Public Services

Public-Private Partnerships: Working together to Improve Pubic Infrastructure and Services

............... 8 Benefits and Challenges of PPPs .............................................Table of Contents Bridging the Infrastructure Gap ............................ 5 PPP Risk-Reward Curve and Compensation Models . 6 Value for Money: PPPs versus Pure Public Investment .... 11 Deloitte’s PPP Services ...... 13 Public-Private Partnership ii ............................................................................................................................................. 9 The PPP Life Cycle .................................................................................................................................................. 4 PPP Range of Options ................................................... 3 What are Public-Private Partnerships? ....................................................................................................................................................................................................................................................... 10 Global Trends in PPPs ...................................................................

public sector model of public service delivery toward one in which public and private sectors work together in a partnership that serves their interests as well as the interests of citizens and other users of infrastructure. share risks. These partnerships are complex and relatively inflexible structures. However. Governments and public authorities should seek advice from outside consultants to help them design PPP programs and projects that will achieve their intended objectives. Significant political. such as PPP. PPPs can ease fiscal restraints and boost efficiency in the provision of public infrastructure and services. Through an infusion of private capital and managerial and operational experience. legal. On average. This constant challenge requires bold approaches and practical solutions.Governments and public authorities are increasingly turning to public-private partnerships (PPPs) to deliver efficient and cost-effective infrastructure and services. Despite their potential. achieve better value for their money and increase innovation in their infrastructure and provision of services. however. making it unsuitable for some projects. better value for money and increased innovation across a range of sectors. while also increasing their value for money. governments have limited financial resources to devote to capital expenditures and expanded public services. National and local governments and public authorities are constantly looking for ways to expand and modernize their public infrastructure and services. Improved infrastructure and services are a necessary precondition for successful and sustainable economic growth and social development. Public-Private Partnership 3 . the ability to deliver goods and services in a timely and cost-effective manner is critical. developing countries need to spend 5 percent of their gross domestic product (GDP) annually on infrastructure capital expenditures in order to sustain and expand essential public infrastructure. Bridging the Infrastructure Gap In today’s global economy. PPPs are highly complex policy instruments and must be fully understood and professionally implemented and managed if they are to deliver on their potential. Public-private partnerships can help improve public infrastructure and services through shorter delivery times. implementing a PPP program or project is not easy. regulatory and institutional hurdles must be overcome in order to move from a traditional. better value for money and increased innovation across a range of sectors. PPPs are not without challenges. The Growing Infrastructure Gap The infrastructure gap – the amount of investment required to meet core infrastructure needs – is large and growing. PPPs can help public sector entities shorten delivery times. However. Such partnerships allow private sector organizations to apply their skills and experience to infrastructure development and operation and mobilize finances for long-term infrastructure investments. PPP procurement and implementation also can be lengthy and costly. however. public authorities are increasingly turning to public-private partnerships (PPPs). To bridge the gap between available public resources and the cost of needed infrastructure and services and to ensure that infrastructure and services are delivered as efficiently and cost-effectively as possible. PPPs can help improve public infrastructure and services through shorter delivery times.

1 1 Although PPPs are considered a new concept that has gained prominence in the last 20 years. the following elements typically characterize a PPP: The infrastructure or service is funded. water. elements of risk to the private partner is key in distinguishing a PPP from the more traditional public sector model of public service delivery. by the private partner. universally accepted definition of public-private partnerships. PPPs often mean different things to different people. operate or maintain an infrastructure or service. PPPs are complex structures. all PPPs involve some form of risk sharing between the public and private sector – to provide the infrastructure or service. PPPs offer a new and dynamic approach to managing risk in the delivery of infrastructure and services. particularly in countries with well-developed institutional and regulatory capacities. roads.e. In general. construct. Risks are distributed between the public partner and private partner and are allocated to the party best positioned to manage each individual risk. in whole or in part. wherever the private sector has been involved in the delivery of traditional public services (i.e. renovate. rail and electricity). PPPs have actually been around for hundreds of years. involving multiple parties and relatively high transaction costs. maintenance and operation) to increase synergies and discourage low-capital/high – operating-cost proposals. construction.What are Public-Private Partnerships? There is no single. especially in developing economies. PPPs refer to forms of cooperation between public authorities and the private sector to finance. Although there is no universal consensus about the definition of public-private partnerships. design. PPPs are a procurement tool where the focus is payment for the successful delivery of services (the performance risk is transferred to the private partner).. at times significant. PPPs typically involve bundled services (i. At their core. Although institutional PPPs have been quite successful in some circumstances. There are two basic forms of PPPs: contractual and institutional.. In general. manage. Public-Private Partnership 4 . which can make assessing and comparing international experience in such partnerships difficult. The allocation of sizable and. contractual PPPs are significantly more common. PPPs are output-/performance-based arrangements – as opposed to the traditional input-based model of public service delivery – where the focus is payment for the successful delivery of services.

e. depending on the public sector’s objectives and needs. PPP Glossary at a Glance Common terms and acronyms associated with public-private partnerships include: Service contract: The government contracts with a private entity to provide services the government previously performed. The private partner assumes significant investment risk. while the public sector retains ownership of the original asset. then operates and maintains the facility at its own risk for the contract period. operate and transfer (BROT): A private developer builds an add-on to an existing facility or completes a partially built facility and rehabilitates existing assets. Concession: The government or public authority grants a private entity exclusive rights to provide operate and maintain an infrastructure asset for a specified period of time. rehabilitate. Multiple types of PPP transaction structures Public-Private-Partnerships Works & Service Contracts Low Management Contracts Lease Agreements (LDO. then operates and maintains the facility at its own risk for the contract period. the lease agreement can include investment requirements (i. etc. Within this range. accepted industry norms and the financial realities of the proposed transaction. lease or rent. however. depending on the public sector’s objectives and needs. Rehabilitate. the legal and institutional environment. Examples include: Rehabilitate. operate and transfer (ROT): A private sponsor rehabilitates an existing facility. leases or rents the facility from the government owner.) BOT/BOOT Concessions Divestitures/ Privatization High Extent of private sector risk PPPs fall somewhere between the traditional public sector model of public service delivery and full privatization. however. Build. lease-develop-operate contract structures). The private operator takes on the operational risk. an infinite number of potential PPP transaction structures can be employed. and transfer (RLT): A private sponsor rehabilitates an existing facility at its own risk.. Within this range. The specific transaction design depends on several factors. including the targeted risk transfer. Lease: The government leases the public infrastructure to a private operator for a fee. then Public-Private Partnership 5 . Figure 1.PPP Range of Options PPPs fall somewhere between the traditional public sector model of public service delivery and full privatization. Management contract (MC): The government contracts with a private entity to operate and manage a facility or provide multiple services. an infinite number of potential PPP transaction structures can be employed. In some instances.

lease and transfer (BLT): A private sponsor builds a new facility largely at its own risk.PPP Glossary at a Glance operates and maintains the facility at its own risk for the contract period. The asset is only paid for by the public sector when it has been completed. Design-build-finance-transfer (DBFT): A private entity finances and constructs the infrastructure asset which gives it the incentive to complete the project on time and within budget. The facility may or may not return to the public sector at the end of the concession period. to the private sector. This is common under the private finance initiative (PFI) model. the greater the risk. the private entity must be compensated for assuming these risks (Figure 1). Greenfield projects can be organized into categories: Build. own and operate (BOO): A private sponsor builds. PPP Risk-Reward Curve and Compensation Models Given that PPPs allocate certain risks to the private partner. This is also commonly referred to as design-build-finance-operate (DBFO). Divestiture: The government transfers public infrastructure an asset. Build. the greater the required return. The private sponsor may or may not own the assets during the contract period. Greenfield projects: A private entity or public-private joint venture builds and operates a new facility for the period specified in the project contract. transfers ownership to the government. operate and transfer (BOT): A private sponsor builds and operates a new facility at its own risk and then transfers the facility to the government at the end of the contract period. leases the facility from the government and operates it at its own risk up to the expiration of the lease. either in part or in full. Generally speaking. Figure 2. owns and operates a new facility at its own risk. Build. Generally. Risk-reward Relationship by Type of PPP High Concession Rewards (Returns) BOT Lease Divestiture Management Contract Service Contract Low Low Risk Risk Reward Relationship by the Type of PPP High Public-Private Partnership 6 . the government will include certain conditions with the sale of the asset to ensure that improvements are made and services continue to be delivered.

guarantees and subsidies. This system provides capital assets for the provision of public services. power purchase agreements (PPAs). The government secures a private entity’s borrowings by guaranteeing repayment to creditors in case of default. The most common example of this is when a government guarantees the fixed payment of an off-take agreement (e. investments. Government Support Mechanisms Hosting governments can provide financial support to or reduce the financial risk of a project in many ways. The government agrees to fulfill the obligations of a purchaser (typically a publicly owned enterprise) with respect to the private entity in the case of non-performance by the purchaser.e. such as contributions.. toll roads. or to ensure that full cost recovery is compatible with affordability criteria and the public’s ability to pay. the private partner is typically compensated through either: User-based payments (i. the government or public authority often needs to provide some financial support to the project to mitigate specific risks. this model is used for a large number of infrastructure projects and gives the private sector strong incentives to deliver infrastructure and services on time and within budget. and payments can be made either in installments or all at once. Availability payments are at the heart of one form of PPP. This form of guarantee is most common in roads with minimum traffic or revenue set by a government.. Debt guarantee. water purchase agreements (WPAs)] A combination of the above In user-based payment structures.K.g. PPA or WPA) between a private entity and the publicly owned enterprise. The government or public authority agrees to provide a cash subsidy to a project. typically this income is from customer user fees. It can be a total lump sum or a fixed amount on a per unit basis. while also liberating scarce public resources for other social priorities. such as demand risk.In PPP arrangements. PFIs simultaneously allow governments and public authorities to spread the cost of public infrastructure projects over several decades. airport or port charges) Availability payments from the public authority [i. Common forms of government support mechanisms include: Cash subsidy. Revenue guarantee. This creates greater budget certainty. When government supports are present. but they should be carefully designed and implemented to allow for optimal risk allocation between the public and private sectors. Developed in the U. PFI.. Public-Private Partnership 7 .e. Payment guarantee. the objective is to increase private capital mobilization per unit of public sector contribution. The government sets a minimum variable income for the private partner.. Government support mechanisms can take many forms. the PFI model.

Value for money does not simply equate to selecting the cheapest bid or lowest price for an asset. The private sector has skills and experience that can be applied to infrastructure development and operation. What’s behind the growth in PPPs? Governments and public authorities are increasingly turning to PPPs for several reasons: Governments have limited financial resources to devote to capital expenditures. The private sector can mobilize finances for long-term infrastructure investments. Not all projects are suitable for public-private partnerships. Governments are in need of greater efficiency and more performance-based service delivery. which should provide equivalent or better value for money than a 100 percent public sector approach. which should provide equivalent or better value for money than a 100 percent public sector approach. Value for money is a key driver in public-private partnerships.Value for Money: PPPs versus Pure Public Investment Not all projects are suitable for PPPs. it means opting for the best long-term solution for service delivery. incremental benefits of PPPs may accrue from: Speedier implementation of infrastructure projects Better service and coverage Life cycle focus of service delivery/reduced life cycle (long-term) costs Improved efficiency and innovation Risk sharing designed to create incentives to succeed Value for money is a key driver in public-private partnerships. When compared to a public sector approach. Public-Private Partnership 8 . Value for money does not simply equate to selecting the cheapest bid or lowest price for an asset. which is an attractive risk-return opportunity for many private sources of capital. it means opting for the best long-term solution for service delivery. It involves analyzing the total long-term costs (life cycle costs) of service delivery and evaluating the concomitant benefits to the public at large.

Cost savings from PPPs typically come from lower construction expenses. Private sector development/investment opportunities. PPPs provide stable. Because PPPs generally allow payments to be spread the cost of the infrastructure investment over the lifetime of the asset. creating additional revenue for other public sector priorities. can create significant cost savings in the delivery of public infrastructure and services. the private sector is constantly searching for new investment opportunities. This allows the public to benefit from the investment much sooner than with traditional “pay-as-you-go” financing. In addition. By liberating the public sector from the direct provision of non-strategic services. These new sources of income can be shared with the public sector. Budget leveraging/additional capital. Benefits of PPPs include: Speedier implementation of infrastructure projects. In addition. it can act as a more effective regulator. the public sector can move ahead with infrastructure projects without waiting for significant upfront capital. available to governments and public authorities to develop infrastructure and services. As the cornerstone of any modern economy. PPPs have a solid track record of completing construction on time or ahead of schedule. This allows the public to benefit from the investment much sooner than with traditional “pay-as-you-go” financing. focusing on ensuring that the private partner maintains required customer service levels. Improved efficiency and cost savings. because PPPs generally allow the public to spread the cost of the infrastructure investment over the lifetime of the asset. Public sector focus on strategic functions and outcomes. Innovation and the private sector profit motive can create incentives for the private partner to develop new and creative sources of revenue from public infrastructure. PPPs have a well-established track record of improving quality and service levels. Customer service orientation. governments can focus their scarce resources on their core mission. PPPs have shown potential in addressing infrastructure shortages and achieving good value for money. the public sector can move ahead with infrastructure projects without waiting for significant upfront capital. This mobilization of additional capital allows governments to increase their overall level of investment in infrastructure development. Generation of additional revenues. coupled with an optimal risk allocation. Private sector innovation also can facilitate the provision of continued high-quality services. Public-Private Partnership 9 . long-term investment possibilities for the private sector. among many.Benefits and Challenges of PPPs Public-private partnerships are not intended to entirely replace the traditional public sector model of public service delivery. PPPs are just one tool. improved efficiency and lower costs of associated risks. public-private partnerships result in an infusion of private capital into public infrastructure and services. Private sector efficiency. Specialist private service providers offer experience in their respective fields. Given the use of performance – based incentives. Because payments are tied to infrastructure and service delivery. as well as the opportunity to enter into service sectors previously monopolized by public authorities. By shifting financing responsibilities to a private party. reduced life cycle costs. as the public sector divests itself from day-to-day service provision.

on a government’s capacity to execute and manage innovative partnerships. which must be prepared to act as a competent counterpart and regulator. developing adequate oversight and monitoring structures. regulatory. governments are establishing centralized PPP units to set policies and drive the PPP process. PPP procurement and implementation can be lengthy and costly. In order for PPPs to be successful. however. institutional and policy framework components for the PPP. but the public may perceive the increased rates and charges as a result of the private partner’s required return on investment. making it unsuitable for some projects. in great part. they can generate considerable problems if handled incorrectly.. applying appropriate risk models. in great part. but it is only a small part of a broader framework. Leading Practice: The Centralized PPP Unit Increasingly. The PPP Life Cycle When implementing PPPs. governments and public authorities should seek help from outside advisors to support the development of public sector capacity to implement and manage PPP programs. contract management and risk analysis). This may require a different set of government proficiencies (i. Standardizing processes and leading practices to bring certainty to the market. Seeking external advice can help governments design PPP programs and projects that will achieve their intended objectives. securing stakeholder buy-in. Promoting PPP projects and initiatives. managers skilled in negotiation.e.Despite their potential. The transaction is an important component of a PPP. they need to be implemented within a broad policy framework that takes into account all phases of the PPP life cycle. Equally important are establishing the legal. Public-Private Partnership 10 . and incorporating the PPP into broader sector strategies. on a government’s capacity to execute and manage innovative partnerships that take into account all phases of the PPP life-cycle. overlooking other critical factors. governments need to adopt a lifecycle perspective. Championing legal. Public-private partnerships can create the following challenges: PPPs are complex and relatively inflexible structures. Success depends. When implementing public-private partnerships. governments need to adopt a life cycle perspective. Success depends. PPPs are not a panacea. For this reason. PPPs do not achieve absolute risk transfer. This is not necessarily a direct consequence of the PPP. Not all projects are suited for PPPs. PPPs may lead to higher user charges once implicit or explicit subsidies are removed. and to support the implementation of specific projects. The public sector will retain some risks. managing the change process. governments place too much emphasis on the transaction. while also increasing their value for money. Serving as a knowledge base and source of technical assistance to government institutions and agencies. regulatory and institutional reforms. as needed. Although PPPs offer significant benefits as an infrastructure delivery tool. The functions of such organizations include: Vetting potential PPP projects to confirm that they meet specified minimum standards. All too often. PPPs place additional responsibility on the public sector.

The policy and planning phase is critical to determining the eventual success or failure of any PPP initiative. Table 1 summarizes some principal PPP infrastructure opportunities. BOOT. Table 1. institutional strengthening and developing leading practices to ensure that PPP program objectives are obtained. Partnership and implementation phase. The partnership phase involves several stages. This phase helps secure the best value for money through a quantitative and qualitative analysis of project options (i. governments and public authorities have increasingly turned to PPPs as an infrastructure delivery tool in multiple sectors. Global Trends in PPPs During the past 10 years. and termination/asset handover. other DBFO/DBFOM (PFI). divestiture. It is essential to structure the deal so that it is bankable. BTO. MC. concession. MC. PPP infrastructure opportunities Indicative PPP models BOT. while the government provides oversight and compliance monitoring.. other BLT. divestiture. BLT. feasibility studies). other BT. During this phase.The PPP life cycle generally involves three major phases: Policy and planning phase. including construction. This long-term relationship requires an effective governance structure. operations and management. Competitive incentives involved in the procurement process also help achieve better value for money. while simultaneously achieving optimal risk allocation. PFI. the private partner operates the infrastructure facility. This trend shows no sign of slowing. MC. Although the PPP experience can vary greatly from country to country or region to region. Transaction phase. divestiture.e. institutional and policy framework for the PPP. In this phase. BOOT. regulatory. This includes capacity building. as well as trained government officials who can act as competent PPP counterparts. renegotiations and developing regulations. concession. governments establish the legal. The transaction phase is completed when project agreements have been formalized and the private partner has achieved financial close for the project. Other activities during this stage may include dispute resolution. the establishment of performance standards and incentives and the implementation of open and competitive processes to select the private partner. concession. MC Representative challenges Demand risk Opposition to tolls and tariff increases Competing facilities Pricing and risk allocation sensitivity Policy/regulatory risk Political sensitivity Cost recovery Project scaling Adequate risk transfer Other Sector Transport Sub-sectors Airports Seaports Roads Railroads Electricity Natural gas Treatment plants Utility School infrastructure Research facilities Energy Water and Sewerage Education Public-Private Partnership 11 . BOOT.

Public-Private Partnership 12 . BOO. other Political sensitivity Performance measure Other Political sensitivity Project scaling Value for money Other Other During the past 10 years. BOO. MC. MC. BTO. MC DB. DBFOM (PFI) BOO. other Representative challenges Political sensitivity Project scaling/ transaction costs Insurance implications Demand and revenue risk Cost recovery Project scaling/transaction costs Municipal works/ urban regeneration/ social welfare Public buildings Public housing District heating Sports and leisure Parking/transport Others Correctional facilities Defense IT PFI.Sector Health Sub-sectors Hospital infrastructure Clinical and nonclinical services Indicative PPP models DBFOM (PFI). BOOT. DBOM. BOT. BTO. other Prisons DB. governments and public authorities have increasingly turned to PPPs as an infrastructure delivery tool in multiple sectors. This trend shows no sign of slowing.

2009. Representative PPP Engagements in Developing Countries 2: Afghanistan: Privatization support for an Afghan telecom company. including PPP transaction and analytical support across infrastructures (port. preparation of PPP toolkit. Deloitte works with our clients to establish a legislative and regulatory PPP framework. regulatory. including its Emerging Markets Practice. Montenegro: Master plan preparation for international airport system. toolkit preparation and training. including contracts with the federal government. East Africa: Assessment and report preparation on PPP project preparation support facility. Egypt: Capacity development and training for central PPP unit. desalination. Jordan: Management support program for work on the Aqaba Port. build human capacity and develop transactions. logistics. PPP for industrial estates and special economic zones.). and on May 8. the Court approved this agreement. Transaction support to an international airport.Deloitte’s PPP Services Deloitte offers advisory services relating to virtually all phases of the public-private partnership life cycle. We take an integrated. BearingPoint reached an agreement to sell substantially all of the assets of its Public Services practice. etc. UAE: Development of project methodology for industrial development projects using PPPs. assessment of leading airport PPP practices on behalf of a major Siberian international airport. Kosovo: Development of a centralized PPP policy initiative (including the legal. institutional and policy framework). Public-Private Partnership 13 . training and organizational development Strategic planning for PPP programs Marketing/public relations Complete program management for PPP units and infrastructure funds and facilities 2 BearingPoint Acquisition: On March 23. Bulgaria: Comprehensive due diligence and transaction advisory services on airport concession transactions. 2009. We offer services in each of the three PPP phases: Policy and planning phase: Legal and regulatory framework strengthening Institutional development Creation of centralized PPP unit Creation of standardized practices. rail. Curacao: Assessment of PPP opportunities for key infrastructures. as well as options assessment for multi-sector PPP projects (pipeline development). to Deloitte as part of a previously announced restructuring of its business. procedures and toolkits Capacity building. airport. On April 17. valued in excess of 1 billion USD. Russia: Multi-model transport PPP feasibility study for major port. holistic view of PPPs and work collaboratively with our clients to provide measurable and sustainable PPP initiatives that offer them the best value for money. 2009 Deloitte closed the acquisition of substantially all of the assets of BearingPoint’s North American Public Services practice. support institutional reform.

For more than 15 years. and others as appropriate. private and transaction design decisions Legal and institutional environment due diligence PPP transaction management Transaction design and development Preparation of tender documentation Investor outreach and marketing Tender management Negotiations and contract closure Design of project oversight and governance structure Partnership and implementation phase: Transition assistance Contract oversight and monitoring Development of contract governance models Contract management assistance PPP project and program assessment Capacity building and training Benchmarking leading practices Deloitte understands that public-private partnerships are just one tool for infrastructure and service delivery. we have implemented leading practice standards in all aspects of financial management. Deloitte’s Global Emerging Markets Advisory Division offers a broad range of economic governance and private sector development services to developing countries worldwide.Transaction phase: Financing and implementation options assessment for PPP project candidates Financial modeling for value for money. Deloitte’s Service Offerings are Designed to Accomplish Key Public Sector Objectives: Improved public governance of infrastructure and utilities Enhanced financial performance of infrastructure assets Value for money in service delivery Strategic engagement of private sector partners Deloitte’s PPP services are offered through our Infrastructure. Public-Private Partnership 14 . Our passionate and dedicated professionals manage PPP advisory engagements around the world. Deloitte’s Emerging Markets Advisory Division With more than $300 million in annual revenue and 600 employees worldwide. public vs. Privatization and Utilities (IPU) practice. part of our Global Emerging Markets Group. capital investment planning. and government reform through its consulting projects in developing countries around the world. cooperating extensively with Deloitte consultants in Europe. the Middle East and North Africa (MENA region). public and private sector development. Deloitte’s world-class financial management and public services professionals offer our public and private sector clients the skills and experience they need to manage and implement critical projects and meet pressing challenges. We help our clients honestly assess all financing and implementation options.

IFC. DFID. EU) Host-country governments and development and investment agencies Commercial partners from numerous industry sectors The IPU practice has completed more than 100 engagements in more than 40 countries. facing severe institutional. ADB. This allows us to deliver results-oriented. Public-Private Partnership 15 . Key clients Bilateral donors (USAID. logistical and infrastructure constraints. execution-driven solutions to help our clients achieve desired results.Deloitte has implemented projects in some of the most difficult locations in the world. Because we are both management and technology consultants. we understand the technical challenges of a particular project as well as its cultural and political context. with transactions valued in excess of 3 billion USD in cash and committed investments. CIDA) Multilateral donors (the World Bank.

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