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Establishing a PPP Framework

21.1 Why have a PPP Framework?

A good PPP framework aims to ensure that the right projects are selected as PPPs, and that they are developed, delivered and managed in a structured, transparent and efficient way. Equally, a good framework minimizes the risks that a PPP project will not deliver Value for Money (VfM).

PPPs involve multiple conflicting interests. If risks are not allocated appropriately, the public sector may incur costs that it cannot control. If the procurement process fails to consider market conditions, the tender process may not be competitive. If contingent liabilities are not monitored, there may be unexpected fiscal obligations incurred by the government. See box 2.2.

BOX 2.2: Conflicting Objectives and Risks in PPPs

In a PPP, key stakeholders will have conflicting objectives. For example, private parties seek to maximize profits while minimizing risk, whereas the government pursues the public interest. Within the government, sector agencies seek to maximize service delivery. This may conflict with ministries of finance that seek to prudently manage financial obligations and risks.

The best way to address this conflict is to define the objectives of the PPP program and each PPP project clearly and up front. This includes the relative priorities, so that conflicts can be identified and resolved early.

As highlighted in chapter 1.8.2 of the PPP Guide, there are a number of risk factors related to not having a framework. PPP frameworks address those risks and increase the likelihood that PPPs will succeed;

  • Increasing the capability of government agencies to deliver PPPs: PPP projects may be developed by various agencies across the government. Each of these agencies may be an expert in its own sector – for example, in highway development, or water service provision. However, most agencies will not be experts in PPPs. If each agency has to learn how to do PPPs on its own, learning costs will be high, as will the risk of mistakes. Codifying standard practices in a framework reduces learning costs and the risk of mistakes. Codification and standardization makes it easier for skills developed on one project to be transferred to another project in another sector;
  • Providing a structured way of reconciling disparate objectives: Delivering a PPP project typically requires co-operation between numerous government agencies and private firms, all with competing objectives. A PPP framework helps in managing expectations, training, and skills development. This not only helps to establish a common objective between stakeholders, but also improves the longevity of the PPP program (in particular by establishing new mind-sets);
  • Making sure that whole-of-government risk is limited: Sector agencies developing PPPs will focus on delivering a project that will work well for the sector. However, they may be less alert to other risks which are more important at a whole-of-government level. These risks include government reputation and fiscal risks. A good framework will build in processes and responsibilities for identifying and mitigating such risks;
  • Generating market interest: A key factor for a successful PPP is a competitive procurement process. Competition helps drive down price and promote innovation. A good PPP framework can be an effective way of communicating the quality of the PPP program to the market, as well as the government’s commitment to potential investors. Thus, a PPP framework can make PPP projects more attractive by increasing competition. PPP frameworks can also reduce investors’ perception of risk, making it more likely that projects can be privately financed. PPP projects delivered by governments with transparent PPP processes and effective oversight will be perceived as less risky; and
  • Facilitating probity and oversight of the PPP program: As with any important government program, independent oversight and evaluation are desirable. Having clear processes, decision making criteria, and allocation of responsibilities makes such oversight more effective. Clarity about what officials should do makes it easier to assess if they did what they were supposed to do. Clarity about objectives makes it easier to assess if those objectives are being achieved. If things are going wrong, a clear and well documented framework makes it easier to learn lessons from the experience. Evaluators of the program can distinguish between whether the officials are following the framework and the framework needs to be improved, or whether the problem is that officials did not follow the framework. If the problem seems to be with the framework itself, having a well-documented framework can make it easy to see which particular parts of it need to be changed (see section 1.9 for more on oversight of PPPs).

Many PPP projects developed in the absence of a PPP framework have gone wrong. The Dabhol Plant in Maharashtra, described in box 2.3, is a case study in which the inexperience of an agency and the lack of a PPP framework contributed to the inappropriate delivery of a PPP project. There were a number of issues with this project: the PPP project was identified without a plan in place, the private party to deliver the project was selected in an uncompetitive process, and the contractual negotiations were largely driven by the private investor. Under an effective PPP framework, it is unlikely such a project would have proceeded. Without a PPP framework, officials are at risk of making poor decisions, such as not procuring a project competitively, or taking a project to market before it is properly developed.

 

BOX 2.3: A PPP project without a Framework

The Dabhol Plant in Maharashtra project ended unsuccessfully for both the government and the private promoter because decisions were unstructured and poorly governed, leading to an outcome that was not in the public interest.

Enron led the project, and the contractual terms included the creation of a corporate vehicle, the Dabhol Power Corporation (DPC). The DPC was to construct the power plant in two phases and sell power to the Maharashtra State Electricity Board (MSEB) under a 20 year take-or-pay contract. The contract was backed by both a state government guarantee and a counter-guarantee by the federal government.

In 2001, after the first phase was completed, the MSEB did not meet its financial obligations given the high energy purchase price under the Power Purchase Agreement (PPA). The DPC attempted to call in its guarantees, but the federal government refused to make such payment on the basis of alleged technical breaches. It was not until 2004 that settlements were made.

It is unlikely this project would have proceeded if the approach to identification, procurement, appraisal and negotiation were good practice, as shown in table 2.1.

TABLE 2.1 – Dabhol Plant Framework Approach

Step

Dabhol

Better approach

Identification of a project

By a private party on its own initiative.

 

From an integrated sector plan that shows the most economic set of investments to achieve sector objectives.

Selection of a private party

By negotiation with a single proponent.

Through competitive processes to discover which firm is the best party by scoring against a set of defined and rational criteria.

Appraisal

Advice by the World Bank that the project was unaffordable was disregarded.

Projects that are not affordable will not proceed.

Contractual agreement

Negotiation based on a draft prepared by the private party.

Contract developed by the government based on an optimal allocation of risks between parties.

It is desirable to initially establish general principles and then provide the detail of the framework in parallel with the development and delivery of the first projects. While it might seem that the framework should be established first before undertaking projects, this is not generally the best approach. By developing the framework in isolation of real world projects, processes may become over standardized, which may create delays or lock-in unworkable procedures or approvals. Moreover, political and bureaucratic priorities tend to favour initiatives that are clearly linked to tangible results. A PPP framework advanced as part of delivering tangible projects may therefore be given higher priority than one that is not so linked.


In addition, by developing general principles first, then using projects to refine that process, the framework will be suited to meet the particular needs of the jurisdiction.[1] For example, in British Columbia, the PPP framework is nonspecific. As a result, it has been able to adopt a number of innovations, particularly in the area of financial structuring that might not have been possible under a more detailed framework. This flexibility has supported the large number of PPPs in Canada.

 

 

[1] Deloitte and Touche USA LLP have developed a PPP Market Maturity Curve that shows how jurisdictions generally work up to the full operation of the PPP Program, starting with a simple framework and a small number of projects. Refer to UNECE (2008) Guidebook on Promoting good governance in PPPs for more information.

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