1.4 Scope of the PPP Framework

The scope of the PPP framework indicates the types of projects for which the framework will apply. Scopes are generally defined by jurisdiction, sector, size, and contract type. It is good practice for designers of a framework to consider each of these dimensions, and to be explicit in the framework about its scope. These aspects are explored in the remainder of this section.

Jurisdiction

The scope of any PPP framework will be limited by the jurisdiction of the government that promulgates it. It is natural to think of national governments that set PPP policies for their country, but what about different levels of government?

In federal systems, any PPP framework promulgated by the federal government can only extend to PPPs that fall within the government’s competence as set out in the constitution. These competencies differ from country to country, but are often quite limited. For example, in the United States (US), PPP frameworks are developed by the states; the federal government is responsible for relatively little infrastructure. In India, while states can develop their own PPP frameworks, the Union Government, through the PPP cell in the Department of Economic Affairs, leads the development of the PPP framework. In Canada, PPP frameworks are developed at the provincial level (the Canadian Government also has its own PPP program, for other national projects). Box 2.5 in section 1.5.4 provides more detail on sub-national PPPs.

In non-federal systems, there may be sub-national governments at a second level of government with competence in certain infrastructure and services that develop PPP frameworks. For example, in Spain the central government retains the powers to promote “national interest infrastructures”, while the regional governments (Comunidades Autónomas) have the competence to procure linear transport infrastructure (as long as the infrastructure is entirely within its territory). They also have the exclusive competence to procure social infrastructure (courts, schools and hospitals).

The extent to which national governments control the PPP projects and frameworks of local governments is an even more complex question – and one that in federal systems can vary from state to state. For example, in South Africa, the National Treasury must review and comment four times during the development of PPPs at the municipal level to ensure that government procedures are followed and contingent liabilities are controlled. Technically, the reviews are advisory only, but in fact serve as de facto approvals, without which the development process cannot proceed.[10] In Canada, PPP Canada (a federal agency) has a funding mechanism that allows it to fund PPP projects at the provincial and municipal level. This funding comes with requirements related to how projects are structured and managed, which contributes to the track record of the Canadian market. This is especially helpful for jurisdictions which have only one or two potential PPP projects and so will not develop their own framework or practices.

Sector

When governments intend to focus PPPs on just a few sectors, the framework may be designed with these sectors in mind. Further, the application may be explicitly limited to those sectors. South Africa created a PPP framework explicitly for highways (as well as a separate, more tailored framework for other PPPs). The Philippines created a special regime for privately-financed power plants.

Other PPP programs and their governing frameworks may cover multiple sectors, but still set limits. As an example, the framers of Singapore’s PPP policy (2004) limited its scope to those sectors “in which other similar countries have had proven success with PPP”, including sports facilities, incineration plants, water and sewage treatment works, major information technology (IT) infrastructure, education facilities, hospitals and polyclinics, expressways, and government office buildings.

Size

Many governments define a minimum size (or value) for PPP projects implemented under the PPP framework. The relatively high transaction costs of implementing a PPP can make PPPs below a certain size unviable. A size limit may mean PPP type contracts cannot be used for smaller projects. For example, Singapore’s PPP policy (2004) states that, initially, PPPs will be pursued only if they have an estimated capital value of over US$50 million. Brazil’s PPP law (Law 11079 2004) sets a minimum size of 20 million reals (US$11.7 million equivalent) for individual projects.

In some jurisdictions, small projects are bundled as a way of economizing transaction costs. For example, the Pennsylvania Bridges Project bundles the rehabilitation of 558 bridges spread across several counties across the state into one large project. The concessionaire is required to complete construction by the end of 2017 (within three years of signing the contract) and will be responsible for the majority of design, financing, and maintenance risks over the 28 year term of the concession.

PPP size limits may change over time as the government gains a better understanding of the size of projects that are suited to a PPP. British Columbia, Canada, is instigating a policy in which projects that are worth over $100 million will be screened as PPPs. Initially, the policy stipulated that projects over $20 million were to be screened; this was raised to $50 million and is now in the process of being raised to $100 million. This was partially because experience shows that PPP projects under $100 million are typically not viable, but also in response to pressure from the local construction industry that is uncompetitive in internationally procured PPPs.[11]

Contract Type

The scope can also define specific aspects of the contracts that will be considered. Chapter 1 describes the range of contract types within the PPP family.[12] Many frameworks are explicitly limited to a particular subset of this range, while others attempt to allow and control PPPs of almost any type within a single framework. For example, India’s draft National PPP Policy (2011) describes the types of contracts that are considered as PPPs, types of contract that will not be used (those involving private ownership of assets), and those that are not covered by the PPP policy (Engineering-Procurement-Construction (EPC) contracts, and divestiture of assets). Brazil’s PPP law (Law 11079 2004) and Chile’s Concessions Law (Law 20410, 2010) both define limits on the contract duration: in Brazil, it is a minimum of five years, and in Chile, it is a maximum of 50 years.

Typically, the legal traditions of the country will influence the type of contract for which the PPP framework will apply to. This is discussed in detail in section 1.5. In summary, the two main categories of contracts are:

· Government-pays contracts: The government agrees to pay the private party on the basis of the availability and, in some instances, the performance of the service over a period of time. For example, to ensure that school or medical facilities are provided free of cost to the user, the government may contract with private firms to provide the facilities and pay for them from the government budget. The scope of the UK's Private Finance Initiative (PFI) program has been predominantly ‘government-pays’ contracts, with minimal ‘user-pays’ elements; and

· ‘User-pays’ or concession contracts: These contracts are designed to allow the private sector to lease a government asset, to deliver public services, and to generate an income from supplying the service. The French PPP framework was originally framed around concession contracts.[13]

Summary Examples of Scope Definitions

Table 2.2 rovides details on how various countries have defined the scope of their PPP frameworks and programs.

TABLE 2.2: Example Definitions of PPP Framework Scope

Unified Frameworks

In countries with established PPP programs, PPP frameworks are often applied across all sectors and, in some cases, across multiple jurisdictions within a country (federal, state and local). An example of such a framework is Australia’s National PPP policy framework; it applies to all significant public infrastructure (both economic and social infrastructure and their related services) procured by commonwealth, state and territory governments.

A unified framework can simplify things for agencies interested in developing a PPP as well as for prospective investors. Unified rules and processes result in greater efficiency for the private sector, and hence greater bidder interest. Investors often view governments as monolithic, thus expecting that governments will adopt consistent practices across sectors. Moreover, many PPP issues are the same regardless of the sector or jurisdiction, so a single set of well-designed rules may serve a governments well.

However, there are also disadvantages in trying to create unified frameworks across sectors and jurisdictions.

· Difficult to develop and inflexible to change: The greater the scope of the PPP framework, the more difficult and time consuming it will be to develop and change. The most challenging task in developing a framework is gaining endorsement from stakeholders. The wider the scope, the more likely there is to be conflicting interests. However, a PPP framework designed for a targeted problem is relatively easy to establish and can be easily adapted. It will limit the stakeholders involved and the legislative or policy frameworks that need to be addressed;

For example, the first Philippines PPP framework was the Build-Operate Transfer (BOT) Law passed in 1990. However, it was soon apparent that the procurement processes under the first BOT laws were too slow and restrictive to allow the government to procure privately financed power generators (independent power projects - IPPs) as quickly as was needed. Between 1992 and 1993, the country suffered a power crisis, with brownouts lasting between 8 to 16 hours a day. In response, a new legal framework for the IPP program was created by the Electric Power Crisis Act of 1993. This framework enabled crisis mitigation and by 1994 there were no brownouts.[24] Then, when Manila faced a water crisis in 1994, a legal framework was created to facilitate water PPPs. The National Water Crisis Act (NWCA) was passed in 1995 to provide a legal basis for concession agreements.

· Unable to address unique infrastructure challenges: Specific laws that enable the development of PPPs in one sector or jurisdiction may not work in another. For example, in South Africa, in effect two PPP frameworks exist – one for highways and one for non-highways. The South Africa National Roads Authority developed a clear PPP framework in 1997.[25] A ”non-highway” PPP framework was later developed in 1999 when the treasury became concerned that PPPs were increasingly used by other agencies as a means of off-balance sheet financing. The National Roads Authority was not brought under the new general framework, as the existing highway framework had already proven its effectiveness;

A number of 'parallel' PPP frameworks may exist within a single jurisdiction. If carefully designed, they may be effective in delivering PPP programs that target specific objectives. However, if there is any overlap or conflict with existing frameworks, laws, and/or policies, new 'parallel' PPP frameworks may be unclear For example, in Romania, Law No. 178/2010 which provided the general PPP framework was never used because it overlapped with the existing concession framework regulated by the Government Emergency Ordinance no. 34/2006.[26]

As an alternative, an ‘umbrella’ policy can be developed, which then has sector specific versions or detail. For example, in the UK, 'umbrella' policies have been developed by HM Treasury, which are then applied by PPP units that operate in central government departments such as defense and health.