Professional Documents
Culture Documents
PARTNERSHIPS
FINANCES FOR INFRASTRUCTURAL AND
BUILDING PROJECTS
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Private Public Partnerships in
Infrastructure
• A major new user of project financing techniques
• Infrastructure traditionally financed and managed by
governments
• Demand for infrastructure has been growing faster than
government funding available, particularly in emerging
economies.
• Recent trend has been to involve the private sector in
the supply and provision of these services
• For example: Roads, Bridges and Tunnels, Light Rail
Networks, Airports and Airport control Systems, Water
and Sanitation, Electricity Generation, Hospitals,
Schools, Prisons
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Private Public Partnerships in Infrastructure
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Private Participation in Infrastructure
(PPIs)
• In many instances, the governments
receive tax payments from the project, and
in certain cases, a share of the profits.
• The structure of the partnership can vary
along a spectrum from a leading private
sector role to a marginal one.
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Different PPP Models
Privatisation
Buy-Build-Operate
Degree of Private Sector Risk
Build-Own-Operate
Build-Own-Operate-Transfer
Build-Lease-Operate-Transfer
Lease-Develop-Operate
Design-Build-Operate
Operation / Maintenance
Service /License
Design-Build
Government
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Public-Private Partnership Models (Cont.)
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Public-Private Partnership Models (Cont.)
• Design-Build-Finance-Operate/Maintain (DBFO, DBFM or
DBFO/M): Under this model, the private sector designs,
builds, finances, operates and/or maintains a new facility
under a long-term lease. At the end of the lease term, the
facility is transferred to the public sector. In some countries,
DBFO/M covers both BOO and BOOT. PPPs can also be
used for existing services and facilities in addition to new
ones. Some of these models are described below.
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Public-Private Partnership Models (Cont.)
• Lease: The government grants a private entity a
leasehold interest in an asset. The private
partner operates and maintains the asset in
accordance with the terms of the lease.
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Public Private Partnerships (PPPs)
4. Innovation
Some parts of the project may need new approaches and
innovative thinking
The extend of PPPs will depend on the complementarities
between the tasks
5. Risk
Major risk can be managed better by private sector (ex.
construction-delay risk, being contractor and operator give
incentive to minimize such risk)
Political risk is better managed by public sector
6. Economies of scale
Private sector is taking advantage of economies of scale from
the operation of similar project in other jurisdictions, the PPP
option becomes more attractive
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Public Private Partnerships (PPPs)
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Risk Analysis
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Risk Analysis
• It is necessary to achieve significant risk transfer in order
to derive the full benefits from the capital inflows from the
private sector and the management change
• Financing costs of risk transfer and pricing of risk are
important in efficient allocation of risks
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Risk Analysis
• Pricing of Risk
– To use PPPs, government must compare cost of
public investment and provision of service with
using PPPs to provide the service
– PPPs sometimes are an efficient way for
government to relieve its risks
– Government has to pay for the risks that it
transfers to the private sector
– Project-specific risk (e.g. interruption of supply
of building materials, labor problems, unfavorable
weather, etc) can be diversified across a number
of government or private sector projects and need
not be priced by the government
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Risk Analysis
– Market risk reflects the economic
developments that affect all projects and
cannot be diversified and should be priced
properly
– private sector demands a discount rate
that includes a risk premium on the risk
free discount rate that typically
government uses
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Competition and Regulation in PPPs
• Private sector efficiency is main reason for PPPs
• Competition is the important source of efficiency
in both the private and public sector
• Competition in award of construction and service
contracts necessary to foster competition,
managerial improvement and spur innovation
• In the case where private sector sells to public
sector, there is little scope for competition after
the contract is awarded and government usually
regulate prices
• Price regulation and incentive based regulations
are used to increase output, hold down prices,
limit monopoly profits
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Prerequisites for PPPs Success
• Political commitment
• Good governance
• Government expertise
• Effective Project Appraisal and Selection
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Risk Transfer
• Need for Risk Transfer to the Private Sector
– Determines whether PPPs is a better option than to have
public investment and government provision of service
– Influences the appropriateness of accounting and
reporting treatment of PPPs
• Risk Transfer and Ownership
– PPPs are legally owned by private and are legally
mandated to bear the risks of the project
– If government bears ownership related risks, it is in effect
the owner of the asset, and in that case the PPPs will be
indistinguishable from traditional methods of financing
– Different risks are associated with owning and operating
an asset and risk transfer can be assessed by reference
to these rights and obligations 22
Risk Transfer
• In the case where ownership related risks are not specified
by PPP contracts, risk transfer can be assessed by
reference to the overall risk characteristics of the PPPs
• In the Non-separable contracts (ownership and service
elements cannot be distinguished) the balance between
demand risks and residual value risk borne by government
is used in the UK
• Demand risk is borne by government if service payments to
a private operator are independent of future need for the
service
• Residual value risk is borne by the government if the asset
is transferred to the government at more or less than its
residual value
• Other factors such as government guarantees, extent of
government influence over asset design and operation can
be used to assess the degree of risk that has been
transferred away from the government
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