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Public-Private
Partnerships
in Transitional
Nations
Public-Private
Partnerships
in Transitional
Nations:

Policy, Governance and Praxis

Edited by

Nikolai Mouraviev and Nada Kakabadse

Public-Private Partnerships in Transitional Nations:
Policy, Governance and Praxis

Edited by Nikolai Mouraviev and Nada Kakabadse

This book first published 2017

Cambridge Scholars Publishing

Lady Stephenson Library, Newcastle upon Tyne, NE6 2PA, UK

British Library Cataloguing in Publication Data

A catalogue record for this book is available from the British Library

Copyright © 2017 by Nikolai Mouraviev, Nada Kakabadse

and contributors

All rights for this book reserved. No part of this book may be reproduced,
stored in a retrieval system, or transmitted, in any form or by any means,
electronic, mechanical, photocopying, recording or otherwise, without
the prior permission of the copyright owner.

ISBN (10): 1-4438-7312-8

ISBN (13): 978-1-4438-7312-3
 

TABLE OF CONTENTS

List of Figures............................................................................................ vii

List of Tables ............................................................................................ viii

Introduction ................................................................................................. 1
Transforming the Public Sector Challenges into Opportunities
by the Deployment of Public-Private Partnerships
Nikolai Mouraviev and Nada Kakabadse

Part One: The Nations’ Search for Effective PPP Governance:

Insights from Case Studies

Chapter One ............................................................................................... 10

PPPs in Public Infrastructure in Croatia
Mihaela Grubišić Šeba

Chapter Two .............................................................................................. 36

Legal and Institutional Aspects of Public-Private Partnership in Ukraine:
Reality and Prospects
Oleksii Soloviov

Chapter Three ............................................................................................ 59

PPP Development in Russia: Overview of Current Trends
and Transport Case Studies
Svetlana Maslova and Andrey Yushkov

Chapter Four .............................................................................................. 86

Public-Private Partnerships in the Turkish Healthcare Sector:
Policy, Procedure and Practice
Uğur Emek

Chapter Five ............................................................................................ 109

The Formation and Management of Public-Private
Partnerships in Kazakhstan
Ken Charman and Timur Narbaev

 
vi Table of Contents

Chapter Six .............................................................................................. 127

Public-Private Partnerships in Pakistan: A Nascent Evolution
Fahim Ullah, Muhammad Jamaluddin Thaheem and Muhammad Umar

Chapter Seven.......................................................................................... 151

PPP Governance in China: Current State, Challenges and Trends
Lei Zhou

Chapter Eight ........................................................................................... 173

Public-Private Partnerships in Indonesia: The Regulatory Environment,
Progress to Date and Lessons Learned
Catarina Figueira, Giorgio Caselli and Heru Rahadyan

Chapter Nine............................................................................................ 198

Infrastructure Provision through Public-Private Partnerships:
The Experience of Nigeria
Akanbi Olusayo Oyebanji and Champika Liyanage

Part Two: New Perspectives on Partnerships

Chapter Ten ............................................................................................. 220

Public-Private Partnerships as a Policy Tool for the Sustainable
Utilisation of Renewable Energy Sources: The Case of Kazakhstan
Nikolai Mouraviev and Anastasia Koulouri

Chapter Eleven ........................................................................................ 241

Do Public-Private Partnerships Create Social Value?
Nikolai Mouraviev and Anastasia Koulouri

Conclusion: Lessons Learned

Chapter Twelve ....................................................................................... 258

PPP Governance: Challenges and Lessons Learned
from Transitional Economies
Nikolai Mouraviev and Nada Kakabadse

Editors and Contributors.......................................................................... 265

 
 

LIST OF FIGURES

Figure 4.1 Number of beds (in thousands) and % of qualified beds in total
Figure 4.2 Institutional structure
Figure 4.3 Tender process
Figure 4.4 Services provided by the private sector partner
Figure 4.5 Number of beds and average investment commitments of health
PPPs
Figure 5.1 Kazakhstan’s PPP Advisory Centre: institutional links for PPP
arrangements
Figure 6.1 Pakistan PPP Projects
Figure 6.2 Official PPP Structure in Pakistan
Figure 7.1 PPP procurement process guidelines
Figure 8.1 Principal parties in the Indonesian PPP framework
Figure 8.2 Financial support for PPP projects in Indonesia
Figure 11.1 PPPs’ social value: principal elements

 
 

LIST OF TABLES

Table 1.1 The evolving PPP legal framework in Croatia

Table 1.2 Stages of PPP approval and implementation: the government
perspective
Table 1.3 Implemented PPP projects in Croatia, 2006–2016.
Table 1.4 Mandatory PPP contract content
Table 1.5 Characteristics of the two sports halls PPPs
Table 1.6 Advantages and disadvantages of sport arena PPPs
Table 2.1 Critical impediments to PPP implementation in Ukraine:
institutional and financial issues
Table 2.2 Critical impediments to PPP implementation in Ukraine:
tendering and contractual issues
Table 3.1 Highlights of Russia's PPP development
Table 3.2 Transport PPP projects in Russia - mini case studies
Table 5.1 The main characteristics of the PPP projects
Table 5.2 The PPP evaluation framework
Table 5.3 PPPs in Kazakhstan: lessons learned
Table 6.1 Details of power projects during the 1st phase
Table 7.1 PPP development in China
Table 8.1 Estimated infrastructure investment need for the 2015–2019
period, in IDR trillion
Table 8.2 Progress of selected PPP projects in Indonesia
Table 8.3 Summary of selected PPP projects planned in Indonesia
Table 9.1 Key principles determining PPP procurement as an appropriate
option for any public project
Table 9.2 The PPP process
Table 9.3 ICRC institutional structure
Table 9.4 Projects that were awarded a concession contract after the
formation of ICRC in 2008
Table 9.5 Selected PPP projects of the Lagos state government
Table 9.6 Lessons learned from PPP project implementation in Nigeria
Table 10.1 Kazakhstan’s key energy data (2014)
Table 10.2 Clean energy in Kazakhstan: key government initiatives and
developmental efforts

 
 INTRODUCTION

TRANSFORMING THE PUBLIC SECTOR

CHALLENGES INTO OPPORTUNITIES
BY THE DEPLOYMENT OF
PUBLIC-PRIVATE PARTNERSHIPS

NIKOLAI MOURAVIEV
AND NADA KAKABADSE

In many nations across the globe, governments promote the use of public-
private partnerships (PPPs) in a variety of sectors including energy,
transport, housing and utilities infrastructure, sports and recreation,
healthcare, education and in the social sphere. A PPP arrangement exists
where a government engages in a long-term contractual relationship with a
private sector partner(s) for the implementation of a public sector task,
such as the provision of transport infrastructure (e.g. roads, bridges,
tunnels, airports and sea ports) (Akintoye et al. 2003; Grimsey and Lewis
2004). Typically, governments aim to engage with the private sector in
order to close or reduce the gap between the required and actual range and
volume of public services. Experiencing an acute shortage of budget
funds, governments often turn to the private sector and form partnerships
with private firms that use their own funds to build or renovate an asset for
the subsequent delivery of services to the general public and businesses.
Having invested in the construction or renovation of a facility, a private
company employs an asset for the public service provision and receives
payments from customers and/or the government in order to recover its
investment and earn profit (Mouraviev and Kakabadse 2016).
A few principal reasons for PPP deployment are common to most
economies: governments aim to avoid budgetary constraints, transfer risk,
fully or in part, to the private sector, and make use of the private sector’s
technological and management expertise (Savas 2000; Wettenhall 2003).
In the OECD countries, the prevailing approach is that a PPP should
2 Introduction

deliver value-for-money, i.e. the government’s whole-of-life costs, related

to financing a partnership, should be lower than the cost of the
government’s in-house service provision (Osborne 2000). As a commonly-
understood concept, this approach is used in many nations, although not
without criticism. Concerns exist as to whether PPPs dilute the boundaries
of the public domain and undermine the area that constitutes a public
service ethos. Critics of PPPs argue that a government should be
accountable for the efficient work of the public sector and the provision of
public services, and be responsible to the communities and society at large
(Parker and Hartley 2003; Parker 2012). From this perspective, even if a
PPP delivers value-for-money, one might still argue that, via PPP
deployment, the government has distanced itself from its traditional
responsibilities.
However, transitional nations have their own approaches to PPP
development and their own means of justifying why a PPP should be
launched (see, for example, Urio 2010). For these countries, the value-for-
money perspective cannot serve as a reliable basis for decision-making
regarding whether or not to deploy a PPP. The reason is that, typically,
governments attempt to attract private investors by offering them generous
financial support (e.g. subsidies, payments for investment, exemptions
from taxes), therefore reducing or eliminating PPP’s value-for-money
(Morallos and Amekudzi 2008). If PPPs are not underpinned by value-for-
money, how can governments in transitional nations justify the need to
deploy partnerships?
This book shows that, in addition to commonly shared reasons behind
the implementation of PPPs, each nation has its own set of PPP drivers
shaped by the political, economic, legal, institutional and social context.
What are these reasons? How does the power struggle and political
environment shape the government policy regarding PPP deployment?
What are the legal barriers that impede PPP development? What are the
institutional obstacles? From the social perspective, are citizens in a
certain nation ready to pay for PPP-provided public services that used to
be free or subsidised by the government, whilst now they are delivered by
private PPP operators for a fee? More generally, is there public acceptance
of public-private collaboration: do citizens view PPPs as curse or cure?
Drawing on the analysis of the contextual environment of selected
economies, this book discusses these and many other issues, and attempts
to draw insights into the emergent PPP experience of transitional nations.
Naturally, this allows the reader to draw lessons from international best
practice, and contrast and compare the progress that different nations have
achieved to date in PPP development.
 Opportunities by the Deployment of Public-Private Partnerships 3

However, this book does not merely highlight the nations’ PPP
experience. Rather, it focuses on PPP policy and governance. The
importance of the PPP governance perspective should be emphasised, as it
is a largely neglected area of research, particularly in the context of
transitional nations. Whilst PPP governance has received much attention in
industrialised economies, such as Australia, Canada, the UK and USA, in
transitional countries the management and governance issues are typically
overlooked and/or disregarded. They are simply not at the top of the
governments’ priority list. However, as this book demonstrates, a large
number of PPP failures occur due to a lack of attention given to how PPPs
should be managed and controlled. Instead of addressing governance
issues, governments usually focus on drafting a PPP contract and on the
partnership launch. The insufficient attention paid to the PPP governance
structures, processes, partner interaction, risk mitigation and dispute
resolution explains the significance of this book. Not only does it allow the
reader to assess the context and factual data on PPP development in
selected nations, but also their experience in policy design and
implementation, and in tackling governance issues.
Whilst the public sector in a specific economy has its own challenges,
many governments query whether or not PPPs are able to effectively
address these. From the governance perspective, what are the structures
and collaborative arrangements that underpin partnerships, work well and
facilitate the transformation of these challenges into developmental
opportunities? By sharing the experience of nations in Africa, Asia and
Europe, the book permits the reader to understand the commonalities in
PPP deployment, avoid mistakes and learn from other economies. There
are questions that concern many, if not all, governments on all continents.
These include:
 What are the common and frequent mistakes that governments
make when they deploy partnerships and decide on governance
issues? Being aware of these mistakes is critical as this will allow
governments to avoid them.
 What are the best practices that can be borrowed? Knowing this
will make PPP deployment easier, faster and generally more
effective.
 How can countries increase PPPs’ value-for-money? Understanding
these tools and methods will make governments’ efforts more
attractive to the public and make it more difficult for political
opponents to challenge the need for the proliferation of PPPs.
 Do partnerships play a broader role in society, i.e. do they create
social value, in addition to the construction or renovation of
4 Introduction

infrastructure, hospitals, schools or facilities in the energy sector? If

so, what are its dimensions? The emphasis on PPPs’ social value
might significantly help governments to promote partnerships as a
policy tool.
 Can PPPs serve as the core, or a backbone, of entrepreneurial
networks? If so, PPPs might effectively contribute to the economic
side of sustainable development, i.e. create jobs and enhance an
economy’s durability.
 In addition to traditional tasks for which partnerships are launched,
such as renovating roads and building tunnels, can PPPs be
instrumental in accomplishing certain less traditional government
tasks? Among the latter are disaster risk management of built
infrastructure, for example in coastal communities, and promotion
of clean energy, i.e. expanded use of renewable sources for energy
generation. Many nations (e.g. Indonesia, Kazakhstan, Russia, and
Sri Lanka) are keen on finding robust instruments, financial
schemes and organisational arrangements for tackling these
challenging tasks, but have not yet identified effective solutions. If
PPPs can be used for these tasks, this would further enhance their
applicability as a policy tool.

This book addresses the abovementioned issues and lays the

foundation for further enquiry into more specific areas of PPP work
through the lens of the governance perspective. Part One of the book
provides insights from the field by highlighting PPP development and
governance matters from selected nations. Part Two takes a different
approach: instead of a country-specific focus, it offers discussions on key
themes.
In Part One, each chapter has its own focus. A contribution on Croatia
gives a detailed account of how its PPP legislative framework evolved
over time and highlights the role of various institutions in the PPP
governance structure. It also explains the use of the public sector
comparator during the preparation of a partnership contract and elucidates
the contract’s mandatory elements as specified by Croatian law. The
chapter further provides a case study of sports halls PPPs and summarises
the lessons learned.
As the power struggle in Ukraine has been intense for a number of
years and governments at all levels changed regularly, this inevitably
presents a challenging and unstable environment for PPP development.
Nonetheless, the nation is progressing in forming its legal and regulatory
PPP framework and has launched a few partnerships on an experimental
 Opportunities by the Deployment of Public-Private Partnerships 5

basis. The chapter on Ukraine identifies the critical impediments to PPP

implementation in the area of institutional and financial matters, and also
in relation to tendering procedures and contractual provisions.
The next chapter discusses Russia’s experience in PPP governance,
e.g. the formation and work of the national and regional PPP centres and
financing channels. This chapter categorises various barriers to PPP
development in the nation and assesses progress to date. Of particular
interest are three case studies of transport PPPs in Russia, two of which are
being implemented at the level of a large city (St Petersburg) and one at
the national level. As Russia has a large and rapidly growing number of
PPPs and has already accumulated certain management experience, the
chapter highlights lessons that could be drawn for more effective
governance.
Turkish PPPs in healthcare is the focus of the subsequent contribution
that sheds light on the policy in this sector, the institutional framework,
and imperfections in the tendering procedure. In addition, the chapter
discusses risk sharing arrangements and financing issues, all of which
might be useful for those economies seeking to build or reconstruct
hospitals in the form of a PPP.
PPP development in Kazakhstan is highlighted in the next chapter. It
shows how the legal framework for partnerships has evolved from 2005 to
present, what PPP projects have been launched and what the typical
management problems are. The chapter elucidates the role that
Kazakhstan’s National PPP Centre plays in fostering partnership
proliferation in the nation and gives details of activities of the recently
formed PPP Advisory Centre. The chapter also draws lessons learned in
the areas of risk management, PPP governance and concessionaire
management.
In Pakistan, the government PPP policy focuses principally on the
transport infrastructure (roads). However, the chapter on Pakistan attempts
to offer a broader perspective by providing a comprehensive picture of the
PPP development to date. It gives details of partnerships in the energy
sector, highlights the stages in PPP development, shows the PPP
governance structure at the national level, and comments on the debate in
the nation regarding how to conceptualise a PPP. The latter is also relevant
to many other countries, including Kazakhstan, Russia and Ukraine, in
which the governments and academics still search for a commonly shared
understanding of what constitutes a PPP. In addition to summarising the
distinguishing features and challenges to PPP development in Pakistan,
this chapter also includes case studies of two PPP projects in transport
6 Introduction

infrastructure and the energy sector. In conclusion, the chapter identifies

the required elements of an effective PPP policy framework.
A chapter on China gives a detailed account of the history of PPP
development in the nation, and then captures the features of the PPP
procurement process, governance and financing issues, drivers and barriers
at various levels including the programme, project and political levels. Of
particular interest to the reader will be the sections about governance, how
the government engages with the private sector in China, and PPP
internationalisation in the country.
In order to address the PPP governance issues in yet another Asian
nation—Indonesia—the relevant chapter focuses on the institutions, the
interaction between them and the regulatory environment. It also
elucidates the financing schemes and extensive support that the
government extends to partnerships. In addition to case studies, the chapter
highlights ten critical challenges to PPP development in the nation.
In Nigeria, the government’s attempts to create an enabling
environment for PPPs have resulted in the adoption of principles that drive
decision-making regarding partnership deployment, which the next chapter
discusses. This might be of particular interest to transitional nations that
are seeking a framework (i.e. guidelines and criteria) for selecting projects
and launching PPPs. This chapter also provides a detailed analysis of an
institutional structure that is part of PPP governance in Nigeria. Further,
the reader will benefit from three case studies and the structured
presentation of the lessons learned.
Part Two of the book features two chapters, both of which offer
emerging perspectives on PPPs which have not, to date, been fully
explored in the literature. The chapter on PPPs’ social value raises the
question regarding how to assess, in a comprehensive way, PPPs’ impact
on society. Using examples from Kazakhstan and Russia, this contribution
shows PPPs’ impact on the economic and political dependency of a region
within a transitional nation. The chapter’s core is a theoretical framework
that elucidates how PPPs create social value.
The next chapter in Part Two discusses whether PPPs can be
effectively used for the promotion of clean energy. The chapter argues that
a PPP fits two objectives at the same time: the government agenda
regarding the expanded use of the renewable energy sources (as opposed
to the reliance on oil and gas) and the government policy aimed at the
more extensive use of the private funding and expertise for economic
development.
The concluding chapter summarises the lessons learned from the
countries’ PPP experience discussed in the book. It shows developments
 Opportunities by the Deployment of Public-Private Partnerships 7

and issues common for all or most nations, and highlights elements of PPP
governance that are missing in most economies. Further, it offers
serendipitous findings, i.e. those that are not apparent, for example that
governments persistently fail in promoting PPP benefits other than
efficiency.
What can the reader expect to draw from this book? In addition to the
rich data on the projects and PPP development to date in selected nations,
the book lays the groundwork for contrasting and comparing successful
and unsuccessful government actions, institutional, legal and financing
initiatives and procedures at the international level. This offers an
opportunity to make cross-country and cross-sectoral comparisons,
although they should be made with much caution because, in PPP
deployment and governance, the nation’s context plays a critical role, and
solutions cannot be mechanically copied. Nonetheless, the book provides
valuable insights into the present and evolving PPP policy and governance
in transitional economies.
Whilst the future of PPP governance might be of a particular interest to
the academic community, practitioners will also benefit from this book in
a variety of ways. Policy makers, consultants, managers and workers in
PPPs and in many organisations that are linked with the PPP field will be
able to form a background for international comparisons and learn from
the experience of others. Whilst copying solutions is unlikely, borrowing
certain elements and adjusting them to the specific context is a possibility
that this book provides. Importantly, this book presents the factual data
and their assessment that gives impetus for developing the reader’s own
understanding of PPP issues and governance options that could be applied
in different contexts. From this perspective, the book might attract a wide
spectrum of readers who are interested in PPP development in transitional
countries.

References
Akintoye, A., M. Beck, and C. Hardcastle, eds. 2003. Public-Private
Partnerships: Managing Risks and Opportunities. Oxford: Blackwell
Science.
Grimsey, D., and M. Lewis. 2007. Public private partnerships: The
worldwide revolution in infrastructure provision and project finance.
Cheltenham: Edward Elgar Publishing.
Morallos, D., and A. Amekudzi. 2008. “The state of the practice of value
for money analysis in comparing public private partnerships to
8 Introduction

traditional procurements.” Public Works Management and Policy

13(2): 114–125.
Mouraviev, N., and N. Kakabadse. 2016. “Conceptualising public-private
partnerships: A critical appraisal of approaches to meanings and
forms.” Society and Business Review. 11(2): 155–173.
Osborne, S.P., ed. 2000. Public-Private Partnerships: Theory and
Practice in International Perspective. London: Routledge.
Parker, D. 2012. The private finance initiative and intergenerational
equity. The Intergenerational Foundation. Accessed September 23,
2012. www.if.org.uk.
Parker, D., and K. Hartley. 2003. “Transaction costs, relational contracting
and public private partnerships: A case study of UK defense.” Journal
of Purchasing and Supply Management 9(3): 97–108.
Savas, E.S. 2000. Privatization and public-private partnerships. New
York: Chatham House Publishers.
Urio, P. ed. 2010. Public–private partnerships: Success and failure factors
for in-transition countries. Lanham, Maryland: University Press of
America.
Wettenhall, R.A. 2003. “The rhetoric and reality of public-private
partnerships.” Public Organization Review: A Global Journal 3(1):
77–107.
 CHAPTER SIX

PUBLIC-PRIVATE PARTNERSHIPS IN PAKISTAN:

A NASCENT EVOLUTION

FAHIM ULLAH,
MUHAMMAD JAMALUDDIN THAHEEM
AND MUHAMMAD UMAR

1. Introduction
In Pakistan, an awareness of the scope of public-private partnerships (PPPs)
for the procurement of infrastructure is evolving. The concept of PPP is not
applied in its entirety in Pakistan; certain customisations are performed in
order to suit the local context. Political instability and issues in the country’s
legislation deprive the nation from receiving the required foreign
investment. As a result, local organisations, which are usually state-owned
enterprises, are keen on PPPs, as opposed to industrialised countries where
partnership arrangements are made either with foreign agencies or with
private local organisations.
Although PPPs can be traced back to 1991, with the establishment of the
National Highways Authority (NHA), their potential is yet to materialise,
as most of the existing PPP projects are dominated by government funding.
This is mainly in the form of Viability Gap Funds (VGFs) and other funding,
to sustain the projects and attain the expected revenues (NHA 2009). The
concept of VGFs is mainly borrowed from developing countries where, due
to lower investor confidence, governments have to provide equity, in which
to secure, they typically borrow funds from foreign banks and foreign
governments. Using VGFs of varied proportions, road infrastructure worth
PKR377,873 million (USD3,607 million) has been procured in the country
in recent years (NHA 2015). A number of small and large road projects have
been completed as part of the NHA’s strategic plan. With considerable
investment in infrastructure over the past two decades, Pakistan has
128 Chapter Six

experienced a mix of success and failure in its PPP projects (Mubin and
Ghaffar 2008).
Out of 125 countries, Pakistan is ranked 67th in the provision of basic
public infrastructural facilities (UNESCAP 2015). The Government of
Pakistan (GoP) estimates that public funds provide for less than 50% of the
infrastructure investment required for sustainable economic growth to
compete in the region of South Asia (ADB 2010). Although there are
enormously large needs, the nation’s limited resources are insufficient to
meet even most basic citizens’ requirements for infrastructure and related
services. Not only is government funding limited, there is also a significant
gap in the capability of government line departments responsible for
building and operating major infrastructural facilities (Noor et al. 2012).
With a requirement of approximately PKR110 billion required in order to
meet its infrastructure needs and to ensure sustainable economic growth as
per the Medium Term Development Framework (MTDF), Pakistan spent
only PKR18.5 billion on infrastructure development through PPP between
2005 and 2010 (IPDF 2010). Based on the lessons learned, aggressive
objectives were set in the Millennium Development Goals (MDG) for
2010–2015, and considerable work has been undertaken, as evidenced by
Water Sanitation and Hygiene (WASH), Higher Education and other
aspects covered in the Tenth Five-Year Plan (Planning Commission 2010).
Since 1990, the investment of Pakistan in PPP projects has been smaller
than in other countries in the region, for example, China or India. The
principal share of investment between 2005 and 2008 was in the energy
sector. Furthermore, the years between 2005-2007 have been the most
productive in PPP investment according to the World Bank report (2010).
Recent data show that Pakistan, due to electricity crises, has received an
investment of around $750 million in 2015 alone (SDPI 2015).
Noor et al. (2012) summarised that the restraining forces are stronger
than the driving forces in the case of non-traditional (i.e. PPP) methods in
Pakistan. The main driving force is the need to ensure efficient management
by line ministries, whereas the restraining forces include:
 A lack of understanding of PPP mechanism. Many organisations,
from line ministries to the central government’s bodies responsible
for PPP procurement, are still struggling to develop a standardised
policy and standard operating procedures (SOPs).
 Revenue issues. Owing to the slow pace of development and
continuous inflation, revenue–generating endeavours in PPP projects
do not necessarily yield sufficient revenue.
 Public-Private Partnerships in Pakistan: A Nascent Evolution 129

 Longer concession periods. Due to uncertain revenue generation,

instability in economic policy that often leads to higher costs,
concessionaires often seek to obtain a longer term of operations.
 Resistance to change. For a very long time, line ministries have
followed traditional public procurement where involvement of
private parties was non-existent. It is still difficult for many of them
to accept that private banks, development financial institutions
(DFIs) and contractors may work together in a collaborative fashion.

These restraining forces in the implementation of PPPs in Pakistan are

dominant and their impact must be reduced. The GoP recognises that its
need in better infrastructure cannot be achieved through scarce public
funding, although attracting and retaining private investment is a
challenging task. Other tasks include obtaining the basic knowledge of PPP
finance, developing a comprehensive policy framework, and ensuring
consistency and efficiency in policies and project procurement process.
The largest beneficiary of PPP in Pakistan is the road infrastructure
sector, mainly procured through the Build-Operate-Transfer (BOT) model.
In addition to benefits, there are complexities in BOT contracts due to long-
term contractual obligations and involvement of many parties in a project
(Mubin and Ghaffar 2008). To resolve these complexities, a comprehensive
legal, economic and technical framework is needed to ensure successful
project implementation. Furthermore, the success of PPP in Pakistan largely
depends upon political stability, consistent implementation of infrastructure
development policies, and effective participation of line ministries, such as
the NHA, the Infrastructure Project Development Facility (IPDF) and the
Infrastructure Project Financing Facility (IPFF), in PPP procurement. The
most significant constraints faced by stakeholders during the planning and
construction phases of BOT projects are those of a political and financial
nature. Pakistan requires private sector investment in infrastructural
development at 5% of GDP per annum (USD15 billion) to meet the nation’s
target for GDP growth of 7–8% (IPDF 2010). To meet this challenge, the
GoP needs PPP procurement through proper planning and management.
This chapter discusses the structure of PPP organisations in the country,
the debate between academic and industrial experts on the understanding of
PPPs, and the success and failure of various PPP endeavours. It also
provides case studies of selected PPP projects. PPP as an alternative
procurement system is in its developmental phase in Pakistan and its
management has not yet matured. This has resulted in a mixed trend of
success and failure of PPP endeavours. Furthermore, drawing on the
experience of other countries, the PPP governance has been modified to suit
130 Chapter Six

the national needs of Pakistan, which makes the local PPP structure and
management different from those in other economies. The chapter’s aim is
to highlight the contextual features of PPP policy, structures and procedures
in Pakistan. This might also help investors in their decision-making
regarding which projects to support in the nation.
The chapter begins by highlighting the PPP development in Pakistan.
The country’s PPP management structure is explained by introducing the
principal organisations responsible for PPP initiatives, and their allocation
to administrative units. Subsequently, this chapter discusses PPP
understanding by two streams of Pakistani experts: academic and industrial,
and highlights the gap between their understanding and their focus. Lastly,
the chapter discusses the challenges to PPP deployment and provides case
studies.

2. PPP Development in Pakistan

This section discusses how PPP projects were initiated in Pakistan,
particularly in the energy sector, infrastructure and telecommunication.
Two phases of PPP development in Pakistan can be observed: the first
phase was from the early 1990s to 2000, and the second phase continues
from 2001 to present. In 1993, after considering the role of the private sector
in investing in the national infrastructure development projects, Pakistan
initially established a policy and regulatory framework for PPP in the
telecom and energy sectors. In 1994, the Private Power and Infrastructure
Board (PPIB) was created as a one window facilitator to promote private
sector participation in the power sector (PPIB 2013). During the first phase,
PPP procurement included 15 power projects of over 3000 MW capacity. It
also included the construction of Pakistan’s first six-lane motorway (M-2)
which, at 367 km in length, connects the cities of Islamabad and Lahore.
The motorway was constructed by the South Korean Daewoo Corporation
and opened in November 1997. Under the 1994 Power Policy, which
ratified the creation of the PPIB, the government sought private investment
in power generation, to satisfy growing energy needs. All these projects, as
detailed in Table 6–1, are still operational.
In the second phase, the GoP commenced major initiatives in structuring
a proper framework for undertaking PPP projects in other sectors, such as
transport and logistics, water supply, sanitation, solid waste utilisation,
social sector and real estate. The examples of PPP legal and institutional
development during the second phase include the Privatisation Act 2000,
the creation of the Ministry of Privatisation and Investment, Insurance Act
2001 and the formation of the Board of Investment.
 Public-Private Partnerships in Pakistan: A Nascent Evolution 131

The World Bank (2010) noted that Pakistan has successfully completed
81 PPP projects in various sectors over the past two decades, as shown in
Figure 6-1, with 64 (78%) belonging to the energy sector. From 2006 to
2009, the nation has also experienced a considerable boom in PPP projects.
During this time, the construction of Gawadar port, Sialkot International
Airport, Lahore-Sheikhupura-Faisalabad dual carriageway, Lakpass
Tunnel, 84 MW New Bong hydropower project and Quaid-e-Azam Solar
Park were principal successful projects. The emphasis on the energy sector
was due to multiple reasons: energy crises in Pakistan have only worsened
over time. The registered shortage in 2009 was 40%, growing to 50% during
the summer of 2012 (Farooqui 2014). The situation continued to deteriorate:
urban areas were facing 10–12 hours of load shedding, while in rural areas
electricity remained unavailable for 16–18 hours (Khalil and Zaidi 2014).
This gave impetus to investment opportunities in the energy sector. In 1994,
Pakistan’s National Power Policy, which created PPIB, offered an attractive
bulk power purchase rate to independent power projects (IPPs). The first
IPP was commissioned in 1997, when private sector participation in power
generation was only 20%. However, this surged to 36.2% in 1998–99.
Currently, 75 IPPs are operational, contributing around 38% to the country’s
power generation with an average daily payment of PKR2,549.455 million
(USD24.3 million) (NTDC 2015; NTDC 2016).
132 Chapter Six

Figure 6–1 Pakistan PPP Projects

Number of PPP Projects

35 32
30 27
25
20
15 12
10 6
4
5
0
0
1990-93 1994-97 1998-2001 2002-05 2006-09 2010-13

Source: compiled by the authors from World Bank 2010.

 Public-Private Partnerships in Pakistan: A Nascent Evolution 133

Table 6–1 Details of Power Projects during the 1st Phase

Gross / Net /
Installed Dependable Public Sector Private Sector
# Project Name Length
Capacity Capacity Partner Partner
(MW) (MW)
1 Lalpir Limited 362 350 WAPDA Lalpir Limited 30
Pak Gen (Private)
2 Pak Gen. (Pvt.) Limited 365 350 WAPDA 30
Company
Altern Energy
3 Altern Energy Limited 29 29 WAPDA 30
Limited
Fauji Kabirwala
Fauji Kabirwala Power
4 157 151 WAPDA Power Company 30
Company
Limited
Gul Ahmed Energy Ltd. K-Electric
5 136 125 Gul Ahmed Energy 22
(GAEL) (KESC)
Habibullah Coastal
Habibullah Coastal Power
6 140 126 WAPDA Power (Pvt.) 30
(Pvt.) Co.
Company
Japan Power Generation (Pvt.) Japan Power
7 135 120 WAPDA 30
Ltd. Generation
Kohinoor Energy
8 Kohinoor Energy Limited 131 126 WAPDA 22
Limited
134 Chapter Six

Liberty Power
9 Liberty Power Project 235 211 WAPDA 25
Limited
Rousch (Pakistan) Power Rousch (Pakistan)
10 450 395 WAPDA 30
Limited Power Limited
11 Saba Power Company Limited 125 125 WAPDA Saba Power Company 30
Southern Electric Power Southern Electric
12 136 119 WAPDA 30
Company Limited Power Project
K-Electric Tapal Energy (Pvt.)
13 Tapal Energy Limited 126 120 22
(KESC) Limited
14 Uch Power Limited 586 551 WAPDA Uch Power Limited 30
Davis Energen Power
15 Davis Energen Power Project 10 10 NTDC/WAPDA 30
Limited
Source: compiled by the authors.
 Public-Private Partnerships in Pakistan: A Nascent Evolution 135

3. PPP Management Structure in Pakistan

This section deals with PPP management and the various organisational
structures in place for handling PPPs in Pakistan. Firstly, the structure of the
federal and provincial organisations is discussed. Then, through an
exploration of their interaction, the dynamics resulting from the devolution
of the PPP management to the provinces are discussed.
The PPP method of procurement is a complex web of interactions and
transactions between the public and private bodies. In traditional public
sector procurement, the rules are well-established. However, in the case of
a PPP, the roles of the public and private organisations are so intertwined
that this creates opportunities for conflicts and disputes. To mitigate this,
central and local governments across the world devise policy frameworks,
SOPs and form dedicated agencies to address PPP management issues.
In order to facilitate private investment, in May 2006 Pakistan’s
Ministry of Finance (MoF) established IPDF and IPFF, which aimed to
streamline the preparation and closure of PPP transactions between the
public organisations and private investors. These facilities also determine
the public funding gap for making transactions viable while minimising cost
through competitive bidding (IPDF 2012). The overall structure of
Pakistan’s PPP system has been influenced by the Malaysian system where
state-owned enterprises may act as concessionaires. In Pakistan’s system,
finance ministries at the federal and provincial levels are central to PPP
procurement. Provincial governments have been empowered to establish
their own policies in accordance with their needs. The federal PPP
procurement, shown in Figure 6–2, is primarily managed by the MoF.
136 Chapter Six

Figure 6–2 Official PPP Structure in Pakistan

Source: adapted by the authors from Planning Commission 2010.

As a project development authority, the IPDF provides expertise and

hands-on support to public institutions (ministries, provincial governments,
local bodies and state-owned enterprises) on the PPP process. Its spectrum
of projects includes transport and logistics, urban mass transit, municipal
services, social infrastructure, and small to medium-size energy projects
(IPDF 2012). Furthermore, in order to provide financial support to the
technical proposals put forward by the IPDF, the IPFF renders assistance by
not only ensuring external funding, but also by assessing the need for VGF
to be financed by public bodies. The entire process is monitored by the MoF
that acts as the central decision-making organisation, in consultation with
line ministries. In addition to this federal PPP structure, provincial PPP units
have their own mechanisms that are generally, similar to the federal system.
In 2007, the government PPP programme included the following:
I. The launch of a PPP Task Force, chaired by the Advisor to the Prime
Minister on Finance and comprising all major stakeholders. The
rationale for the establishment of this Task Force was to formulate a
policy, regulatory and legislative structure that would facilitate the
formation of a PPP market in Pakistan;
II. The establishment of the IPDF that would serve as the Secretariat to
the Task Force and provide technical assistance to the government
agencies, build their implementation capacity and provide technical
input on how to structure financing, guarantees and subsidies;
III. The formulation of a business plan to establish the IPFF, in order to
provide long-term financing in local currency for PPP projects using
a fixed rate.
 Public-Private Partnerships in Pakistan: A Nascent Evolution 137

To date, the IPDF has handled various PPP projects worth $2.1 billion.
Among these projects the largest are in transport and logistics. After the
adoption of the Eighteenth Amendment to the Constitution of Pakistan in
April 2010, provinces have received autonomy in dealing with PPPs. As a
result, provincial governments have taken several important steps in order
to increase private sector participation, for example they have established
PPP units within the planning and finance departments, and have formulated
comprehensive PPP policies at the provincial level. This may be illustrated
by the PPP framework for Khyber Pakhtunkhwa, developed in collaboration
with USAID (USAID 2013).
Although the federal PPP body is still functional, the provinces are
managing a number of PPP projects trying to meet their local needs, for
example solid waste utilisation and a bus rapid transit system in Punjab, and
the construction of a road and a bridge in Sindh. The north-western province
of Khyber Pakhtunkhwa has incentivised private investment in the energy
sector by offering tax exemptions (PEDO 2016). This initiative has not
created any conflict between the federal and provincial PPP units. The
federal PPP unit now deals with projects of a national strategic nature, such
as motorways (M-2 and M-9), harbours (Pakistan Deep Water Container
Port), railroads (expansion of ML-1 and ML-2) and energy generation
(Quaid-e-Azam Solar Park).
It is worth noting that PPP projects have been implemented better
compared to the publicly procured projects. Although there was a relatively
small number of PPP projects, they have supported the country’s strategic
endeavours. For example, the ten service areas on the M-2 motorway and
the Lakpass Tunnel on the national highway N-25 could be considered
success stories. However, most of the projects had to deal with an
ineffective PPP policy framework, which resulted in slower procurement.
Nonetheless, upon completion of the procurement stage, these projects
witnessed speedy development.
It must also be noted that operational problems such as land acquisition,
right of way, provision of utilities, political influence and security concerns,
which are common for traditional projects, were properly handled in PPP
projects during their implementation due to extensive government support.
After the adoption of the Eighteenth Constitutional Amendment not only
have provincial PPP units been actively participating in procurement of
infrastructure, but the cooperation between various administrative units has
also improved. A success story is the procurement of motorway M-9 that
earlier was a troublesome project. Thus, the devolution of power in the
nation has paved way for better PPP procurement due to the involvement of
138 Chapter Six

local stakeholders in decision-making. Also, the provincial authorities have

received certain financial incentives to form PPPs. The provincial units are
now empowered to launch small projects swiftly, which prior to this had
been a cumbersome task. However, the increased satisfaction of provincial
bodies has come at the cost of enhanced complexity of decision-making due
to the involvement of multiple new stakeholders.

4. PPP Comprehension: Difference between

Practitioners and Academics
This section deals with the understanding of PPP by the two main groups:
Pakistan’s academic and industrial experts, and highlights the considerable
gap between the two.
PPP is understood differently by different stakeholders; there is a gap in
understanding of basic concepts between the manufacturing and
construction industries in Pakistan and the internationally published
literature. PPPs’ key features are valued differently by both sectors. In order
to obtain a comprehensive overview of the partnerships’ key features, a
questionnaire survey was conducted by the authors involving around 30
experts from both academia and the industry, with equal representation.
They were asked to list and rank the key factors (on a scale of 1 to 10)
affecting PPPs in Pakistan.
The results of this survey reveal a considerable gap between the focus
and importance given by both groups to the influential factors of PPP. The
largest gap of 84.6% was found on the factor of project development cost,
which was given a score of 9.68 by the industry and only 1.22 by academia.
This is mainly due to the unstable economy of Pakistan. Industry seems to
overestimate the development cost due to associated uncertainties, risks and
instability in the prices of key project elements, whereas academia calls for
life cycle cost assessment and undermines the cost due to data
unavailability. Similarly, another factor–price (or toll)– shows a difference
of 71.4%; industry gives it a full score (10), whereas academia assigns a
value of just 2.86. This can be explained by high inflation in the country
and, therefore, by the significance of the price. In most of the projects, as it
was earlier noted, there is fear that an extension of a concession might be
sought due to poor management or planning. As a result, investors may try
to transfer their financial risk to users by asking to increase the price (or a
toll), whereas academia is in favour of reduced or minimum tolls or prices.
Another factor–capital structure of the company–displays a variation of
around 58% but, unlike the previous two, it is ranked low by the industry
and high by academia, with scores of 1.22 and 6.92 respectively. This is due
 Public-Private Partnerships in Pakistan: A Nascent Evolution 139

to the relative novelty of this mode of procurement. In the opinion of

industry experts, the capital structure of the company is not of great
importance. They argue that the funding will be jointly provided by other
private organisations, so even a company with a weak financial structure
can survive. Academia opposes this view and ranks the financial status of
the main company as well as partner organisations as high. These experts
argue that a company with a weaker financial status can jeopardise the
project.
Generally, the industry experts ranked lower factors, such as
government’s interests, corruption, market situation, market demand,
discount rate, government effectiveness, service price and sale price. This
gap highlights a weak link between current industry practice and the
concepts highlighted in the literature. There is no proper alignment between
industry professionals and academic experts. Industry focuses on costs and
financial aspects, which often blinds these experts from seeing the holistic
implications of PPP projects.
However, there are certain factors to which both groups give equal
weight. These factors are government guarantees, revenue streams and
poorly-defined sector policies. They are given a higher score by both groups
owing to their importance for PPPs.

5. Investigating the Challenges to PPPs in Pakistan

This section discusses the challenges to PPP deployment in Pakistan, with
a focus on two sectors: roads and hydropower. Interviews were conducted
with field experts, and their opinions regarding the causes of PPP success
and failure are presented.
Data were collected from 19 experts from the construction industry, as
well as MoF and NHA. These experts hold upper management positions at
their respective organisations, and had at least five years of experience with
PPP projects throughout Pakistan.

5.1 PPP in the Road Sector

In the road sector, PPP projects are subjected to various risks including the
nature of the project’s scope, its location, and the PPP model implemented
(Noor et al. 2012). Therefore, public and private perspectives highlight
multiple influential factors regarding PPPs. During the discussions, an
interviewee reported that:
“PPP is beneficial for the country because of off-budget financing and it has
no burden on PSDP (public sector development projects)”.
140 Chapter Six

It was further added that:

“In case of PSDP, due to uncertainties of cash flow, organisations suffer,
making PPP the best solution”.

An interviewee from a private organisation considered PPP as a very

attractive choice of business opportunity, as they need a continuous cash
inflow to support a large set-up of human and technical resources. He added
that:
“Generally private party arranges its finance for the project through local
and international banks and investors which assists in uplifting the economic
growth of the country”.

However, he was also of the opinion that, owing to the riskier

environment, international banks incorporate extra risk allowances that
result in a higher interest rate when compared with other countries.
These statements show that a developing country like Pakistan has a
dynamic need for PPP to fulfil its infrastructure desires but the question
arises: what are the barriers? While stating the deficiencies, the first
interviewee gave an example of a project where they are still unable to
establish methods for the proper estimation of Value for Money (VfM). He
added that:
“In this project, we received bids drastically varying from engineering
estimates and each other”.

The precise estimation of VfM is the primary objective of any PPP

project, and sustaining it throughout the contract life is the utmost challenge.
In this case, the incompetence of the public party to precisely estimate VfM
resulted twice in the termination of the project.
This points to an inadequate legal framework and estimation methods,
as a result of which stakeholders and decision makers are at a loss. The
crucial nature of these projects necessarily demands sound data and
analytical support in order to commit a tremendous amount of resources.
Not only does this create issues at the conception and planning stages, the
lack of a legal framework creates a responsibility conundrum where
stakeholders are unaware of the legal ramifications in cases of conflict and
dispute.
In another interview, political and security-related factors were
highlighted as key threats to a road sector PPP project. An interviewee,
while giving an example of a project, mentioned that:
 Public-Private Partnerships in Pakistan: A Nascent Evolution 141

“The major problem during procurement as well as its implementation was

the security situation of the country. When we advertised this project, it was
financially feasible but when we took it to the market, the (law and order)
conditions in the country were such that we did not get the intended positive
response”.

As a result, the project took two years from initial advertisement to final
award. Still now, the project is facing problems due to the same issues in its
implementation. The unstable law and order situation in the country has
affected its image, resulting in a lack of investor confidence.
Another interviewee reported that political factors have a major
influence for public parties which are external to the organisation. He
further elaborated the case of a motorway M-9 project, which is a severe
example of political influence. Initially, in 2005 a renowned construction
company offered a proposal for an expected cost of PKR7 billion (USD67
million). After negotiations, the concession was awarded in September
2006, but was terminated by the government in July 2007 mainly due to
political pressure. Afterwards, a state-owned enterprise managing the
retirement fund began taking an interest and the offer of construction was
approved in 2010. However, Transparency International Pakistan
highlighted the inability of the organisation to undertake this project, due to
its limited mandate. This forced the enterprise to abandon the idea. Then, in
July 2012, the NHA signed a contract with a Malaysian company at an
estimated cost of PKR18.26 billion (USD175 million) for the construction
period of 30 months and concession period of 28 years. But this arrangement
was also terminated due to the potential concessionaire’s inability to close
financial matters within the deadline. Finally, in March 2015, as per the
national PPP policy, the project was awarded to another state-owned
enterprise having expertise in infrastructure development, at a cost of PKR
36 billion (USD345 million). Therefore, the instable political environment
of the country, inconsistency in policies, and use of political pressure and
influence adversely affected the procurement of this project.
Another challenge to PPPs in Pakistan is presented by issues in their
management. An example of serious management difficulties can be seen
in the previously mentioned project, where the cost of the project for a 136
km motorway increased from PKR7 billion to 36 billion (almost 500%) in
seven years (Jamal 2012). One of the main reasons is the incompetency of
the public party to evaluate the suitability of the project. Similarly, an
interviewee stated that:
“Owing to the infancy stage of PPP in Pakistan, we are still unable to
develop comprehensive policies”.
142 Chapter Six

An interviewee from a public party explained that each organisational

section or department is responsible for their own assignments. A common
problem is that, when the Project Director (PD) is appointed, a big debate
erupts in the organisation as to which section’s General Manager the PD
must report, due to project’s phase-wise progression. This crossing of
domains of planning and construction causes problems. The dilemma they
face is: who is in a better position to implement the project? The crossing-
over of domains creates friction in the organisation, which adversely affects
project implementation. He further added that:
“When planning guys jump into the domain of construction, their own work
suffers”.

This negative state of affairs highlights the immaturity of organisations

involved in PPP projects and their ignorance of standard organisational
theories.
The private sector in Pakistan is inadequately educated to fully
understand PPP. For example, the respondents from private sector stated
that they cannot go in the design domain, and insist that the public party
carry out design. An interviewee from a public party stated that they can
only broadly guide the private sector in what is required. Translating it into
detailed designs is their responsibility. In addition, decisions regarding the
arrangement of financing and the execution of construction are the
responsibility of the concessionaire. The public party is only interested in
the project’s performance. The interviewee from the private party also
admitted that, at this point in time, their organisational capacity is
insufficient to understand PPP, its complexities, its problems, and how to
tackle them. Similarly, Noor et al. (2012) found that, not only is there
insufficient financial strength, there are also huge gaps in public sector
potential and capacity to operate infrastructure. Hence, there is a lack of
understanding and awareness for PPP among both the public and private
parties, due probably to their limited experience of PPP with compared with
traditional procurement.
Based on these analyses, it can be concluded that Pakistan’s PPP system
has yet to mature for delivering successful projects. In the road sector, there
have only been a couple of completed projects which are still in concession,
as discussed in detail below. The challenges discussed above are potential
entry barriers for PPP and lead towards failure at the conception and
planning stages. A case in point is the M-9 which failed to commence twice
due to the immature policy framework and supporting mechanism.
However, identifying these challenges provides stakeholders with an
opportunity to convert them into strengths, by working closely with
 Public-Private Partnerships in Pakistan: A Nascent Evolution 143

potential investors, regulatory authorities and to learn from international

best practices.

a. Lahore-Sheikhupura-Faisalabad dual carriageway

This 130 km long dual carriageway joins Lahore, the capital city of Punjab
province, to the industrial hub of the province Faisalabad through
Sheikhupura. The project achieved financial close in March 2004 and
construction was undertaken from April 2004 to November 2006, at a cost
of PKR2713 million (USD46 million). It involved renowned construction
firms including Frontier Works Organisation (FWO), Sachal Group and
Habib Rafiq (Pvt.) Ltd, and the NHA as the public body. The carriageway
was essentially an extension of an existing route and the source of major
income was that of tolling. An SPV, named LAFCO, was developed for the
project. The construction was completed well within time. The original
concession period sought and agreed upon was 25 years.
During the project concession, the revenue saw a major increase
compared with forecasts, leading to fast recovery of the investment and the
timely transfer to the NHA. In the light of this fast recovery and an ensuing
study on the possible revision of the concession period by the authors, in
consultation with the NHA, it was revealed that the concession period may
be reduced to 24 years. The reduction in the concession period was due to
the following reasons:
• An average growth of 30% in number of vehicles during construction
in 2004–2006;
• No route promotion was required to attract new traffic as the route
was already established;
• High tolling was available during the concession;
• The high expertise of the companies involved in construction.

b. Habibabad project

Habibabad town is located in the Kasur district in Punjab province. The

project under discussion, with an estimated cost of PKR492 million
(USD4.7 million) (IPDF 2012), is a 4-lane curved bridge project spanning
400m on national highway N-5 (commonly known as G.T. road), around 90
km from Lahore. The construction duration was two years. With operations
beginning in 2014, this project is one of the most successfully constructed
BOT projects in Pakistan. Although initially given a concession of 10 years
(to be transferred to NHA by 2024), the post-feasibility analysis revealed an
interesting pattern of recovery, suggesting a possibility of project transfer
144 Chapter Six

within only six years. A study conducted by the authors discovered that the
project’s concession should have been 5.8 years, which was confirmed by
the officials of the NHA, when contacted by the authors to explain their
findings. Officials informed the authors that concession closure has already
been initiated by the contractor as a goodwill gesture. This is unusual, since
an extension is sought in many projects by the concessionaire for debt
servicing and to earn a minimum acceptable rate of return. This highlights
the greater competency and potential of the contracting firm. One of the
factors that was ignored by the planning team was the project’s payback
potential due to a greater volume of existing traffic.
The post-feasibility studies of the project predicted a huge success
owing to positive socio-political support and desirable market conditions.
In addition, the smaller project size, less complicated nature, brownfield
construction and easy access due to non-proximity with any urban area,
aided the increased revenue. However, it seems that the planning team
overestimated the project complexities and assigned an overly cautious
concession. As previously highlighted, one of the main reasons was a lack
of life cycle cost assessment and holistic understanding of risk exposure of
PPP projects in Pakistan. Although the contractor has voluntarily initiated
the conclusion of the concession, planning incompetency cannot be ignored.
If the assigned concession was to run, the project would have costed the
government much more, and in the current crumbling economy of Pakistan,
this additional financial burden would have been transferred to the end
users. This could have damaged the acceptability of PPP projects.

5.2 PPP in the Hydropower Sector

In Pakistan, policy requirements dictate the use of Build-Operate-Own-
Transfer (BOOT) in the organisation of hydropower projects, since they are
of strategic nature to the country. This is why an interviewee reported that
hydropower projects are costlier and more risky, as they involve equity
redemption at the end of lease term, when transferring the asset. Thus, in
the hydropower sector in Pakistan, the financial risk is the most dominant,
followed by political and management risks.
Power shortage is one of the chronic problems hampering the
development of Pakistan since 1994, as previously discussed. Despite an
acute need, at the moment the government does not have enough money to
build even a single power plant.
Not only does the country face a lack of funds, it is also riddled with
political pressures and a lack of transparency (Ministry of Finance 2015).
All interviewees stated that, due to a shortage of potential bidders in the
 Public-Private Partnerships in Pakistan: A Nascent Evolution 145

power sector, scope definition and detailing is undertaken fully and as early
as possible so that the contract could be completed on a priority basis. It is
interesting to observe that, despite the government’s emphasis on power
generation facilities and a recent investment of around $750 million, the
severity of financial risk acts as an entry barrier for many potential investors.
Coupled with this, the state’s law and order conditions, creditworthiness and
human development index affect investor confidence, although they may
earn a handsome return on investment. Interactional problems between
private and government parties are severe due to their individual work ethics
and attitudes (Razzaq et al. 2016).
The first independent (hydro) power production (IPP) project in
Pakistan, which has successfully achieved financial closure, faced a number
of hurdles. Against an estimated cost of about US$235 million and joint
ownership of Hubpower (HUBCO) and Laraib Group with an equity split
of 75% and 25%, the project achieved financial closure in December 2009.
Construction began immediately and commercial operations were started in
March 2013, which was two months ahead, under the purchase power
agreement (PPA). Energy generated by the project is purchased by a single
buyer, the state-owned National Transmission and Dispatch Company
Limited (NTDC) which is a constituent organisation of the Water and Power
Development Authority (WAPDA) under a long term PPA. It entitles the
NTDC to bear the hydrological risk through guaranteed payment for fixed
costs, including debt servicing and insurance. A cost-plus tariff mechanism
is in place after considerable debate and discussion under the PPA.
First, when the project was conceived in the early 1990s, there was no
framework available for its bankability during its whole course, giving rise
to a number of issues; for instance, under the 1995 policy, an upfront tariff
of US 4.7 cents per KWh (unit) was given. But the NTDC objected to this
after two years and succeeded in withdrawing the tariff. It offered to
renegotiate and imposed a very low tariff of US 3.1 cents per unit. The
company accepted the proposal subject to availability of financing on this
tariff. A number of international lenders were approached and a few showed
interest, but not at the tariff suggested by the power purchaser. As a result,
they went back into negotiations and renegotiations until the power
purchaser reinstated the original US 4.7 cents per unit in 2004.
The issues were brought to the attention of cabinet and leadership by the
policy implementation authorities, which resulted into a revision of Power
Policy in 2002, making more concessions available. It provided tariff
guidelines and the regulator, National Electric Power Regulatory Authority
(NEPRA), announced upfront, as well as cost-plus tariffs of around 11
alternative thermal projects. As a result, a tariff of 8.5 cents per unit (kWh)
146 Chapter Six

was negotiated in 2009. Hence, almost a doubled tariff was set for the
project, due to the inconsistent and delayed decision-making. This was the
main hurdle during the tenure of the development of this project.
Furthermore, the implication of laws was unclear: a tax incentive and tax
holiday was given in the 1995 Hydel Policy, but the relevant tax department
could not implement or regularise it as the law was not in concurrence with
the policy.
It took considerable time to amend and translate the law and formalise
the issuance of the Statutory Regulation Order (SRO). According to another
interviewee, there were some items in the policy for which regulatory
modification was needed. Again, due to the location of the project (in a state
with its own parliament and authority for law-making, along with being an
internationally disputed territory), a backup arrangement had to be made,
linking the GoP and the state government policies to safeguard the interests
of all the stakeholders. An interviewee reported that the project would have
cost $100 million if completed in 2004, as compared to $235 million in
2009. This success story, despite its many challenges and barriers, points to
the need for a better policy framework and cross-board cooperation. It also
identifies the potential of such projects, for which the market is ripe and
ready. Responding to this challenge, the National Power Policy 2013 has
focused on attracting and directing local and foreign investments towards
rapidly expanding the country’s power generation capacity (Ministry of
Water and Power 2013).

6. Conclusion
Currently, the volume of public services is insufficient and available public
funds are limited, paving the way for PPPs. However, project financing for
partnerships requires serious improvement. Political and economic
instability and various kinds of risk created a situation when PPP model in
Pakistan does not correspond to models used by industrialised nations. For
example, a foreign investor acts as a private party in a typical PPP; however,
private investment is usually not available in Pakistan. As a result, local
companies invest in PPP projects by forming joint ventures. Following the
Malaysian model, state-owned enterprises also act in lieu of a private party
and in this capacity, may become part of a concession. Although this has
had a positive impact on local business development, the much-needed
foreign investment to support economic development is missing.
In terms of innovation and new ideas, PPPs in Pakistan have their special
features. Debt is normally acquired against the sovereign guarantee of the
GoP, and state-owned entities usually take most of the PPP projects in the
 Public-Private Partnerships in Pakistan: A Nascent Evolution 147

road sector. Currently PPPs are effectively blended with public

procurement. This means that the revenue generating capacity of a PPP is
quite high, and no financial default has ever occurred. It is worth noting the
low confidence of foreign investors in the local industry, which means that
there are reduced opportunities for Pakistani projects to benefit from
international collaboration.
Key features of PPPs in Pakistan are:
(i) State-owned organisations acting as third parties or even
performing the role of a private partner;
(ii) VGF allowance as equity portion in the form of foreign loans;
(iii) Underdevelopment of PPP institutional framework and
management tools;
(iv) Unstable economy and low financial management capabilities of
the government;
(v) Acute shortage of qualified staff;
(vi) Risk sharing between participating parties is a challenge;
(vii) Lack of transparency in PPP projects; and
(viii) Absence of a comprehensive legal framework.

With regards to sustainability, infrastructure projects procured using PPP

are performing as expected. Despite the context of a developing country, the
revenue generating potential is fully exploited in BOT projects. No
concessionaire has requested an extension of a concession’s term, and in one
project it has been reduced. The real test of the nascent PPP structure will come
when project disputes may evolve. On occasion, sustainability concerns
overburden the underperforming economy, resulting in substantial government
bailout funds paid to support existing projects and extend the contracted
concessions’ terms.
In developing countries, including Pakistan, the government support is
a critical factor for PPPs. This support is not only restricted to the financial
realm but also involves operational issues, project governance and
administrative interventions. The government is primarily responsible for
defining a clear and achievable project’s scope. Although internationally,
project governance and financial performance may be of paramount
importance, in the conditions of high inflation in Pakistan, a PPP contract
first and foremost must ensure the technical viability and financial
feasibility prior to the project launch. A PPP contract must incorporate a
risk sharing mechanism, attainable value-for-money and reliable revenue
streams that would guarantee the recovery of investment. Therefore, a
comprehensive policy framework is mandatory, and it should:
(i) Specify and prioritise PPP scope and mechanism;
148 Chapter Six

(ii)
Check for market potential;
(iii)
Test value-for-money through precise financial analysis;
(iv)
Ensure a transparent procurement processes;
(v)Provide a mechanism to obtain sovereign guarantees on behalf of
the government; and
(vi) Develop a mechanism for efficient risk sharing.
A comprehensive legal framework is also a fundamental requirement to
enhance transparency, specify the responsibilities of the public and private
sector parties, reduce the cost and time of the PPP procurement process, and
incorporate SOPs for dispute resolution. There is an urgent need for
concrete actions involving key stakeholders and academic experts who can
focus on enriching Pakistan’s PPP experience by drawing on international
best practice.

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