfer for constructing and operating its solid waste transfer facilities. and then held a competitive tendering process to select the winning firm. The Government conducts regular inspections of the transfer facilities to verify that the specified requirements are being met. the government. Under a design–build–operate (DBO) contract. BOT agreements tend to reduce commercial risk for the private partner because there is often only one customer. Public– Private Partnerships for Urban Environment Working Paper I. There are many variations on the basic BOT structure including build–transfer–operate (BTO) where the transfer to the public owner takes place at the conclusion of construction rather than the end of the contract and build–own–operate (BOO) where the developer constructs and operates the facility without transferring ownership to the public sector.org/pppue/gln/publications the development of major new components as well as extensions to existing systems. With the design–build–finance–operate (DBFO) approach.Structuring a PPP: Available PPP Options Introduction  9  Box 7: Build–Operate–Transfer for the Construction and Operation of a Solid Waste Transfer Facility in Hong Kong. and equipment replacement schedules. DBFO arrangements vary greatly in terms of the degree of financial responsibility that is transferred to the private partner. Source: Public–Private Cooperation in the Delivery of Urban Infrastructure Services (Options & Issues). Potential strengths BOTs have been widely used to attract private financing to the construction or renovation of infrastructure.undp. financing. building. and the number of possible permutations is large. and BOTs sometimes involve expansion of existing facilities. Available: www. the responsibilities for designing. The questions of ownership and the timing of the transfer are generally determined by local law and financing conditions. China Hong Kong. (See Box 8). ownership is never in private hands. The private partner must be confident however that the purchase agreement will be honored. which include a transfer station and fleet of transfer trucks. The bidding documents laid out technical and environmental performance requirements. The Government prequalified several firms based on their experience in designing and operating transfer stations. a single contract is let out for design. Instead. and operating are bundled together and transferred to private sector partners. United Nations Development Programme (UNDP). . and operation of the infrastructure project. The station has been built and is currently in operation. construction.

worldbank. which leverages revenue streams dedicated to the project. Potential weaknesses BOTs have a project-specific application so they are potentially a good vehicle for a specific investment. However.htm An advantage to DBFO projects is that they are financed partly or completely by debt. Toll rates are based on a fixed formula and increase annually in line with an escalation formula linked to the consumer price index. Source: World Bank. • of shortfall in traffic: provision to extend the contract in case of nonachievement of Risk a 0% return over the 0-year period. operation of the toll plaza. Operate. While initial capital construction costs may be reduced through the private sector’s experience. and vehicle registration fees. and separators. including the pavement. private debt may be an expensive substitute for public financing where a take–or–pay agreement is in place. a toll review committee is constituted to provide a recommendation to the Government. Available: http://rru. • Inflation risk: Borne by the contractor but this is transferred to the contractor because of the fixed price nature of the contract. Risks are mitigated as follows: • Land acquisition risk: the Government bears all responsibility for completion.0 Public–Private Partnership Handbook Box 8: Build–Own–Operate and Transfer Contract to Develop. including toll collection. For a higher toll increase than approved in the contract. bridges. An independent engineer and independent auditor are hired to oversee the contract agreement and report to the Government and the contractor. Direct user fees (like tolls) are the most common revenue source. India The contract for this -kilometer toll road facility includes the design and completion of the project road. Additional revenue is also possible at the discretion of the Government. but with less impact on overall system performance. Tool Kit for Public-Private Partnership in Highways. toll facilities. • Force majeure risks: comprehensive insurance coverage and a temporary toll review provision to mitigate loss of revenue for a short period due to force majeure. It can be difficult to link the increases in production brought about by a BOT with commensurate improvements on the demand side. and maintenance of the facility. shadow tolls. might include lease payments. traffic regulation. and operation and maintenance. for instance. The contractor has relative autonomy to determine its work methods and plan its maintenance. and Maintain a Toll Road in Gujarat. .org/ Documents/Toolkits/Highways/_carac//_. other sources of finance in the road sector. cross-drainage works. It also covers management. • Revenue risk: Borne by contractor but tolls are automatically revised every year through an agreed indexation formula. medians.

7 million joint venture. From its position as shareholder. (9%). a $1. a major state-owned enterprise in centrifugal compressors. supplying 70 steam turbines. buckets. and 00 compressors as well as total engineering solutions to help the country improve the reliability and availability of its energy production and transmission equipment. 97 wind turbines. 005. Ltd. The private partner assumes the operational role and a board of directors generally reflects the shareholding composition or expert representation. and officials may be tempted to meddle in the company’s business to achieve political goals.6 Joint Venture Joint ventures are alternatives to full privatization in which the infrastructure is co-owned and operated by the public sector and private operators. The company may also be listed on the stock exchange. was formed on 8 January 00 between GE Energy (75%) and Shenyang Blower Works (SBW) (5%). GE Liming is an $18. Under a joint venture. This is important because the government is both part owner and regulator. The joint venture brings to the Chinese oil and gas industry a wide range of GE Energy’s oil and gas service offerings. the government has an interest in the profitability and sustainability of the company and can work to smooth political hurdles.com/about/ press/en/005_press/08505. the public and private sector partners can either form a new company or assume joint ownership of an existing company through a sale of shares to one or several private investors. Box 9: Energy Expansion through Joint Ventures in the People’s Republic of China General Electric (GE) Energy has been active in the People’s Republic of China (PRC) for more than 90 years. and gear manufacturing in the PRC. Box 9 highlights joint venture arrangements in the PRC.gepower. coupled with strong local capability. A key requirement of this structure is good corporate governance. 180 hydropower units. in particular the ability of the company to maintain independence from the government. one of the PRC’s primary manufacturers of aero-derivative gas turbines and jet engines. 4.Structuring a PPP: Available PPP Options Introduction  1 41 The benefit of competition is limited to the initial bidding process and these contracts are often renegotiated during their life. Available: www. however. Source: GE Energy. and nozzles to contribute to the assembly of GE’s Frame 9FA and 9E gas turbines in the PRC. 5 August. blowers.htm . GE Energy Expands Role in China. The joint venture manufactures combustion components. 165 gas turbines. The tender documents and processes require careful design and adequate time.9-million joint venture formed on 8 August 00 between GE Energy (51%) and Shenyang Liming Aero-Engine Company. GESTT.

all partners have invested in the company and have an interest in the success of the company and incentives for efficiency. . which can lead to concern for corruption. Under the joint venture structure. Figure 9: Structure of Joint Venture Contract Government Regulation: Tariff setting Service standards Environmental monitoring Reporting Asset Ownership (full or partial) Private Owner/Operator Services Revenues Consumers Source: Heather Skilling and Kathleen Booth. Under a joint venture. Joint ventures also take some time to develop and allow the public and private partners considerable opportunity for dialogue and cooperation before the project is implemented. both public and private partners have to be willing to invest in the company and share certain risks. 007. Joint ventures also have a tendency to be directly negotiated or to follow a less formal procurement path. Public–Private Partnership Handbook The joint venture structure is often accompanied by additional contracts (concessions or performance agreements) that specify the expectations of the company. Potential strengths Joint ventures are real partnerships of the public and private sectors that match the advantages of the private sector with the social concerns and local knowledge of the public sector. Potential weaknesses Government’s dual roles as owner and regulator can lead to conflict of interest. Figure 9 is the typical joint venture contract’s structure.

Hybrid arrangements provide a tailored solution in terms of scope.Structuring a PPP: Available PPP Options Introduction   4 4. Obviously. and technical resources and creation of a platform for investment planning that is more integrated. Under this structure. through a management contract. LEMA faced penalties for not achieving improvements. Similarly. the variations are endless. The Government decided to keep water and electricity services together in the scope to permit continued cross-subsidies from electricity to water. LEMA. the contracting authority retains full responsibility for undertaking and financing new investment even though the operator may be in a better position to manage new construction and some other investment obligations. the operator is given a limited investment responsibility. This contract design yielded several benefits. financial. Jordan. For instance.7 Hybrid Arrangements Contract arrangements that incorporate different characteristics of a range of contract types can also be developed. such as extension of network service coverage in certain areas. In some cases. Under a standard affermage/lease. but examples include: • A “management contract plus” arrangement. is responsible for water distribution and wastewater collection in Amman. • A private contractor. the contractor may put additional inputs at risk to achieve the cash flow outputs. these bring together the attributes most suitable to a particular project’s requirements and the operating conditions. • In Gabon. the operator and contracting authority may reach an agreement to cofinance investments. a concession contract was offered for a vertically and horizontally integrated national utility. risk sharing. The contract provided LEMA with a fixed-fee and a bonus based on the improved performance of the utility. providing both water and electricity. Alternatively. To achieve the bonus (if sufficiently large). • An “affermage–lease plus” arrangement has the ability to share responsibility for investments. and/or scope that is most directly suitable to the project at hand. in which the performance-related element of the management contract is substantial enough to transfer real risk. Called “hybrid arrangements”. . the payment of bonuses to the management contractor might be linked to achievement to increases in the operating cash flow of the utility by a predetermined amount. the management contract in Amman was one of the first to adopt risk-sharing mechanisms more typically associated with deeper forms of PPP. including cost reductions through the sharing of human.

From this analysis. no PPP option could be applied without tailoring it to the local context. and to address labor issues. Incorporating different components of different contract types or using several contracts in combination may be necessary. and financing requirements and constraints (as identified in the diagnostic). commercial. its advantages and disadvantages.Introduction  4 5 Structuring a PPP: Selecting the Option As previously mentioned. of the options under consideration. or customer satisfaction. The list of reform objectives should be compared with the results of the diagnostic and features of each contract type. BOTs are more often employed in the development of toll roads and wastewater plants while management contracts might be seen in health-care or water services. and special requirements of the sector based on characteristics of the system or population. Selecting an appropriate PPP option is based on a diagnosis of: • • • • • • • PPP options available (as described in chapter ). financial. The government and its advisors would use cost/benefit analysis and would consult with a wide range of possible private partners (operator survey) to gain insight on the appeal. to improve low-income service provision. PPP should be implemented within an overall reform strategy. legal and regulatory constraints (as identified in the diagnostic). technical constraints and goals of the sector (as identified in the diagnostic). likely outcomes and prerequisites. or lack of appeal. it is possible to determine which option is most likely to succeed at meeting the greatest number of (or the most critical) objectives. institutional issues (as identified in the diagnostic). For instance. The objectives of a PPP project will be a subset of the objectives for the overall sector reform. improved services. Particular PPP forms are used more widely and are more readily applied to particular sectors. Priorities for a PPP might include increased coverage. That said. interest of the market (local and international as described below). Additional modifications may be necessary to facilitate the financing of the transaction. to respond to concerns of potential partners. The options provide a menu of contract types that can be modified to suit specific project requirements. . efficiency improvements with associated reduction in government subsidy.

deeper forms of PPP that transfer greater risk to the private sector will require more sophisticated legal and regulatory structures. or poor technical performance. the operating environment. during the preparatory phase by implementing legal and regulatory reforms. and by assessing the market interest. which is shared. a briefing. ensuring key investments are made. The private sector’s interest in the option: A particular option such as a concession may best meet the objectives of the government. as well as availability of local skills to implement and monitor the transactions. Often. The comments are based on a pre-bid road show. If prerequisites are not in place as determined through the diagnostic. Other constraints may be low-cost recovery levels. the opportunity is described in an “Information Memorandum”. a summary of the key attributes of the project. For instance. is it government’s priority to reduce the costs of service? On the other hand. An alternative would be to achieve PPP prerequisites. or a project paper. and sector. see Table 6. different options may be more suitable to delivering them in a project. lack of system information. For instance.6 Public–Private Partnership Handbook Government objectives for the PPP process: Selecting a PPP option is influenced by the government’s specific objectives. but the level of risk may be unacceptable to potential private investors. The likely level of interest can be assessed through analysis of previous investments in the region. Each form of PPP has a set of prerequisites for successful implementation. Before the formal procurement process. 007. it may be prudent to start with a less extensive form of PPP. Table 6: Prerequisites of PPP Options Option Political Commitment Low Moderate Moderate High High Cost Recovery Regulatory Tariffs Framework Low Moderate High High Variable Low Moderate High High High Information Base Low Low High High High Government Capacity for Contracting. Management. country. is there a limited goal to improve billing and collection? Or is the priority to expand coverage? Depending on the objectives. potential bidders are often invited to comment on a proposed project structure. . Prerequisites to implementing a particular form of PPP: The diagnostic analysis determines the status of the sector undergoing reform. and Analysis Moderate Moderate High High High Service Contract Management Contract Lease Concession Build–Operate–Transfer and variations Source: Heather Skilling and Kathleen Booth. and/or putting new institutions in place.

Collecting this market feedback from potential private partners during the design/preparatory phases ensures that the bid package attracts interest. the available options can be ranked and the government can take an informed decision on the PPP strategy to be adopted.Structuring a PPP: Selecting Introduction  7 the Option 4 and anticipated financing. These discussions also generate market interest in an opportunity and may broaden the pool of potential bidders. Based on these three criteria. The road map will then be updated to reflect the PPP option selected and preparatory work can start. .

concession rights. The legal work continues as the PPP process progresses.)—or be of more broad and general relevance (company law. sector licensing. the PPP structure has to reflect the prevailing tax regime. operations. 6. and agreed-upon PPP process. foreign exchange regulations.1 Establishing Appropriate Legal. institutional and capacity building. As such. To the extent that laws have to be changed to accommodate the desired PPP. financial. etc. regulatory.). and Policy Frameworks The potential PPP project will exist with a public policy framework. environmental laws. Regulatory. The desired PPP option has to be contrasted with the existing regulatory arrangements and capacity and regulatory gaps should be filled or the PPP structure should be changed. Gaps are also identified where new legal instruments are required. The gaps may include the need for (i) more explicit regulations and requirements of the operator (to be . etc. These may relate directly to PPP (privatization law. public service laws. the regulatory regime including oversight arrangements for pricing. documented. but the “general” ones typically simply need to be recognized and followed. contracts. labor laws. and addresses the constraints identified through sector analysis: • • • • legal. the timetable should reflect a realistic period for this. and commercial. the preparatory work falls within the same categories as the sector diagnostic. In general. and policy frameworks. and market structure may need to be changed or newly created. regulations. The legal analysis will have resulted in an inventory of existing laws. which includes specific legal and regulatory settings. It may be possible to change the “direct” ones to facilitate the PPP. The preparatory stage culminates in the achievement of an environment conducive to sustainable reform and in a well-defined. technical issues. customer service. and other legal documents that define the characteristics of PPP or those that have to be changed. dispute resolution procedures.Introduction  4 6 PPP Preparatory Work The sector strategy and road map (updated based on the PPP option selection) outline the work to be done to create the enabling environment and structure the PPP transaction. etc. labor laws. and economic issues. Corporate structures have to adhere to company laws and other legal requirements. Similarly.

ministries. Figure 10 illustrates the balancing of service and costs. . subsidizing cost-recovery. (iii) training regulators. From these starting points. 006. monitors) and regulation (ministries. (ii) developing actual regulatory institutions (such as an independent regulator. or revisiting the initial targets and service standards. auditors. The roles of each entity involved in performance monitoring (boards. Development of the final technical specifications of a project is an iterative process which builds on feedback from the market and the affordability of the project at each design stage. and (iv) developing procedures whereby the regulator requests and receives information. Figure 10: Balancing Service and Costs Specify Service No Estimate Costs Implement Satisfied? Set Tariffs and Subsidies Yes Source: World Bank and PPIAF. and ultimately enshrined in the PPP contract. regulators) should be described and justified by assigned authorities.50 Public–Private Partnership Handbook embedded in contract. estimating the cost of these desired services (factoring in presumed efficiency gains) and cost recovery tariffs is possible. 6.2 Technical Preparation The technical specifications of the proposed PPP project need to be defined and documented in the terms of reference. a regulatory unit within government. The preparation stage is the time to develop the preliminary specifications. Government has the option of putting these cost recovery tariffs in place. The technical design of a project starts with identification of desired coverage targets and service standards. or statute). Approaches to Private Participation in Water: A Toolkit. and contracting of regulatory capacity). regulations.

Boxes 10 and 11. Using  Public  Private  Partnership  to  Deliver  Successful  Rail  Projects. Ove Arup & Partners Ltd. and investment analysis. quantify necessary investment. and estimate resulting operating performance. of the type of specifications that might be contained in the technical portion of a request for proposals: Box 10: Example of Performance Specifications in Railway PPPs Performance Specifications – Railway PPPs Key technical specifications to be detailed in a railway PPP might include: Availability of service: • Stations: locations. Below are two samples. Technical terms of reference need to strike a balance between being too narrow/restrictive and too loose. external interfaces Transfer: • return conditions. A strategy for dealing with this dilemma is to focus on defining the technical outputs expected rather than dictating the inputs to be employed. frequency. Too loose terms may lead to proposals that diverge significantly from each other and are hard to compare and rank. asset inventory. passenger capacity System: • reliability. . Technical specifications that are too narrow may mean that a bidder is prohibited from using the most economical technical solution. passenger throughout Trains: • Journey time. including demand analysis. final years issues Source: Dr. maintenance manuals and records. degraded mode operation Ambience – quality of journey: • Quality of finishes. lifts and escalators. The technical terms of reference enable bidders to understand required outputs. thus allowing the bidders some reasonable latitude to determine the most efficient way to achieve outputs. opening hours.PPP Preparatory Work Introduction  51 1 The technical preparation builds on (and refines) the analytical work that has been done in preparing the sector analysis and road map. Nick. seat/standing ratio. safety. customer information. Higton. fare collection Capability: • system architecture.

For public stakeholders and the public at large.3 Institutional Structures and Capacity Building When restructuring sector roles is part of the PPP process. and public latrines or other improved sanitation options (for sanitation services). and implement a PPP process. Approaches to Private Participation in Water: A Toolkit. accountability. the private sector is engaged to undertake activities that were in the public domain and the public sector becomes a regulator or monitor. manage. quality control.1 PPP Unit A PPP unit is established as a point of coordination. 006. or the percentage of households to be connected • Percentage of roads with tertiary pipes • Geographic area to be served through direct connections. 6. which is seen to be at arms’ length from the sector to be reformed. Existing institutions need to build capacity to be able to take on new roles and new institutions often have to be created. Quality Standards: • Availability of service • Pressure • Water quality • Effluent treatment • Customer service Source: World Bank and PPIAF. 6. or other nonpiped delivery systems (for water services).5 Public–Private Partnership Handbook Box 11: Example of Performance Specifications in Water PPPs Performance Specifications – Water Service PPPs Key technical specifications to be detailed in a water and sanitation PPP might include: Coverage Targets: • Number of new direct household connections. if any. and information related to PPPs either within a single sector or across a range of sectors. the units provide transparency and consistency.3. kiosks. For private proponents.) . These units are created as a new agency or within a ministry such as the finance ministry. playing a limited role in actual service provision. project implementation office/project implementation unit. Some key institutional arrangements used to support PPP are: • • • PPP units. the units are able to disseminate information and provide specialized management of a specialized process. Most countries initially lack the institutions and institutional capacity required to organize. standpipes. (See Box 1 for PPP units in Australia and the Philippines. and technical assistance.

which must be approved by either the Investment Coordination Committee of the National Economic and Development Authority (NEDA). and Spearheading promotional activities for the Philippine BOT program and specific projects through brochures and road shows.gov. the NEDA Board. As part of its program.PPP Preparatory Work Introduction  5  Box 12: Public–Private Partnership (PPP) Units in Australia and the Philippines Australia—State of Victoria State governments in Australia are mainly responsible for most infrastructure sectors. Developing infrastructure projects. This minister is then responsible for facilitating consultation with the other government departments involved in the project. It now spends more time training national and local government officials. the Center was mainly involved in marketing the BOT concept to private investors. Initially.gov.vic. To guide and promote consistency in analysis and procedures. and municipal authorities select and award projects under the framework. Project responsibility is assigned to a single minister in each case. the Victorian government has formulated an Infrastructure Investment Policy for Victoria. Providing technical assistance and training to central and local government officials on the design and implementation of projects. That department also acts as a reference center when guidance is required by other government entities. The minister will also work with the Department of Treasury and Finance.botcenter. In the State of Victoria. a description of which was published in June 199 by the Department of Treasury and Finance. or by local or regional councils.au/ The BOT Center of the Philippines The Government of the Philippines created an institutional structure to support the country’s large private infrastructure program.ph/ . Source: www. Source: www. Each sectoral agency has a specialist build–operate–transfer (BOT) unit responsible for coordinating the design and implementation of its projects.treasury. the government created a BOT Center to perform the following tasks: • • • • • Keeping an updated national inventory of all nominated projects eligible for development under the BOT framework. provincial. Providing general advice to foreign investors doing business in the Philippines. The authorities prepare a list of priority projects. National. individual government departments are ultimately responsible for concession design and award.

and bidding of projects. development. The units need not be large. There is also increased attention to the structure and location of these units. focus is increasing on the potential role units may play in the oversight of a contract once launched.5 Public–Private Partnership Handbook The units serve to ensure that the key stakeholders relevant to a PPP adhere to a consistent methodology and agreed guidelines: • • • • • • project identification and prioritization. the units should command the right level of authority and should be led by a well-respected and competent executive. PPP units have typically focused on the identification. They are staffed with internal government staff. particularly the project implementation unit (PIU). but it can also be quasi-independent of the ministry. possibly.3. in fact. Recent analysis . and the local context. However. Most PIUs are established to support large capital investment projects (typically donor-funded) and the life span of the PIU is linked with the project life cycle. At times. encouraging competition. it is linked with a line ministry. Further. adherence to transparent bidding processes. the type of project. This may include ensuring that the proper systems are in place for monitoring and reporting. large units can be seen to undermine the intent of PPPs to promote efficiency. and ensuring the most effective use of government resources. A final consideration is of the links between the PPP unit and the line ministries and. The units often require initial or ongoing technical assistance from PPP specialists.2 Project Implementation Unit A PIU is a vehicle to plan and implement a project or projects. with external resources or a mixture of both. due diligence of opportunities. PIUs have been used as a vehicle to dedicate staff to important projects. There must also be coordination with the sector ministry associated with a particular PPP. 6. ensuring the appropriate treatment of employees and government assets. other levels of government. Specifically. The precise structure and role of a PIU will depend on the requirements of the funding agency and the executing agency. there is increased support for the establishment of these units as akin to project developers with a pay structure that is linked to successful transactions. PPP activity may occur on a national or subnational level and the location of the PPP units should correlate to the market activity.

helping develop public messages and information. 6. in which case coordination among the team members should be ensured. developing strategies for government consideration. Ideally. and technical) to the government is not available at this stage. key government officials must have received training in negotiation and be completely familiar with the content and intent of the bid package (the contract.3 Technical Assistance Unless the government is deeply experienced in contracting PPPs. The local capacity building should be supported through working relationships with any advisor. close and regular coordination is needed. bid documents. 6. often occurring swiftly. The specialist advisors should be brought into the process early and should be paired with government counterparts. The advantages to developing a PIU are the creation of a central point of accountability and management. financiers. If external support (financial. The bid and negotiation process involves repeated clarifications and iterations of the bid documents. and bid forms). financial analysts.4 Commercial. and should be training staff to take on new responsibilities. and Economic Preparation In designing and preparing PPP. particularly when staffing is external. Similar technical assistance may also be necessary to build capacity at the entity charged with monitoring contract compliance and progress targets.PPP Preparatory Work Introduction  55  has questioned whether PIUs have been effective in the broader development of project management capacity within governments. These advisors can be procured as a team or recruited individually. creating a package of price and service which is acceptable to customers and . and supporting the bidding and negotiation processes. As PPP is considered. and handles project procurement. and must lead to a good outcome. there must be a process to balance service levels with the tariff levels. The PIU typically monitors and reports on project progress. performing analysis of PPP options. government should be identifying potential local counterpart staff. technical advisors would continue support through to contract signing and possibly beyond. Advisors will pay an important role in maintaining momentum. sociologists. Financial. economists. legal. politically defensible.3. performs financial management and accounting. developing a PPP unit or PIU. there will be occasion to hire transaction advisors and/or specialist advisors such as lawyers. Where both PIU and PPP units exist. The process must be well organized. and sector specialists to support the government.

The funds may be sourced from the public sector or the private sector. including any subsidies that might be required. If the subsidies are not available. depending on the respective cost of capital. 6.1 Project Financing Infrastructure PPP’s typically require financing. external funds are required for the initial investment costs that are recovered over time from future revenue streams. Critical to this analysis is the structure of payments to and revenues for the private partner. However. cost recovery.g. Fundamental to the question of project financing is the correlation between perceived credit risk (resulting from various technical. and consultation and trade-offs—to agree any transitional subsidies until cost recovery is achieved or ongoing subsidies. Regardless of the source of finance. The model will help prioritize investments and inform decisions on who should pay for investments. three important considerations will be (i) the source of financing. and other risks associated with the project) and the cost of finance. (ii) the design of the appropriate tariff structure and tariff levels. the efficiency gains from PPP are expected to outweigh this .56 Public–Private Partnership Handbook sustainable for the utility. A key objective will be to ensure the financial sustainability of the utility through efficiency gains and through balancing of income and expenses. that is. The financial model is a tool that helps achieve the right balance of affordability.4. allowing for an iterative process between the financial modeling and the PPP design.. Some countries also find it useful to use a public sector comparator (PSC) model which helps government test whether a private investment proposal offers value for money compared with the most efficient form of public provision. In preparing the transaction. Providing private financing may therefore increase the financial costs of PPP. financial analysis and modeling—to determine the cost recovery tariff required to support the desired coverage targets and service levels. This iterative process will encompass: • • • • technical analysis—to determine the cost of service. and (iii) design and application of subsidies. and investment. such funds have a cost and. impact the project’s economics and required tariffs (and thus affordability). coverage and service targets may need to be reduced. As described in section . e. the financial model must be flexible enough to accommodate a range of variables.5. to low-income customers. market and social research—to determine what people are willing and able to pay for certain service levels. therefore. commercial. A government’s cost of funding is typically lower than that of a private operator even of the same originating country.

. lenders perform their own calculations related to project performance and cash flow. To determine the amount of debt finance the project can sustain. project finance is a specialized activity and. depending on prevailing market conditions. with an ultimate benefit to consumers. The company owners will not usually finance all project requirements. from the government itself or from a development finance institution) or political risk guarantees (from insurers or development finance institution) against the government or regulator not adhering to agreements (e. often called special purpose vehicle (SPV). In addition.g. The operator will typically establish a project company for implementing the contract.. but the final arrangements and risk allocations will only be put in place . instead. may or may not be available at any time. The bidders will have potential financiers lined up. creating one of the initial drivers for PPP. (ii) limits to the availability of local currency debt financing to match local currency revenue steams. As a result. faces a number of challenges including (i) long-term debt maturities to match project cash flows. These include debt service cover ratios. together with the level of certainty and transparence of regulatory settings.). Infrastructure project financing in general. concession agreement. whether from banks or bond markets. Project financing requires a very thorough appraisal process because of the sole reliance on project cash flows. public sector financing is usually scarce. the operator may seek credit enhancement through insurance or guarantees. loan life coverage ratios. they will provide a proportion as equity and borrow the remainder of the required financing from financial institutions or place debt securities in the capital market. and (iv) no security/guarantee except for project assets available (“nonrecourse financing”). These might include (partial) credit guarantees (e. The creditworthiness (“bankability”) of a project depends on a number of factors. take-or-pay off-take agreement.g. To make financing possible or to secure better borrowing rates. financing periods) as well as strong off-take arrangements to reduce market/revenue risk (predictability of cash flows).PPP Preparatory Work Introduction  57  additional cost and result in net savings and efficiency gains. (iii) limited available equity and resulting high degree of leverage. some of which are within the control of the government when designing PPP. The company owners may be a consortium of companies or a single large company. It is critical to understand that the bidders may not fully know the prospective financing arrangements until the last stage of the contracting process. etc. and project life coverage ratios. hence. which affect future cash flows. Lenders will undertake due diligence exercises to get comfort that the project assumptions and risks are reasonable. They include commercially attractive project design and tariffs (shorter payback and.

006. (iv) required economics (return on investment) for private operator. unit price as a function of consumption to help low-income users) or tariff adjustment mechanisms (e. (iii) resulting cost recovery. the lenders may impose their requirements on the project. Figure 11: The Iterative Process of Designing Tariffs Operational Efficiency Cost recovery Service Standard Subsidy Level (& structure) of tariffs Willingness Ability to pay Source: Heather Skilling and Nils Janson. This creates the risk that a winning bidder fails to complete financing and may have to withdraw.2 Tariff Design Tariffs need to balance a number of objectives: (i) stipulated service standard and associated costs.58 Public–Private Partnership Handbook when the contract is near certain..g. The following objectives provide an appropriate starting point for designing tariffs: • • • • cost recovery/return on investment. It is critical to employ qualified and experienced specialists for this modeling and optimization task. The right combination of factors must be determined through an iterative optimization process using the project model (see Figure 11). This highlights the importance of critically assessing the financial resources and borrowing capacity of potential bidders during prequalification. exchange rate changes) are used. and (v) need for/availability of subsidies. fairness and equity. incentives for efficiency. .4. for input cost changes. and simplicity and comprehensibility. (ii) customers’ willingness and ability to pay. This process is made more complex if differentiated/complex tariff structures (e..g. A useful tool is the imposition of a bid bond or a deposit payment by the bidder that is forfeited in case the winning bidder withdraws. 6. At this late stage.

. which guarantees the operator recovery of all costs plus a the rest. These rates are then applied to the real companies to ensure that the average return falls between rates of return on assets of 6% and 1%. 1998. for toll road usage). and the the service of distribution. and expand its services and assets. A private operator may be willing to accept a lower IRR if some risks are reduced or mitigated through government actions or otherwise. Washington. operation) location.. If Pricing structures should also reflect variations of marginal are adjusted to reach the upper by the average actual return falls outside this range.g. adjusted for the perceived risk of the project. The operating costs of the benchmark "efficient firm" and prescribing coverage of service levels and allowing overall rates to different customers or bythe replacement valueandassets are based on a weighted average of estimates made by the industry and tariffs to cross-subsidize more costly customers. However. DC: World Bank. and no customer should be denied access to water on the grounds of poverty (see section 6. customer type.. Revenues are considered adequate if they enable an operator to maintain. the regulatory agency. people in similar circumstances pay similar amounts or people accepting lower quality of services should have their bills lowered. a private operator will only get involved in a project if it sees a fair chance to make a profit given a predetermined set of service standards and tariffs. are often considered a public service.) Incentives for efficiency Box 13: Electricity Pricing In Chile Tariffs should giveof electricity pricing is distinctive because of theachieve efficiency in operations Chile's method incentives to private operators and investors to innovative approach to rate (supply-side efficiency) and make necessary and/or desired investments. the rates costs (investment. Price–demand ing the costs of an optimally operated firm and setting rates that provide a 10% real return elasticity should also be taken into account and optimized (e. etc. The procedure involves determineconomy as a scarce resource (demand management or demand-side efficiency). This can be achieved by effectively charging different or lower limit. The not provide an regulated efficiency and too low a tariff may not be sufficient to entice companies buy incentive forconsumers has two components: a node price at which distribution new investment. period. Prices also need to send the correct signal to customers to use value-added with appropriate The value-added of distribution is calculated every  years. on Subsidies). modernize. power from generators and from the transmission grid. The internal rate of return (IRR) and return on equity (RoE) are the most commonly used measures to assess the financial attractiveness from a private operator’s perspective (as described in section . The price system includes regulated rates for consumers with pricing demand of less than  megawatts and freely negotiated rates for profit. replace. tariffs should reflect costs and different customer groups/classes should observe tariffs that reflect the cost of supplying them. the private operator has the chance to improve the ultimate financial outcome by being particularly efficient in investment and operations. Specific subsidies or cross-subsidies built into the tariff system can address this situation. some services. Beyond that.5). like water and wastewater services. Therefore. Infrastructure Concessions: A Guide to Their Design and Award—Privatization Tool  As a starting point for determining fairness. Source: Kerf.PPP Preparatory Work Introduction  59  Cost recovery/return on investment The combination of service standards (costs) and tariffs (revenues) determines the commercial viability of a project. Fairness Kits. depending on whether they fall above or below. For example. over the replacement value of assets. (See Box 1 for Chile’s experience in electricity pricing. A private operator will assess the potential IRR of a project against its own cost of equity. Michel. does final price to regime. A “cost-plus” peak of return regulation.

For example. customers may not understand the implication of changes in consumption for their bills or the range of options available to them. It is therefore essential to define practical rules for adjustments. the objective of incentives may conflict with the objective of simplicity at times because on cost grounds it may make sense to have a very complex tariff structure.3 Tariff Adjustments To expect one set of tariffs. Mechanisms There is a difference between the regulatory requirements of utilities. an understanding of how assets will be valued. to remain viable and appropriate over the typical life of a PPP project is unrealistic. and other forms of public infrastructure. and extraordinary tariff adjustments. After evaluating these factors and determining the appropriate allocation of risks in PPP. water. inflation. tariff resets. 6. However. For example. and • The frequency of adjustments including cost pass-throughs. tariff indexation. There is a further requirement that certain fundamentals be in place including a definition of a reasonable rate of return. such as changes in raw material prices (such as oil prices for power). Balancing the objectives There is a need to balance these above objectives against one another.60 Public–Private Partnership Handbook Simplicity and comprehensibility The objective of simplicity and comprehensibility means that tariffs should be easily accessible and understandable to employees and consumers of the utility. including cost plus and pricecap regulation. the initial tariff rates and tariff structure are set in place until an adjustment is warranted. if a tariff structure is too complex. . A similar conflict could arise with the fairness objective. such as waste management. • The mechanisms by which the adjustment will be made. or even a tariff structure or regime. This requires defining: • The triggers or drivers for a price adjustment. and telecommunications. and exchange rate fluctuations (where the operator had to assume unhedged foreign currency exposure). and whether any additional returns are to be allowed. such as roads. over simplification may result in incentives being lost or a negative impact on fairness. electricity.4.

tailored approach. including the economic expertise available. on the other hand. At a more mature stage of regulation. . there is no adjustment unless the operator applies to the regulatory authority and requests a review and reset. Many regulatory systems encompass aspects of revenue or price-cap and cost-plus mechanisms in a hybrid. but delivers weaker incentives for efficient operation and development since the recovery of a rate of return is assured. In theory. which may mitigate risk. During the early stages of development when regulatory capacity is being developed. Revenue or price-cap regulation.PPP Preparatory Work Introduction  61 Tariff adjustment mechanisms for utilities are discussed below within two basic categories: cost-plus mechanisms and price-cap mechanisms. Prices can be set high enough to attract capital. Under this system. Revenue or price caps are put in place to control the quantum of revenue over a period or specific prices. investment requirements of a sector. Nevertheless. the form of regulatory system should be subject to detailed analysis and consideration. this approach provides the best match of prices to incurred costs. sector. and motivation for efficiency. rather than pursue efficiency. Cost-plus or rate of return mechanisms permit regulated firms to pass all operating expenses and capital costs on to the consumer. Under this mechanism. including an after-tax return on investment. This approach may provide a stronger incentive to improve efficiency and reveals the true costs of providing services. price caps may be a better choice. It nevertheless has a strong element of certainty from an investment perspective. as well as methodological approaches to sector-specific issues. industry. which takes account of country. Cost-plus regulation has the potential to encourage firms to inflate operating costs. but the firms are given leeway to increase earnings through performance improvements. provides a more direct incentive for efficiency. The choices of regulatory approach is driven by many factors. a firm can change its price level and its tariff structure according to an index that typically includes an inflation measure and a “productivity offset” (commonly called the X factor). The regulator reviews the operator’s overall cost base in response to any proposal that higher (or lower) prices are needed to cover their full costs. and infrastructure capital investment profiles. cost-plus mechanisms might be appropriate to attract large-scale investment. the accounting and auditing system.

The discussion of tariff resets has to cover: • • • the objectives of the reset.6 Public–Private Partnership Handbook Regulation of nonutility infrastructure PPPs takes a slightly different form and is typically articulated through the PPP contract. encouraging efficiency through a rate of return. Other pass-throughs might include a change in tax rates. and triggers for a review and potential reset. Under an infrastructure PPP. While indexation may protect the provider from price increases that are predictable and within normal limits. For a long-term PPP. Tariff reset or periodic tariff adjustment. . Therefore. or restoring the financial position of the operator who has confronted an unanticipated (and uncontrollable) change in the operating environment such as an exchange rate change. or a change in the quality standards imposed by government. passed-through. in the tariff charged to and collected from consumers. the rules for tariff resets are defined before PPP is implemented and will be a topic of discussion among all parties relevant to the discussion of allocating risk. Rather than the actual costs of the service. there is agreement that the costs of certain inputs (energy. on a regular timetable. Tariff indexation. In some cases. the indexation formula is based on a basket of prices most relevant to the service being provided. A more tailored mechanism for adjusting tariffs is the tariff reset. the fundamental goal of regulation is to allocate risks rationally and maintain stability between risk and expected return. In this way. the provider is still vulnerable to changes outside the norm or outside the index. The mechanism is appropriate when the service provider has no control over the input. the risk of the input price increase is immediately passed on to consumers. The objectives of the adjustment can include allowing a reasonable rate of return to the operator. an indexation or pass-through will likely be insufficient to accommodate all sector changes over the life of the contract. or bulk water) are to be immediately reflected. In some cases. the tariffs are adjusted to reflect a change in an index of prices (such as the consumer price index). Frequency of Adjustments There are different procedures for enacting adjustments in tariffs. for instance. This mechanism is similar to a cost pass-through but uses a different tool to make the adjustment. yet the provider is also wary of increasing tariffs beyond what consumers are willing and able to pay. the methodology for the reset. The pass-through may reduce the service provider’s incentive to use the input more efficiently.

Subsidies can be established for access (connection charges) or for consumption. Some subsidies are designed as community service obligations and mandated in regulatory or license standards or paid for by direct and indirect public sector transfers to beneficiaries. i. there might be an attempt to determine what the most efficient operating costs would be through benchmarking or obtaining expert advice. If the reset is to restore financial standing to the operator. the subsidy is already effectively in place before PPP. applying to the overall project. only key cost variables may require review.4 Subsidy Design Government subsidies can be used to make a project commercially viable from the perspective of the private operator even if the desired combination of service and tariff levels does not result in sufficient cost recovery. highly unusual circumstances such as strife or bankruptcy might trigger an extraordinary price review. Cross-subsidies do not involve government payments but are a compensation mechanism built into the tariff structure. Governments typically provide subsidies to reduce tariff levels for the purposes of helping the poor. As such. Such a tariff adjustment might be triggered by a request for a review or by a specified event. In many cases. For instance. and/or because of political constraints on raising tariffs. 6. through rising block tariff structures. essentially a public subsidy. This will only make sense if the aggregate cost to the government under PPP (including subsidy) is lower than the cost to the government of operating the service fully under the public sector or the cost of not providing the service at the required service levels. they are reliant on budget support. implementing an efficient PPP with short. In some cases. Government subsidies can be “general”. different methodologies may be used.PPP Preparatory Work Introduction  6 Depending on the objective of the reset. or “specific”. To the degree that unprofitable service activities are provided by a public sector institution are loss making.. Typically. addressing environmental issues. The most common forms of cross-subsidies include subsidies from nonhousehold to household customers. in which case they are tied to service provision to deserving (low-income) consumer segments.or medium-term subsidies may still result in a net .e. and subsidies from high-volume customers to low-volume customers. such as every 5 years. these adjustments are allowed on a predetermined periodic basis. though hidden.4. They serve as a means of reducing average tariff charged to one group of customers by increasing the average tariff charged to another group of customers. addressing public health issues.

might be expected to provide the operator with an incentive to connect those premises. This is not always easy as subsidies may create perverse incentives for inefficient operations or other undesirable outcomes. Governments can subsidize the cost of debt to a utility by lending it money at concessional rates (i. Cash subsidies. such as the number of new connections. Different types of subsidies can be used to address different issues. which would maximize the sum of expected revenues. However. Where the rationale for the subsidy is to increase service coverage. Cheap capital This refers to a reduction in the required rate of return on equity or a lowering of the effective cost of borrowing for the private operator.6 Public–Private Partnership Handbook improvement relative to the status quo. the subsidies enhance the overall value of the project and do not remove incentives for efficiency or serve to perpetuate services of limited value. including output-based aid. however. unremunerated bearing by the government of business risks. Not doing so will ensure that the private operator has little incentive to minimize operating expenses. Subsequent write-offs of these loans by government may represent a further subsidy . Payments may be made to cover a portion of investments or can be related to service delivery. Where there are political constraints to increasing tariffs. a general cash subsidy could be paid to the private service provider to reduce the average tariff required from customers to cover the utility’s operating expenses. In this case. such as in areas where poor households are concentrated. Each of these options is described further below. A fixed subsidy for each new connection. rather than cushion the impact of increased tariffs. and in-kind grants and tax exemptions. through annual reductions in its size. In setting the size of the subsidy in advance. Such a structure may limit the incentive to connect the poorest households. Clearly. cheap capital. it may be more appropriate to link payment of the subsidy to an indicator. subsidies should be designed to ensure that the private operator has an incentive to achieve the desired public policy outcome.e. below its own debt servicing costs). An alternative would be to subsidize the cost of new connections only in certain areas. less connection costs. provision might be made for a gradual phasing out of the subsidy. including output-based aid Cash subsidies involve cash payments by the government to the private operator or project company. setting the size of the subsidy in advance is essential. as operating efficiencies are realized and tariff increases are phased in. Options are cash subsidies..

or land grants. This includes public service acts and regulations. there will be a leakage of benefits to nonpoor households.PPP Preparatory Work Introduction  65 6 to a utility although this is likely to cause significant problems later when further borrowing may be required. whether all employees are eligible for severance . In case subsidies are necessary. such as water abstraction rights. For employees and unions. which would otherwise be subject to some form of charging regime. 6. these forms of subsidy should be evaluated by making comparable estimates of the benefits and costs of each subsidy and assessing how well they achieve their stated objectives.5 Labor Considerations Public sector workers often oppose projected PPP arrangements. collective bargaining agreements. Again. In working through the labor issues associated with PPP. such as targeting the poor. the key issues will be: Redundancies or severance payments. There should be early and constant dialogue among the government. and any precedents in other sectors. laws specific to the sector and the enterprise. the labor unions. potentially ineligible for severance). a legal review is critical. As a result. these subsidies are not targeted to service delivery outcomes or to those customers most in need of assistance. Public service employees should be advised whether they are to be transferred to any new entity (and thus. In-kind grants may take a variety of forms. and public employees to set out the objectives and strategy for PPP. In-kind grants and tax exemptions Governments may also provide subsidies to privately operated utilities through in-kind grants and tax exemptions. which can be a significant cost to utilities in developing countries. Governments may also subsidize the cost of debt to the utility by providing guarantees or by taking responsibility for exchange rate risk. This would include the terms under which employees would be laid off and the opportunity to join a new company if one is being created. Workers need to be dealt with fairly and either provided with employment opportunities in the new company or given acceptable severance packages. assuming that these benefits are passed on to customers and are not captured by the operator itself in the form of offsetting cost increases. Tax exemptions are commonly applied to publicly operated utilities and these may be extended once the utility is privately operated. Information on worker issues should be proactively shared to allay speculation and unfounded concerns.

but would prevent the PPP from displacing smallscale providers until such time as replacement services are available. Local subcontractors. Terms of employment with a new company. and/or improve the capacity of retained staff should be implemented. ensuring against unfair access to procurement officials. PPP partners may be encouraged to integrate such providers into their strategies. There should be an attempt to clarify. safeguarding against corruption. • . speculation will be considerable. including local private and public partners in the PPP process as much as possible is generally desirable. e. what the law does and does not provide for.g. and whether accrued pensions and benefits will be transferred. and operate infrastructure. government should predetermine a policy on the inclusion of local companies. Competent utilities or construction firms may enter into competitive tenders to perform discrete services or to construct new facilities. This would not replace intentions to ultimately provide service through formal arrangements. early in the process. Local partners may be particularly effective for smaller. In sectors such as water and energy where small-scale service providers are prevalent and necessary to fill gaps in the service provided by the dominant utility at least for the short to medium term. To encourage and regulate local participation. security of tenure. but which are remote from the core infrastructure. and setting appropriate and realistic evaluation criteria to enable local companies to compete. there will be questions about training opportunities being offered. Retraining. an explicit program to retrain severed workers. The way in which worker issues are handled depends almost entirely on local labor law and local precedent. reporting lines. Workers should be represented in the process as soon as possible and information should be proactively disseminated. localized projects. which demonstrate a viable market. Otherwise. or whether only certain employees will be eligible for severance and/or opportunity with the new company. Local companies are often qualified to be the private partner in PPPs and to develop. allow for spin off of certain functions.. Contracts with local partners can range from service contracts to BOTs and may apply to big and small projects. to reach small towns and peri-urban areas. benefits. while assuring appropriate project quality. improve. There are a variety of ways to achieve this: • Local private partners.66 Public–Private Partnership Handbook and possible rehiring. Employees will need to know the employment terms. Whether an employee is severed or retained. As soon as possible. including salary. 6.6 Including Local Partners From the government’s perspective.

PPP Preparatory Work Introduction  67 6 • Local government units. Otherwise. low prices.1. the performance expectations. Ongoing consultation with stakeholders is important at every stage. This input is also critical to assess whether key business assumptions of the proposed PPP (in particular tariffs/fees) are realistic and enforceable. There are also conflicts of interest possible in such arrangements. Avoiding consultation invites the risk of later opposition. Consultation with potential bidders and partners is also critical to ensure that the proposed PPP design meets their requirements. and potential risks. which need to be recognized and mitigated against. Many joint venture arrangements include municipal or other local public partners. no subsidies. transforming their role into one of ownership. . which slows or derails the process. no redundancies. This can be an effective way to bring government decision makers and local stakeholders into corporate governance of the company. More formal consultations can take place during project implementation as described in section 7. there is a risk that the PPP design includes an unrealistic combination of (politically) desirable features (high-level service. The stakeholders provide valuable information on the points of concern. and short concession periods) that will make the project unattractive to bidders or unsustainable.7 Stakeholder Involvement The early involvement of all stakeholders in the PPP process helps develop an enabling environment. 6. Collecting informal feedback from the market during the preparation stage is therefore critical.

The PPP Project Sequence is outlined in Figure  (see page 15). highlights are discussed and more information is available through the resource materials listed in chapter 10. A bidder will expect to have a clear understanding of the time line. thus avoiding any semblance of favoritism.Introduction  6 7 Implementing PPPs This chapter discusses some key activities related to implementing PPPs. the transaction manager. including the draft contract. the decision points. Discussions must avoid any bias toward a particular bidder and should be broadly held with sector stakeholders as well. 7. responsible for ensuring that the process runs smoothly. bidders should not enjoy any advantage (e. Not every stage of the procurement process is described in detail. be unwilling to share good ideas. This approach allows the government to identify issues of concern across the range of bidders. the procurement evaluation and process. However. Alternatively (or in addition to a bid conference). Government should send each bidder a full set of the responses to all questions raised. the contract. the government needs to guard against potential manipulation of the PPP design and process by the bidder to its advantage. Note that not all steps are strictly sequential. but have a degree of overlap. some bidders may withhold concerns.. and timely. This information should be given to bidders in . During the transaction stages. and the award and negotiation. in a formal setting surrounded by competitors.g. bidders may be invited to individually comment on the draft bidding documents. The discussion focuses on the bid package.1 Collecting Feedback from Potential Bidders Once PPP has been structured and the preparatory work is underway. During the bid conference. the government presents an outline of the project and bidders are invited to react and question. the sequence of activities. or may collude with other bidders to push for a particular change. transparently. Two specific points of interaction with the potential bidders are: Bid conference. additional information) in the bidding process through such consultations. The government may find it useful to be supported by PPP advisors in its interactions with potential bidders. During these interactions. Likewise. Bid document consultation. should be in place. and the decision makers. it is important to have more formal interaction with potential bidders on the specifics of the transaction as designed.

nevertheless. an official notification is placed in local and international print and electronic media. making photocopies. and granted equally and fairly to bidders. contracts. It also encourages bidders that they will be included among a smaller number of equally capable competitors.2 Notification and Prequalification The bid package. During a transaction. Companies are invited to request a prequalification package and seek access to further information. . 7. This saves the government from the need to eliminate more rigorously from an overly large pool of bidders later in the process. The information should be organized according to topics and as detailed. using other technical equipment. but a prequalification process is common to many PPPs. The prequalification documents usually contain: • project information. Prequalified bidders are invited to use this centralized repository of all information related to the PPP project. This clarity is necessary to provide bidders with a sense of confidence in the transparency and reliability of the process. and any marketing documents as well as protocols for communicating with the public and potential bidders need to be developed. they will question the seriousness of the process if very little data are available. regarding access times.. etc.). • instructions to bidders outlining the anticipated bid process and evaluation criteria.g. and • a list of the documents required of the prospective bidders to demonstrate their suitability for the project. the process organizers and the government nevertheless need to ensure that the data are not false or misleading. which is to be available to potential bidders. Although the accuracy and completeness of the data in the data room are normally not guaranteed. different procurement methods entail different activities. Under this process. Bidders typically apply a degree of skepticism to the veracity of the data. such as the key characteristics of the project and the operating context (such as an information memorandum). The content of the advertisement depends on applicable procurement rules.. advising the public of an opportunity to participate in the project. Prequalification ensures that only bidders with the minimum required expertise and financial strength are able to bid for the opportunity. An important aspect of information dissemination is the establishment of a data room (see Box 1 for a sample index). As seen in section 7.70 Public–Private Partnership Handbook writing and should be regularly reviewed and reconfirmed. The amount of time and effort required to populate a data room should not be underestimated. the room will be staffed by an attendant and bidders must sign and submit to data room rules (e. The starting point in the actual procurement process is the public notification of the opportunity and the prequalification of bidders.

 Budgets VI.6 Others Financial VI.a Annual reports (time series) I.1.a Map of country I.1 Outsourcing Agreements Human Resources IV..1 Operations and Maintenance V. region. Legislation and Regulations II.b Maps of service areas Commercial Contracts III.1.b Inflation index I.a Constitution II.Implementing PPPs Introduction  71 1 Box 14: Sample Data Room Index General I. II.d Real and nominal interest rates I. Investment Programs V.b Donor and consultants’ reports Geographical I. Collective Bargaining Agreements Engineering and Technical Documents V.. Debt VI.a Environmental Protection Act II.a Profile of loans/grants VI. I.1. etc..1 Financial Statements VI.1 National II.. .5 System Files and Drawings V..e Planning Act II....a Gross domestic product (per capita) I.c Wholesale price index I.. In response..1.. Resources Management II. Demand V.e Census or population data and growth Rates I.1.1.c Public Health Ordinance II.1 Economic Data (time series) I. particular expertise).1.1.. Tariff Adjustment Proposals Special Matters Vlll Subsidies.b Others Corporate/Commercial II.1 Approved Tariff Structure VIl. and staff and resources to be directed toward the project. repayments. Current Staff Salary Levels IV.1.a Billings VI.1 Staff Breakdown Chart by Region and Function IV.b Civil Law II.1. Source: Kathleen Booth and Heather Skilling. Fixed Assets & Technical Audits V. 007.d Food and Drug Act II. experience on comparable projects (including any relevant subcategories in terms of size of project.b Collections VI.f Lands Act II..b Income Tax Act Infrastructure Specific II.b Loan disbursements. financial status/resources of bidder.a Companies Act II.1. Commercial VI. ability to raise financing. Community Service Obligations. Institutional I.. the prospective bidders submit information including: • • • • • legal status of bidding entity.c Breakdown of consumers by category Tariffs VIl. and interest VI.

Three main options.3 Defining the Procurement Process Some initial decisions need to be made regarding the procurement and the bid evaluation process. by disappointed potential bidders or by the political opposition.1 Unsolicited Proposals or Direct Negotiations When confronted with an unsolicited proposal. capacity..3. It is important to be realistic about the potential pool of bidders and set the threshold sufficiently high to discourage nonserious or unqualified bidders. are available: (i) unsolicited proposals or direct negotiations (“sole sourcing”). Generally. purchase the project concept then competitively tender among a range of bidders. the score assigned to each.7 Public–Private Partnership Handbook A predetermined scoring matrix should facilitate assessment of the prequalification applications. e. The government needs to ascertain that procurement laws and/or rules permit it to award such a contract based on direct negotiations. The prequalification results in a short list of bidders invited to respond to the bidding package. Box 15 shows the strategy for dealing with unsolicited proposals in the Philippines. and (iii) competitive bidding. the government has three options: • • • direct negotiations to the offeror. (ii) competitive negotiations. 7. and the cost benefits to competitive bidding are lost. sole sourcing can encourage corruption through lack of transparency. The matrix can include special criteria such as expertise in servicing low-income customers or may prioritize local bidders if desired. 7. The matrix sets out each criterion to be scored. while maintaining a pool of bidders large enough for effective competition. As such. .g. However. vulnerability to corruption. There is also an elevated risk that the fairness of the contract award will be challenged at a later stage. The choice of procurement method will depend on the government’s budget. or offer original proponent a predefined advantage in recognition of the value of the original proposal (bonus system) and open-up bidding. and the respective weighting. a short list of between  and 5 companies is a manageable and competitive size. desire to encourage innovation. Entering into a sole-source process can save government time and money and may alert government to an unrealized opportunity for PPP. and objectives of the PPP project. a strategy of direct negotiations could be considered politically risky. Government has to be confident of its negotiation skills and its information to ensure that a sole-source deal is advantageous. need for high-level inputs. distinguished by the level of competition they create.

and provide a mechanism for selecting the best-value proposal based on criteria set.3. In addition. This challenge has been used. If a lower-priced proposal is received. or equity is required.3. The selection of bidders to participate can be nontransparent and may not yield the best bidder pool. national or local authorities were able to accept unsolicited proposals for BOT projects on a negotiated basis if: • • • The project involves a new concept or technology and is not already listed in the roster of priority projects identified by the government. Source: Republic of the Philippines. 7. The project is submitted to a price test or “Swiss challenge” from competitors. The published invitation must inform potential bidders where to obtain tender documents. The bidders are aware of the presence of other bidders and there is pressure to obtain the best price. the award goes to the lower bidder.2 Competitive Negotiations Competitive negotiations entail inviting a small group of bidders to a structured negotiation. proprietary information contained in the original proposal is confidential and may not be disclosed in the tender documents. 199. for example. Competitors have 60 days to submit competitive proposals. . No direct government guarantee. most international lending institutions and assistance organizations require the use of competitive bidding procedures as a condition of any associated loan or technical assistance. Otherwise. This arrangement is quicker and less expensive than full competitive process and can yield good prices. challenging an unsolicited proposal by an Argentine company. subsidy. however. There is also an elevated risk of corruption. The price test works as follows: the agency awarding the project must invite comparative proposals to any unsolicited proposal it has received.3 Competitive Bidding Most governments have rules requiring some form of competitive bidding for procuring any private sector good or service. in the case of a New Zealand developer who submitted a proposal to the National Power Corporation to rehabilitate and maintain a 50-megawatt hydro plant. This needs to be weighed against the degree of and value to transparency. The invitation to tender must be published in a newspaper of general circulation for at least  weeks. Competition is expected to provide transparency in the process and avoid corruption. 7. A time-consuming procurement process may be seen as an opportunity cost to the private sector.Implementing PPPs Introduction  7  Box 15: Unsolicited Proposals Under the Philippines’ Build–Operate–Transfer (BOT) Law. the original proponent has 0 days to match it and win the contract.

and service contracts can be relatively straightforward as the scope of services is readily defined and often quantifiable. . In the single-stage process. • The competitive bid process can either be one stage or two stages. More complex PPPs like BOTs. Competitive bidding for basic operation. The typical competitive bid process has the following activities: • • • • • Public notification of tender Contacting/marketing to potential bidders – preliminary information memorandum – road show – pre-bid conference – bid document consultation Preselection Shortlisting or Prequalification Tendering – selection of bid and evaluation process – distribution of bid documents and draft contract – interactions with bidders – evaluation and selection – negotiations and award Transition – transition/handover strategy – worker rights and payments. The typical information gaps. maintenance. the length of time over which the contract is implemented. and the range of externalities all conspire to make it difficult to set finite targets and predict outcomes. technical and financial bids are submitted simultaneously in response to a request for proposals. a technical response is submitted first and comments are provided. In the two-stage process. A failed auction is highly visible and an embarrassment to the government—another reason careful preparation is important. Communication between the public and private sectors may be strictly limited or a degree of open (although structured) communication may be important to the success of a largescale PPP. In the second stage. the advantages of competition are seen only if there is sufficient interest to generate multiple bidders. and joint ventures are more challenging procurement processes because both the starting information and the result are often unclear. a revised technical bid is submitted together with a financial bid. concessions.7 Public–Private Partnership Handbook Of course.

The motorway project included full environmental impact assessment as well as defined criteria for safety and maintenace performance. managed the PPP process. and evaluation criteria should also be consistent. and local). project design.org. . its development involved three tiers of government (federal. A first decision point is whether the technical evaluation will be on a pass–fail basis (with the deciding evaluation reserved for the financial) or whether both the technical and financial information will be evaluated and assigned weighted scores: • • Decision 1: Weighted technical and financial or pass/fail technical? – If weighted.au. A specific agency.1 Defining the Bid Evaluation Process Initial Decisions The evaluation process and criteria should be transparent. The road was constructed and is operated on a -year concession by a consortium which includes Transurban. what will the minimum qualifying technical score be? Decision : How to divide points between technical categories and subcategories. Macquarie Infrastructure Group. and by drawing up procedures that explicitly ensure that all parties are treated equally. 7. Source: www. The project objectives.4. state. information in the bid documents. Bids are typically evaluated in two broad categories: technical and financial. Box 16: M7 Sydney Orbital Motorway (Australia) The M7 Motorway is a 0-kilometer (km) toll road that circulates western Sydney and interconnects a number of other motorways and major roads. Following the concession period. As a public–private partnership (PPP).infrastructure. the Roads and Traffic Authority. the motorway reverts ownership to the Government. and Leightons Holdings.-billion project was delivered 8 months ahead of schedule and incorporates full electronic tolling technology. confidentiality during a bid process is also needed so as not to compromise the legitimate commercial interests of the parties. The $. see Box 16. A parallel 0-km pedestrian and cycling facility was also constructed as part of the development. The relative importance of each should reflect the importance in achieving the specified objectives.Implementing PPPs Introduction  75  An example of a competitive bidding was the construction of Sydney’s Orbital Motorway. Nevertheless.4 7. what will the weights be? – If pass/fail. together with extensive community consultation and a competitive bid process against specified design criteria. Transparency is achieved by supplying as much information about the process as possible.

Contract awarded to best weighted average technical/financial score. Option : Bids based on up-front payment combined with future concession fees. financial envelopes are opened. • • Likewise. there are four typical variations on the possible presentation of the financial response: • • • • Option 1: Bids based on price of shares or assets being sold. These are confirmed. Option : Bids based on future tariff. and Option : Bids are for service fee—with or without incentive component. which is numerically scored.76 Public–Private Partnership Handbook The technical and financial responses are presented in separate envelopes to ensure a discrete evaluation of each component. There are four variations on how the technical response might be presented: • • Option 1: Contains legal certification and bid bond.4. and contract awarded to lowest price bid. . and contract awarded to lowest price bid. Option : Contains technical proposal. Option : Contains technical proposal. 7. which is scored as pass or fail. Option : Contains technical and financial information used to substitute prequalification. Passing bidders’ financial envelopes are opened and contract awarded to lowest price bid. Financial envelopes of surviving bidders are opened.2 Technical and Financial Evaluation Evaluation criteria should be stated up-front on the bid data sheet. The technical evaluation typically takes into account: • • Quality of the work plan – services to be provided – methodology and approach – meeting performance standards and optimizing incentive compensation – innovations and improvements – training Quality of staffing plan – detail of staffing plan – appropriate experience reflecting required services in staffing plan – professional qualifications and experience of key staff as shown in curricula vitae.

and bank guarantee forms. preparation and submission of bids. and the evaluation criteria. Such a process reduces the amount of time required for contract negotiations by ensuring that bidders agree to the form of contract prior to contract award. the amount of bid security. 7. Instruction to bidders: This provides general instructions to bidders regarding the opportunity. which may include but shall not be limited to bid forms and price schedules. and who to contact regarding negotiations. and provides information for bidders to use in obtaining the full-bid package. Bid data sheet: The bid data sheet expands on the information provided in the instruction to bidders. the content of the bidding documents. a bid security form. bid opening and evaluation. performance security forms. a bid package can range from several volumes of material to a concise document. the bidder’s conference or pre-bid meeting. amounts. indicating any special circumstances or conditions that the bidders must keep in mind.5 Bid Package Depending on the type of contract and the local requirements. the number of copies of the bid to be submitted. The elements listed below are the basic components of a generic bid package: • Invitation for bids: This is a short (one to two pages) document that provides an overview of the opportunity. The invitation for bids will be reprinted as part of the bid package.Implementing PPPs Introduction  77  The financial evaluation is based on: • • • • • Bid prices as readout (currencies. and award of contract. any special instructions regarding certifications or powers of attorney. Sample forms and procedures: The package includes standard forms. • • • • . form of contract agreement. specifies the deadline for bids to be submitted. Draft form of contract: The bid package includes a copy of the draft contract to provide the bidders an opportunity to comment on or mark up the contract. and modifications or comments) Corrections for: – computational errors – provisional sums Corrected bid price Exchange of bids to single currency Formula for scoring bids if weighted technical/financial evaluation. The data sheet also provides the bidders with specific details on where to submit bids. request clarifications. An invitation for bids is typically published in relevant national and international journals.

Circumstances of commencement. and duration of the agreement. Private sector warranties. the package may include information on restrictions governing eligibility to bid on the opportunity and governing procurement using donor funds.6 The Contract Regardless of the option selected. Responsibility for environmental liabilities. 7. The responsibilities of the contractor and the government with regard to capital expenditures. and the extent of their roles and authority. the essential elements to be included in a contract are: • • • • • • • • • • • • • • • • • • • • • • • • • The parties to the agreement. Service quality. The identification of regulatory authorities. Reporting requirements. How key risks will be allocated and managed. whether from fixed fee. The form of remuneration of the contractor and how it will be covered. fixed fee plus incentives. The objective of the contract. Government warranties. The requirement for performance bonds to provide security for government if the construction and/or the service delivery falls below standards. Procedures for coordinating investment planning. and termination of contract. and performance and maintenance targets and schedules. or another arrangement. monitoring. Consequences to a change in law. and depending on the requirements of any donors involved in a project. Interpretation: Sets forth the definitions of important terms and providing guidance on the interpretation of the contract’s provisions. territorial jurisdiction. Procedures for measuring. completion. . Delay provisions describing what is and is not an excuse for a delay in construction or operations. and enforcing performance.78 Public–Private Partnership Handbook In addition to the contents above. The rights and obligations of the government. The scope. The contractor’s rights and responsibilities with regard to passing through or entering public or private property. Force majeure conditions and reactions. modification. if any. Procedures for resolving disputes. The rights and obligations of the contractor. Insurance requirements to provide security for the insurable matters.

and conducting negotiations in several rounds may be necessary. Conflict of interests and dispute resolution. including any restrictions on terminations or redundancies for operational reasons. Indemnification circumstances. such as information technology software manufacturers. Conditions by which public sector employees are employed by the private sector contractor. Only critical personnel should attend negotiations and minutes of the issues covered must be kept. negotiations present the last opportunity to work through contractual issues and both sides may have saved issues to be dealt with at this last stage. Consequences of a change in the ownership or key personnel of the private partner. This list is illustrative and does not capture every clause required in a contract. Negotiations should not reopen items previously dealt with or should not undermine the integrity of the bidding process by deviating from the original proposal. . and Conditions precedent: Describes any conditions precedent to be fulfilled by either party before the contract takes effect. Requirement that each party comply with all laws pertaining to the project. The government side is often the less experienced of the parties at the negotiation table and it is vital that it be supported by appropriate advisory expertise. and advice of legal advisors. the bulk of issues should be sorted out during the bid process. and a fallback plan (which may be the second-place bidder). and the consequences to each party of a termination.7 Negotiations and Contract Start Ideally. local legal requirements and precedent. 7. zoning. and other permits. Description of the conditions under which either party may terminate the contract. However. including the steps to be taken to protect the intellectual property of third parties. planning. The final content of the contract will depend on the project scope. Mechanisms whereby the parties to the PPP contract will interact with each other going forward. The rights of each party to any intellectual property brought to the project or created during the project. Negotiations have to be scheduled with sufficient time for preparation. including obtaining environmental.Implementing PPPs Introduction  79  • • • • • • • • • • • Procedures to be followed when either party to the PPP contract wishes to change any material portion (variation) of the contract. a clear negotiating strategy. The circumstances that may permit either the government or any financial institution to “step in” to the contract to protect its rights under the PPP contract. the processes to be undertaken in that regard.

The management of PPP contracts requires some flexibility on both sides and a means to adapt the terms of the contract to reflect inevitable changes in the operating environment that could not have been anticipated or dealt with in the contract.e. . and Worker transitions – terminal benefits – collective bargaining agreements – transfer of terms of service – redundancies. etc. the early stages of a project are a critical time for the winning bidder to establish the trust of the communities facing development.8 Key Implementation Issues Moving into implementation. the selected bidder should have a well-detailed plan for ongoing communication with the community.. i. The key staff should have the right technical and managerial skills and an established protocol for working together. 7. The timetable and process for transition should also be discussed. Instead.) and the relationship should be strong and flexible enough to facilitate it. Good contract management is not reactive. • • Ability to manage variations. including an appointed liaison. The need for effective communication with stakeholders does not end with contract award. Payment of bonds and guarantees. Both parties should be well familiar with the details of the contract and both should strive for an atmosphere of mutual respect.80 Public–Private Partnership Handbook Part of the negotiations will focus on conditions precedent. requirements. but aims to proactively anticipate and respond to the business needs of the future. the conditions to be met by both sides to declare the contract operational. As the PPP moves into implementation. Ensure the right people on both sides of the relationship are in place. Contracts should be capable of change (terms. These discussions will cover: • • • Registration actions such as the legal incorporation or registration of any joint ventures or project specific companies. scope. several key considerations for the project partners will help ensure success: • Stakeholder management during implementation.

and balance the financial and social risks and rewards to all stakeholders. by their very nature. When this approach is combined with tailored interventions to alleviate service constraints. a PPP can be tailored to address specific reform objectives. The PPP process and contract can therefore be tailored. The underlying cause is that the private sector may have little incentive to extend services to low-income areas due to the high cost of providing the service and low profits due to lack of a payment culture. and representatives of civil society have translated into new. 8. to the requirements of LIGs to the degree desired and feasible. low consumption. experience has shown that many private operators were unable or unwilling to improve or expand services to low-income groups (LIGs). NGOs. In many cases. Then it is possible to consider specific pro-poor interventions that might be attached to a process. The most explicit of these approaches is a new approach called output-based aid or OBA. The concerns voiced by consumers. and low-cost structures for those customers. Service and management contracts The operator has no responsibility to finance operations or to invest in the system and payment is not fully tied to the amount of tariff revenue collected. more or less. As the operator has no responsibility to invest in the system. efficiency. there are other ways in which the PPP process and the basic forms of PPP can be approached from a pro-poor perspective. and capital. involve the LIGs. However. PPPs can provide adequate incentives to the private sector. these contracts. targeted approaches to the needs of LIGs within the rubric of PPP structures. which are required to improve and expand service. the private sector has been able to successfully partner with public utilities to the advantage of consumers. at least in the short to medium term. However. How- . lack of tenure. and the operator can only make best use of those resources provided. cannot require the operator to extend or provide service to low-income areas. All resources apart from specific expertise are provided by the public sector. but which are often lacking in the public sector.Introduction  81 8 Specific Pro-Poor Activities in PPPs The private sector is seen as a potential source of the expertise.1 Pro-Poor Characteristics of PPP Options Reexamining the range of options and any inherent advantages or disadvantages in terms of service to the poor is important. As a component of a reform package.

particularly into areas that are geographically challenging or where the culture of payment is uncertain. the operator typically has the obligation to finance and operate not only the existing system. These include both contract provisions or content and changes in the overall approach to the reform agenda. Under this contract type. Under the compensation scheme of a concession.2 Pro-Poor Interventions in the Context of PPPs To encourage the operator to serve LIGs under PPP. However. this should be specified in the contract or an incentive should be provided. Relevant to LIGs. PPP arrangements might be made more responsive to the requirements of low-income consumers in many ways. the operator would have to determine through cost-benefit analysis that expansion to unserved areas will generate a sufficient return on investment. it is vital to consider low-cost mechanisms of providing service. The operator thus is motivated to sell as much water as possible. the operator also has an incentive to keep operating costs as low as possible to maximize the profit margin. the operator may be motivated to provide service for the sake of increasing tariff revenue or remuneration. low-cost financing for system extension. but also any expansion of the system. the contracts can require expertise in social issues and in developing and implementing any funded low-income strategies. However. 8. Lease and affermage contracts It is possible to structure compensation incentives into a lease that encourages providing service to LIGs within the served area. However. If the low-income areas fall within the existing service area. If the government wants a concessionaire to prioritize expansion to low-income areas. Specifically: . Box 17 highlights Peru’s incentives for rural telephony expansion. potentially to LIGs as well as to others. Concessions Concessions provide the operators with an inherent incentive to provide service to as many customers as possible. and other contract mechanisms relevant to the specific characteristics of the low-income population. The operator will thus seek low-cost ways to provide service and may be reluctant to expand the network. Related to the compensation issue is the scope of a concession. these areas may be a lesser priority than other consumer groups within the service area.8 Public–Private Partnership Handbook ever. extension of the system into unserved areas remains with the public sector (or as negotiated) and may not be a priority for either public or private sector. pricing structures that encourage customer payment. the operator is allowed to keep most or all of tariff revenues at an agreed rate (or formula) for a unit of water.

Specific Pro-Poor Activities in PPPs Introduction  8

Box 17: Incentives for Rural Telephony Expansion in Peru
As an incentive for private telecommunications operators to expand service to rural areas of the country, the Government of Peru has structured public–private partnership (PPP) arrangements that award a subsidy for pay phones installed in predefined target areas. The program uses a “least subsidy” approach to achieve the desired results for minimal cost. Operators bid for the right to provide services to rural areas, and the winning bidder is that who offers to install the phones for the least subsidy. Payment of the subsidies is linked to performance, with part paid upon award of the contract, part once the pay phone has been installed, and the remainder in semiannual installments over the life of the contract, with these payments tied to the operator’s achievement of key performance indicators. This structure not only provides incentives to operators to extend service to low-income areas, but places equal priority on the maintenance of infrastructure and the quality of service to low-income customers.
Source: Cannock, Geoffrey. 001. Telecom Subsidies: Output-Based Contracts for Rural Services in Peru. Viewpoint  Note No. .Washington, DC: World Bank, Finance, Private Sector, and Infrastructure Network.

Reform framework • • The policy commitment to LIGs must be clarified and strengthened. There needs to be common agreement on which segments of the population constitute LIGs, as well as which institutional entity is responsible for updating the definition of LIGs and monitoring their access to service. Current data should be collected on LIGs in terms of service, preferences, and access. These data would be used to inform strategies and coverage targets and set a baseline for measuring progress. Consultation within the LIG community should be ongoing to understand current service levels, constraints, and preferences. There should be a frank consideration of the role of existing or potential small-scale providers or informal service providers and the potential to use those providers for the short to medium term to fill gaps in service until coverage through PPP is expanded. The existence of any legal prohibitions against serving informal settlements or to tailoring service standards to the constraints of a community should be reexamined.

Financial considerations • • The government’s policy on subsidies should be reexamined in the context of cost recovery goals under PPP. There should be consideration of whether connection fees are a greater disincentive to network service than the ongoing payments for service. If so, the connection fee should be reexamined in terms of level and application. Mechanisms to facilitate payment, such as prepaid meters, increased paypoints, frequent billing, and others should be considered.

8

Public–Private Partnership Handbook

The PPP contract • • • • The contract should include the flexibility to implement the right level of service appropriate to the financial capability of the LIGs, with potential to upgrade. Likewise, the technology and construction standards should be appropriate but low cost. The potential for LIGs to contribute in-kind through labor should be considered. The contract should allow for partnership or coexistence with small-scale providers or communities where appropriate to reach a particular LIG.

The PPP bid process • • If bidders were to have obligations in terms of LIG service, they require reliable data on LIGs and site visits. Bidders can be required to present their past experience in serving LIGs and to explain their present strategy under the PPP contract at hand.

8.3

Output-Based Aid Contracts

OBA provides a way in which international financial institutions (such as the Asian Development Bank) can directly structure its financing to benefit poor people, even when the service provider is a private company. OBA is the use of explicit, performance-based subsidies funded by the donor to complement or replace user fees.8 It involves the contracting out of basic service provision to a third party—such as private companies, NGOs, CBOs, and even public service providers—with subsidy payment tied to the delivery of previously specified outputs. This means that targeted and valuable subsidies to disadvantaged populations are funded through donor funds. The private partner, meanwhile, can only recover this funding by achieving specific performance outcomes. A global multi-trust fund was created in 00, the Global Partnership for Output Based Aid, to provide increased access to reliable basic infrastructure and social services to the poor in developing countries through the wider use of OBA approaches (see Box 18 for information). Generally, OBA schemes finance three types of subsidies: • One time. These would include subsidies for connections with the collected user fees covering longer-term operation and maintenance costs. These have been the most common under OBA schemes to date. Transitional. Transitional subsidies are used to ease the transition to full cost recovery tariffs.

Specific Pro-Poor Activities in PPPs Introduction  85 8

Ongoing. Ongoing subsidies are linked to a sustainable source of funding such as general tax revenues, earmarked tax revenues, or explicit cross-subsidies. These subsidies are used to complement the existing funding source. This has been less used and requires longer disbursement periods.

OBA also transfers risk to the operator in several ways. First, OBA links payment of the subsidy to performance outcomes, maintaining pressure on the operator to reach agreed upon service and commercial targets. Second, OBA schemes determine and pay the total level of subsidy ex post. Thus, the operator runs some risk that payment will not be made by government as agreed. Typically, OBA payments relevant to pro-poor service would be linked to outcomes related to consumption and coverage expansion, but OBA schemes are also applied to BOT projects that might have an indirect, positive impact on the poor. For OBA to work, there has to be a process for monitoring and verifying delivery of the specified outputs, to pay out an accurate subsidy.

Box 18: The Global Partnership for Output-Based Aid
The Global Partnership on Output-Based Aid (GPOBA) is a multi-donor trust fund created in 00 and administered by the World Bank, with funding support from the World Bank, the United Kingdom’s Department for International Development, the International Finance Corporation, and the Netherlands Government. The goal of GPOBA is to provide increased access to reliable basic infrastructure and social services to the poor in developing countries through the wider use of OBA approaches. GPOBA will demonstrate and document OBA methods of supporting the sustainable delivery of basic services (water, sanitation, electricity, telecommunications, transportation, health, and education) to those least able to afford them and to those currently without access. Currently, GPOBA funds are eligible to support the following: • Funding of output-based payments under OBA schemes to facilitate the piloting of innovative, small-scale projects; • Studies and other inputs to assist in the design, implementation, and evaluation of particular schemes intended to pilot the application of OBA approaches to the delivery of eligible services; and • Publications, workshops, and conferences to help identify and disseminate emerging knowledge on issues relating to the role and application of OBA approaches.
For more information on OBA, visit the GPOBA website at www.gpoba.org.

The regulator has the mandate to monitor compliance against the regulations and the license. and enforcing contract provisions that are not met. In this case. and the reporting regime. monitoring the performance of all parties to the contract. for example (Box 19). a separate regulator does not exist or is not required. Like a contract monitoring unit. ports and harbors. Where a regulator is present. or may be the PPP unit. publishes reports on performance. and postal services. a unit can be developed within government to receive and verify reports on progress against the contract terms. These entities include: Contract monitoring unit. acceptable procedures of measuring performance results. and reporting on and accounting for payments made. but the monitoring is against the provisions of sector regulations. This means overarching principles and methodologies are set out in regulations and the implementation detail is contained in the contract and a license (if applicable). Where incentive payments are to be rendered. Monitoring. In Papua New Guinea. the unit should also have a method for ascertaining the basis for such payments. and Reporting on Results A successful PPP depends in large part on the capacity of the government to keep the contract on track. created the Independent Consumer and Competition Commission to be an independent regulation body on contracts covering electricity. . Regulator.Introduction  8 9 Framework for Measuring. reporting on results. the contract has to contain explicit details on the targets. Different entities are available to support. there is approximately the same process as above. or to take on full responsibility. and enforces any penalties for nonperformance. In some cases. in addition. This unit may be located within the sectoral ministry. for monitoring progress against the targets specified in a contract. To accomplish contract monitoring. telecommunications. This entails setting clear requirements of the partnership. a more independent ministry such as finance. the regulator must have procedure manuals to dictate the application of its responsibilities. has to develop a procedures manual for verifying performance against the contract and for responding to any contract deviations. The unit. making payment.

The provisions of the ICCC Act apply to all businesses in PNG including government enterprises. telecommunications. • prevent the misuse of market power.eapirf. quality. environmental. tariff setting. The commission consists of three commissioners—one full-time commissioner and two associate part-time commissioners appointed for 5 years.pg. • promote and encourage the efficient operation of industries and efficient investment in industries. and service standards. ICCC is to: • promote and protect the bona fide interests of consumers with regard to price. www. investment.org/MenuItems/Organization/memberprofiles/ICCC. which affects the PNG market.asp . • ensure that regulatory decision making has regard for any applicable health. ICCC has the power to determine market structures.gov.88 Public–Private Partnership Handbook Box 19: Independent Regulation: The Independent Consumer and Competition Commission of Papua New Guinea The Independent Consumer and Competition Commission (ICCC) of Papua New Guinea (PNG) was created in 00 with jurisdiction over electricity. ICCC was fully operational with over 0 staff. quality. Sources: www. The ICCC Act also applies to business outside PNG.iccc. and conduct. ICCC focuses on the following primary objectives: • enhance the welfare of the people by promoting competition and fair trade and protecting consumers’ interests. and reliability of significant goods and services. and reliability of goods and services. and social legislations. In exercising its powers under the ICCC Act. ports and harbors. • ensure that users and consumers (including low-income or vulnerable consumers) benefit from competition and effeciency. By March 00. • promote economic efficiency in industry structure. and • facilitate effective competition and promote competitive market conduct. safety. • promote and encourage fair trade practices. and • protect the long-term interests of the people with regard to the price. and postal services. Specifically.

Box 20: Contracting Out Regulation in Gaza The Gaza Management Contract. published reports. and information made available to customers. January 00. The auditor was also able to bridge the stark information asymmetry gap between the operator and PWA.Framework for Measuring. Source: Contracting Out Utility Regulatory Functions. this contracted expertise replaces the need to retain an ongoing regulatory function. An important role of any of these entities is to report on performance. Some countries find it advantageous to procure the services of independent technical and/or financial auditors. The contract created a simple qualitative scale to measure progress against target. In other cases.000. often from a regional perspective. This example highlights the potential for using external auditors for formulating binding recommendations and addressing issues of lack of competence and limited independence in nascent regulatory agencies. In the opinion of the Palestinian Water Authority (PWA). used an innovative contracting out strategy to overcome the limitations posed by weak local regulatory capacity. . and ReportingIntroduction  89 on Results 8 Independent auditors. the auditor provides an independent assessment of the performance. Monitoring. one of the first private sector initiatives in the Middle East water sector. In some cases. See Box 0 for Gaza’s experience in contracting out regulation. This can be accomplished through training and effective twinning with regional and international peers to provide ad hoc advice. which provides credibility and support to the overall monitoring. once or twice a year. The contract used private “third party” technical and financial audits to calculate the performance-linked management payment. the use of an external auditor helped increase pressure on the operator to perform. The auditor evaluated the operator’s declared performance against the targets set out in the management contract. its weighted average composite score would be 1 and this would allow it to earn 100% of the allotted annual performance linked fee of $750. If the operator earned “excellent” in the performance variables. This is accomplished through websites. While these entities initially employ international experts to strengthen capacity. This may be in a addition to or instead of the role of the contract monitoring unit or regulator. the goal in the long run is to transition to fully local staff. Environmental Resources Management. reports to parliament.

worldbank. websites.iadb.ifc.org/PublicPolicy Journal http://rru.worldbank.oecd.org www.org/ www.undp.org www.Introduction  1 10 Resources and Tools 10.asp www.worldbank.org/toolkit/MOD11. and case studies on public–private partnership (PPP) Toolkits Public Policy interventions World Bank Privatization Database http://rru.gpoba.worldbank.htm Website International Finance Corporation (IFC) website on Asian Infrastructure investment Organisation for Economic Co-operation and Development (OECD) Public–Private Infrastructure Advisory Facility (PPIAF) United Nations Development Programme (UNDP) Tools for pro-poor municipal PPP United States Agency for International Development (USAID) Economic Growth and Development World Bank • • • • Papers.nsf/Content/ Infrastructure www.org/ http://pppue.1 Websites — General PPPs Organization African Development Bank Group (AfDB) Asian Development Bank (ADB) – Private Sector Development Section Business Partners for Development East Asia and Pacific Infrastructure Regulatory Forum (EAPIRF) Global Partnership on Output-Based Aid Inter-American Development Bank (IADB) www.html www.bpdweb.usaid.gov/our_work/economic_ growth_and_trade/eg/privatization.org/index.org/ifcext/eastasia.org/Privatization .org www.org/Toolkits/ http://rru.cfm?subto picID=APP&language=English&topicID=PS& parid=&item1id=8 www.ppiaf.adb.org/PapersLinks http://rru.afdb. html www.org/PrivateSector/default.eapirf.org/topics/subtopics.

html www.go.gov.3 Websites — Sector-Specific Infrastructure www.9 Public–Private Partnership Handbook 10.gc.2 Websites — PPP Organizations and Units Organization Website www.co.ca/pics/ce/ic_psc. Department of Transportation (United States) World Bank • Performance-based Contracting for Roads • PPP in Infrastructure • PPP Toolkit in Highways • Toolkits for Private Participation in Water and Sanitation World Bank Institute • Learning materials related to PPP in Infrastructure www.ic.html .worldbank.org/transport/roads/ resource-guide/index.go.org/ http://rru.org/WBSITE/EXTERNAL/WBI/WBIPROGRAMS/PPPILP.org/Toolkits/ PartnershipsHighways/ www.ppp.worldbank.au http://strategis.jp/index-e.infrastructure.gc.htm Federal Highway Administration.ppp.ncppp.mpb.html www.menuPK: 611~pagePK:61561~piPK:615155~t heSitePK:6110.worldbank.fhwa.org/html/fpd/water/ wstoolkits http://web.dot.ca http://strategis.ca/pics/ce/pguide_ e.gov/ppp/dbb.za B-O-T Center (Philippines) Cabinet Office (Japan) Canadian Council for PPPs Industry Canada: Public-Private   Comparator Infrastructure Partnerships Australia Irish Government PPP Unit Ministry of Finance (Thailand) Ministry of Planning and Budget (Republic of Korea) National Council for Public-Private Partnerships (United States) Partnership Victoria (Australia) Public-Private Partnership Office (Canada) Public-Private Partnerships: A Canadian Guide (001) South African National Treasury PPP Unit 10.ph www.au www.th www.worldbank.html http://ppi.org..partnerships.00.pppcouncil.ca/epic/site/pupr-bdpr.ie www.cao.gov.gov.mof. nsf/en/Home http://strategis.vic.pdf www.ic.gov.org www.pdf www.botcenter.gc.worldbank.kr/english.

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These are: Note 16. Available: http://rru. This section is drawn from the World Bank Tool Kit on Public–Private Partnership in Highways which contains additional detail and simulations. October 005. February 006. From the World Bank Output-Based Aid Guidance Note for Staff. October 000. Ada Karina Izaguirre. Note 50. See endnote . October 00. Note 16. Public–Private Infrastructure Advisory Facility (PPIAF) Gridlines Note No. org/Documents/Toolkits/Highways/_CARAC/index. Sunita Kikeri and Aishetu Kolo. and Georgina Dellacha.htm. PPIAF is a multi-donor technical assistance facility aimed at helping developing countries improve the quality of their infrastructure through private sector involvement. Ada Karina Izaguirre. Privatization proceeds in this context refer to monetary receipts to government generated by transactions such as divestment. Stephan von Klaudy. See endnote . Michael.worldbank. April. The role of developing country firms in infrastructure: A new class of investors emerges. 006. and Note 0. . Schur. Melissa Houskamp and Nicola Tynan. . working closely with the World Bank. PPIAF was developed at the joint initiative of the Governments of Japan and the United Kingdom. and leases. concessions.100 Public–Private Partnership Handbook Endnotes 1    5 6 7 8 This chapter is compiled from the analysis contained in three Notes on Public Policy for the Private Sector produced by the World Bank/International Finance Corporation (IFC). Launched in July 1999. Note 99.

loans.org Publication Stock No.adb.000 employees from over 50 countries. and experience with applying PPPs to the provision of public goods and services. Despite their prevalence as a policy and economic tool. nongovernment organizations. equity investments. and technical assistance. It aims to build knowledge on the key features of PPPs as well as structuring options. Philippines www. private sector. ADB is a multilateral development finance institution owned by 67 members. It has 26 offices around the world and more than 2.9 billion who live on less than $2 a day. particularly the nearly 1. the region remains home to two thirds of the world’s poor. grants. civil society. Its mission is to help its developing member countries reduce poverty and improve their quality of life. guarantees. 071107 Printed in the Philippines . 48 from the region and 19 from other parts of the globe. there remains a continuing interest in information on PPPs from interested stakeholders including government. Mandaluyong City 1550 Metro Manila. and academia. ADB’s headquarters is in Manila. Asian Development Bank 6 ADB Avenue. ADB’s main instruments for helping its developing member countries are policy dialogue.About the Handbook Over the past 2 decades. Despite many success stories. ADB’s vision is a region free of poverty. This handbook is an introductory primer on PPPs in the context of development finance. Public–Private Partnership (PPP) schemes have become widely used in many countries to provide services and infrastructure. About the Asian Development Bank ADB aims to improve the welfare of the people in the Asia and Pacific region. implementation issues.

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