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Log of Correspondence
Detailed Summary
Summary of Annexures
Defined Terms
Public
Private Partnership
or PPP means a government service or private
business venture which is funded and operated through a partnership of
government and one or more
private sector companies usually an unincorporated SPV which builds and
maintains the asset usually during a concession period around 30 years from
practical completion.
Partnerships between the public sector and the private sector
are agreed for the purposes of designing, planning, financing, constructing
and/or operating projects which would be regarded traditionally as falling
within the responsibility of the public sector. Infrastructural projects
such as roads and bridges are prime examples.
The consortium is usually made up of a building contractor, a
maintenance company and a syndicate of banks and/or bond holders. An
unincorporated SPV signs the contract with government and with subcontractors to
build the facility and then maintain it. A typical PPP example would be a
hospital building financed and constructed by a private developer and then
leased to the hospital authority. The private developer then acts as landlord,
providing housekeeping and other non medical services while the hospital itself
provides medical services.
Key features of PPPs include:
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private sector contributes design, construction,
operation, maintenance, finance and risk management skills while the
government is responsible for strategic planning and industry structure,
obtaining permits, some customer interface issues, regulation, community
service obligations and (sometimes) payment on behalf of the service users
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private sector invests in infrastructure and provides
related services to the government
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the government retains responsibility for the delivery of
core services, and
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arrangements between the government and the private
sector are governed by long-term contract. It specifies the services the
private sector has to deliver and to what standards. Payment depends on the
private partner meeting these standards.
Prime benefits of PPPs include:
Increasing efficiency in the execution of projects
There is evidence that often, road
maintenance workforces directly employed by government departments (known as
force accounts) are less efficient than competitive private sector
contractors. In Brazil, a 1992 World Bank study showed that routine road
maintenance costs by contract were 25% lower than by force account, and in
Colombia, they were 50% lower. The chart below shows efficiency gains (cost
reduction of maintenance operations) obtained in Australia from different
forms of maintenance outsourcing
compared to performance
of the road Agency (RTA).
Enhancing implementation
capacity
By giving more flexibility in the
mobilization of resources both in nature and planning, contracting out
allows the delivery of more and more responsive services. Particularly in
countries facing pressure to reduce the size of the public sector, the issue
is critical. In Peru, a rural roads program relied on community-based
micro-enterprises to deliver routine maintenance services under
performance-based contracts. The program addressed the difficulties of
ensuring central-government maintenance of a myriad of scattered rural roads
and the failure of traditional municipal force account works. The system has
excelled in improving reliability of access of rural roads while generating
employment opportunities and acting as a catalyst for other local
development initiatives. On heavily trafficked roads were congestion
and safety can be critical, private sector involvement can deliver more
diversified services optimized to respond to road users' needs and
expectations. Innovative systems and services for traffic management or
stand-by services for accidents are more efficiently provided by the private
sector.
Reducing risk for the public sector
Transfer of part of the project risks to private
partners is one of the key incentives generated by public private
partnerships and directly results in a better control by the public sector
of the overall project cost, delivery time frame and quality of outputs.
Mobilizing financial resources
Private financing in infrastructure is often quoted as a "new" source of
financing. There should be no confusion however between the financial source
of investment that could come from the private sector in the form of debt or
(to a lesser extent) equity and the source of revenue that will eventually
pay back the investment and must come from the taxpayer or the beneficiaries
of the road. There are no "free lunches".
However, private financing for road construction or rehabilitation allows to
mobilize the resources and execute the relevant investments more rapidly
because of the incentive the private sector has to maximize the return on
the investment.
Freeing scarce public funds for other uses
PPPs financed by the private sectors allow the
spreading of the project cost for the public over a longer period of time,
in line with the expected benefits (savings on vehicle operating cost, on
travel time, on accidents). Public funds are thus freed up for investments
in sectors were private investment is impossible or inappropriate (social
services).
On public financed projects, an initial investment is
made by the public sector and recovered by the community in form of the
project benefits. On private financed projects the cost for the community is
incurred trough payments to the private sector over the entire project
operation phase, either through regular payments from the Government or
through collection of tolls from the road users.
Examples of PPPs in Australia include:
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