DEVELOPING A PPP FRAMEWORK:

The 1990s saw the establishment of PPP as a key tool of public policy
across the world. According to the European Commission (2003), PPP is a partnership
between the public and private sectors for the purpose of delivering a project or service
traditionally provided by the public sector. PPP, in broad terms is defined as ‘agreed, co-
operative ventures that involve at least one public and one private sector institution as
partners’. This definition includes loose network of consultative relationships that exist
between a government department and different business associations.

Many countries borrowed heavily from the UK’s PFI program in shaping
their own PPP programs, and common definitions of PPPs therefore draw heavily on
characteristics of PFI. PFI in the UK has mostly consisted of Design Build Operate
Finance (DBOF) contracts, which typically last 20-30 years.

WHAT CONSTITUTES PPP?

In PPP, the public and private sector organizations or entities enter into
formal contractual relationships, where the public sector acts as a ‘principal’, while the
private sector is an ‘agent’. In a typical PPP, the public sector always remains
responsible for deciding the nature of services to be provided, the quality and
performance standards of these services and taking corrective action if the performance
falls below expectation, while the private sector implements and executes the project.
While governments work to serve the public in capital investment projects, private
partners are generally ‘focused on recouping investment and on generating a profit’.

Since both the public and private sector organizations have different
comparative advantages; by joining hands, they complement each others' competencies
through appropriate allocation of resources, risks and rewards. A further advantage is
that the public and private sectors can share risks at different stages of the partnership.
HOW DEVELOPED ECONOMIES LOOK AT PPP:
In the US, National Council for Public Private Partnership defines PPP as
a ‘contractual arrangement between a public sector agency and a for-profit private sector
developer, whereby resources and risks are shared for the purpose of delivery of a
public service or development of public infrastructure’.

The Canadian Council for Public Private Partnership also assumes a

formal definition when it defines PPP as a ‘cooperative venture between the Public and
Private sectors, built on the expertise of each partner, which best meets clearly defined
public needs through the appropriate allocation of resources, risks and rewards’.

PREFERENCES IN PPP INTERNATIONALLY:

Governments have shown different preferences with respect to funding
arrangements. The majority of PPPs in Canada and the United States are publicly
funded, whilst the majority in Australia is privately funded. This shows that private
financing or investment is not a pre-requisite for PPP, though this is preferred in many
countries where private investment is meant to free public resources for fulfilling other
obligations.

Co-operation between the public and private sectors resulting from PPP
should lead to the development of new and better products or services that no
organization, either the public or the private, is able to produce alone.

COMMON INTERNATIONAL REASONS FOR PURSUING PPPS:

The governments with the most developed PPP markets focus on

using PPPs to enable the public sector to achieve value-for-money. PPPs also
generally do not give the governments an access to cheaper capital than they
could raise on their own. Governments can almost always borrow more cheaply
than the private sector, and private enterprises in emerging markets are rarely
able to transcend the sovereign credit rating of the country in which they operate.
PPPS IN PAKISTAN’S PERSPECTIVE AND REASONS FOR
PURSUING PPPS:

It is important to examine Pakistan’s objectives for PPP in order to

understand the risks and responsibilities the government would have to assume in order
to make PPPs successful in Pakistan.

Pakistan has mixed objectives in pursuing PPPs. It has done so primarily

with a view to mobilizing investment in infrastructure sectors that it views as necessary,
but is unable to accommodate within the budget. Other objectives, such as improving
project efficiency and management effectiveness by allocating risks to private sector
participants, have in the past been secondary considerations. However, the focus on
achieving least-cost provision through the use of PPPs has increased over time.

Pakistan’s PPP programs focus on the power and road sectors, both of
which have introduced a number of projects, and plan significant further investment. The
specific objectives of the Government’s PPP programs in these sectors are as follows.

POWER SECTOR:
The 1994 Power Policy described the need for an ambitious investment
program in generation capacity to meet growing demand. Among other measures, it
emphasized the need for “resource mobilization” by attracting private investment in the
sector, to the tune of Rs.102 billion over five years. The primary stated objective of the
most recent Power Policy, in 2002, was “to provide sufficient capacity for power
generation at the least cost”. It aims to do so by moving towards a completely private
electricity sector—all new investment will be under PPPs. While the thrust of much of the
policy is in providing incentives to mobilize private finance, this is done on the basis that
PPP is the “least cost” means of power generation. This is consistent with an increased
focus on efficient allocation of risk through the new framework for managing guarantees.

ROADS SECTOR:
There is no comparable policy laying out the PPP program for the road
sector. Mobilization of resources is a key factor: the National Highways Association
estimates that the Government will only be able to fund 50% of the US$15 billion of new
road investments planned for the next five years. Nonetheless, the NHA gives a two-fold
reason for promoting PPPs: to bring skills/efficiency from the private sector, as well as to
augment limited public resources.

WHY PPP, AND NOT PRIVATIZATION?

The principal benefit of using PPPs to develop infrastructure is that PPPs
they allow the government to allocate risks more efficiently than if the infrastructure were
developed and operated completely by the government or the private sector. Risks are
allocated between the public and private partners based on which partner is best-placed
to manage and respond to the specific type of risk.

More importantly, in a PPP contract, major share holding of a project

remains with the Government, as opposed to privatization, where government has no
control over managing the affairs of the project in a way that suits the national needs.

3rd Level of

CONCLUSION:

Internationally, PPPs are being used across a wide variety of economic

and social infrastructure projects in more than 85 countries. PPPs are a procurement
methodology that brings a rigorous risk-weighted approach to major projects using a
competitive bid process and private sector expertise and innovation. PPPs are achieving
a number of significant improvements in major project procurement and improved public
service delivery. A wide body of evidence supports the following findings:

• PPPs are bringing forward the delivery of major projects;

• The model is achieving value for money, reducing procurement costs,

and delivering more projects on time and within budget than traditional
methods;

• Certainty with lifecycle costing;

• Present market conditions do not close the door on PPPs but do provide
an opportunity for both government and industry to develop a more
refined model that is more appropriate for the new environment; AND

• PPP is the more preferred option, globally, as well as in Pakistan’s

perspective.