Private partnerships have taken place mainly in economic infrastructure, such as telecommunications, power and water. However, recently, attention has also turned to social infrastructure, such as health and education, and other services (garbage collection, facilities management, etc).
Traditionally, these services have been provided by the public sector mainly because most of them entail large capital outlays, and have a long gestation period.
The desire for greater efficiency and better services and the need for additional sources of finance are now increasingly leading governments to embrace a public-private partnership approach to provide these services.
A public-private partnership is a contract between a public sector ‘Institution’ and a private party, in which the private party assumes substantial financial, technical and operational risks in the design, financing, building and operation of an infrastructure related project.
Like many developed as well as developing countries, the federal government has for the purpose of coordinating and promoting public-private partnerships, set up an independent public-private partnership unit--Infrastructure Project Development Facility (IPDF) which has been incorporated as a company under section 42 of the Companies Ordinance, 1984 through the ministry of finance.
IPDF was launched in November 2006 which provides expertise and hands on support on behalf of the federal government to implementing ’Institutions’ at all tiers of the government for infrastructure projects under the public-private partnership modality and for serving as the secretariat to the task force constituted by the federal government in 2006.
A series of guidelines/documents to help government agencies decide whether public-private partnerships are appropriate for particular projects are available on the official website of IPDF i.e. www.ipdf.gov.pk. The Public Private Partnership Standardised Contractual Provisions (Standardised Contractual Provisions) were drafted by IPDF and were later amended in light of the comments/suggestions received through consultations in order to bring the same in accordance with the indigenous business conditions and legal framework.
Special-purpose vehicle: One of the key aspects of the Standardised Contractual Provisions is the incorporation of a Special Purpose Vehicle (SPV) as a company under the Companies Ordinance, 1984. The SPV shall act as the private party that will undertake the project, and it would be responsible to meet with the obligations under the Public Private Partnership Agreement executed itself and the public sector Institution. Representing the private party, the SPV will be responsible for the design, construction, operations, maintenance and transfer of the project back to the Institution at the end of the period of the public private partnership agreement. The SPV will be responsible for arranging the finances for the project. A typical PPP structure is provided hereunder:
Risk management: The standardised contractual provisions stipulate the risk management process which is a key consideration to manage a public-private partnership agreement.
There are three main types of risks involved in a public-private partnership project: (i) technical (ii) financial and (iii) operational risks. The Institution retains the minimal risks. It always assumes the ‘payment in time’ risk. The standardised contractual provisions also ensure that the risks transferred to the private party are retained by the private party during the life cycle of the project and are not transferred back to the Institution.
The standardised provisions aim to achieve a generic ‘risk allocation profile’ between private parties and the public sector across a range of infrastructure sectors. A major benefit of sandardised contractual provisions is that the Institution does not have to renegotiate ‘common risks’ in each transaction.
The risk allocation determines the ‘contract price’ over the life time of the project. Therefore, the draft PPP agreement based on the standardised contractual provisions must accompany the request for proposals for better understanding and evaluation of the private party.
Insurance: Insurance is a major element of an overall risk mitigation strategy to be adopted in a PPP project. A party that bears a risk may, through insurance, pass the financial consequences of the risk to a commercial insurer. The actual contractual provisions provide clauses to the effect that the risk is managed at the cost of the insurance premium which is inbuilt in the ‘payment mechanism’ in the agreement. The insurance should be taken in a competitive insurance market and reflect a true valuation of the risk.
Poor performance by the private party, whether it be failure to deliver the project on the specified dates or that the quality of the services provided are not up to the required standards under the agreement, may cause payment deductions from the revenues of the private party instead of termination of the agreement. This possible threat of losing revenue in the event of poor performance should be a major incentive for the private party to rectify any default in the service.
In this respect, the standardised contractual provisions contain clauses such as (i) identification of rights of the parties in the event of invoking the step-in clause (ii) obligations of payments to the parties including the right of the private party for compensation and (ii) clear procedure for co-operation and assistance by the private party after termination. The standardised contractual provisions also provide for termination due to corrupt acts either of the private party or its sub-contractors.
The projects are handed back to the institution after the expiry of the PPP agreement. The standardised contractual provisions entail that the expected conditions of project assets at the time of expiry of the agreement must be agreed between the private party and the Institution. It provides clauses for unencumbered possession of assets to the Institution on expiry of the agreement. A detailed hand back procedure should be agreed between the parties.
The writer is Senior Adviser-Legal at IPDF. email: ikram.haque@ipdf.gov.pk