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PPP Introduction and Overview

11.2 Analyzing the Definition Proposed by this PPP Guide. Describing and Explaining the Features of a PPP Contract as a Tool to Procure New Infrastructure

This PPP Guide focuses on PPPs as a method for procuring infrastructure development and management on the basis of private finance, as introduced in box 1.3. The definition of a private finance PPP provided in this PPP Guide implies a number of features which need to be present in a PPP contract to be properly regarded as a private finance PPP. This section will describe and explain each of these features. Most of these, with the exception of the presence of Private Finance, are also necessary features to be met by any Infrastructure contract to be regarded as a PPP under the broad definition.

1) “A long-term contract between a public party and a private party”

Long-term: The long-term nature or condition of a PPP relates naturally to one of the essential features of any PPP, which is the effective risk transfer and responsibilities to the private party over a significant part of the life of the infrastructure asset. The long-term also connects with the financial structure as explained below.

Contract: The relationship and/or delegation of management by the public sector to the private sector usually demands the use of a contract, that is, a written document comprising the rights and obligations enforceable by either party. Normally the contract is a single document, with attachments, identified as binding. Sometimes the contractual relationship may be more complex, including different contract documents linking the private party with different public institutions (for example, a PPP for a new power plant may be governed by a license or authorization by the respective Ministry for the plant, together with a Power Purchase Agreement with the state-owned transmission company).

This contract must usually be granted through a public competitive process, which may take the form of a variety of tender processes.

Public party: Includes governments (the procuring authority), or agencies, companies and entities that may act in the respective contract as procuring authorities in the name of the government. These procuring authorities may be national or sub-sovereign (states in a federal country, regional governments, municipalities, and so on). The public partner is also referred to in this PPP Guide as the procuring authority[4], although other terms are internationally accepted or used in some jurisdictions (see glossary).

Private party: Commonly refers to the key private sector company or companies that will be involved in the delivery of the project, whereas “private partner” refers to the contractual counterparty of the public party. In a PPP, it is common for a group of private parties to form a consortium to bid for the PPP contract. If the consortium is awarded the contract, it creates a new company to sign the contract and act as the private partner. This new company is also referred to in this PPP Guide as the project company or as a Special Purpose Vehicle (SPV[5]).

A government owned company or state-owned enterprise (SOE) (including a potential government owned SPV) may be regarded in some countries as a “private entity” subject to civil (rather than administrative) regulations. However, a contract between a procuring authority and such a government-owned "private" entity (when the SOE is owned by the government that procures the project) would not normally be considered to be a PPP, and it is not regarded as such by this PPP Guide (see section 2.2). It is not regarded as a public-private partnership because there are reasonable doubts that there is risk transfer to the private sector[6].

However, the presence of the procuring authority, a related government, or a state company as a shareholder of the project company does not prevent the project contract from being regarded as a PPP, regardless of whether the government holds a minority or even a majority equity stake.

2) “For the development (or significant upgrade or renovation) and management of a public asset (including potentially the management of a related public service)”

Development and management of the asset: One of the essential features of the PPP model is the search for efficiency through the involvement of the contractor. This applies not only to the design and construction of the asset, but also to its long-term maintenance so that construction and maintenance are bundled obligations. In some projects, management will also include operations (either of the infrastructure or a related service).

Significant upgrade or renovation: This PPP Guide deals with PPP as a delivery option for capital intensive projects. PPPs may be also used for intensive additional investment in an existing asset.

Potentially including management of a related service: The focus of the PPP Guide is infrastructure development. However, many PPPs also include the management or operations of a public service when the infrastructure relates to such service or is a platform to allow public authorities to render the service. For example, a PPP of a major transport system, including the operation of transportation service falls within the scope of the PPP.

3) “In the contract, the private party bears significant management responsibility and risks through the life of the contract”

Significant management responsibility: The private party should be materially and integrally in charge of the management of the asset (especially life-cycle cost management), rather than only being dedicated to specific and/or minor areas of management. Otherwise there is no point in transferring life-cycle risks and in relying on a long-term contract under a PPP scheme.

Also, the scope of responsibilities will naturally determine the extent of risk transfer, as risk should not be transferred to activities and events in which the private partner has no control or mechanisms to influence risk management. Risks relate to responsibilities (that is, risks related to long life cycle management of the infrastructure should only be transferred if the responsibility for long-term management — especially maintenance and renewals — has been delegated to the private partner).

Significant risk transfer: There should be significant risk transfer to the private sector over a significant part of the asset life cycle (which links to the long-term nature of these contracts), in addition to the transfer of construction risks.

Significant: The bulk of the risk has to be transferred (as risk transfer is the main driver for PPP efficiency – see section 5), but there is no need to transfer all risks/events and their consequences. There may be significant inefficiencies in transferring certain risks that can be reduced by means of the public partner taking back or sharing the risk.

4) “and provides a significant portion of the finance[7]

As stated in the introduction, private participation in the financing of a project is not a necessary condition for a project to be regarded as a PPP. However, the focus of this PPP Guide is on private finance PPPs.

Securing private finance may be an objective or motivation in itself for a public authority to procure infrastructure under this mode (however, as a motivation, this has to be carefully assessed as explained in section 5).

Furthermore, private finance (usually under a “project finance” structure) may also be an essential factor for efficiency because when the private partner finances all or a significant part of the infrastructure and its remuneration is based on the performance (availability and/or use) of such infrastructure, then financing is at risk. This is a powerful mechanism to align the objectives of the public and private partners; it incentivizes the private partner to be proactive in maximizing the objective of the public party (which is to ensure that the infrastructure is available and adequately operated and/or maintained). The private finance also incentivizes the private partner to manage whole-of-life costs (over the life cycle of the asset[8]). This means that, after meeting operating costs, the private partner has sufficient revenue to service its debt and provide a return to its investors.

5) “and remuneration is significantly linked to performance and/or the demand for or use of the asset or service, so as to align the interests of both parties”

This notion is linked to the private finance feature and risk transfer characteristics of the PPP. The most effective way of transferring responsibility and significant risks over the life of the contract is to compensate the contractor (the private partner in a PPP) on the basis of the performance of the asset (in the sense of quality of service) or on the basis of the level of use, or a combination thereof. Typically, the performance of the asset will depend on the degree to which agreed service levels or the level or volume of use (when the main objective is to extract the financial value of the asset as a revenue maker) are met. The latter case is generally the case in user-pays PPPs, and the former is generally the case in government-pay PPPs.

The link to performance and/or use also results in another particular feature of infrastructure PPPs: the contractor will only receive payments (or most of the payments) once the infrastructure asset is completed, that is, the procuring authority will pay only (or significantly) once the asset is in service[9].

The link of remuneration to performance is paramount for aligning the interest of the private partner (mostly focused on obtaining benefits) with the objectives of the public sector (mostly focused on service reliability and quality). However, interests should be aligned without being prescriptive in the means and methods to be applied (inputs), and leaving reasonable scope for innovation.

The typical contract form of a private finance PPP is the design, build, finance, operate and maintain (DBFOM) contract. But it will only be regarded as a true private finance PPP if significant financing is provided by the private sector at its own risk, and most of the remuneration for the works and operations and maintenance (O&M) activities are linked to performance, maintenance, or the effective use of the infrastructure. This contract type has a number of variations and is also referred to by other terms in some countries.

There are also other contract forms that may be regarded as PPPs, including some infrastructure PPPs that do not involve private finance. These are notably design, build, operate and maintain (DBOM), and some design, build, finance (DBF) projects.

BOX 1.5: Summary of Essential and Other Common Features of a Private Finance PPP

Essential features

Other common features

  • There is a long-term public contract between public and private parties.
  • The construction and long-term management of the asset are bundledtogether in the one contract.
  • There is significant risk transferred to the private sector over a significant part of the life cycle of the asset.
  • There is significant private finance at risk.
  • The private partner’s remuneration is linked to, and at risk of, performance and/or demand benchmarks (alignment of interests).
  • The private party is usually constituted as an SPV.
  • Financing raised by the private party is usually in the form of “project finance”.
  • Revenues are earned by the private party only (or mainly) when the asset is completed and ready to be used.
  • Consistent with the performance focus of remuneration to the private partner, technical and service requirements are also focused on results or “output specifications”, rather than on inputs. The requirements also leave room for innovation.


The next section introduces and explains these and other contract structures used to develop (or manage) infrastructure, so as to analyze which are PPPs and why. Other situations and contexts, which are not contracts but are sometimes confusingly referred to as PPPs, are also examined.

Subsequent sections will provide further information on variations and types of PPPs, give clarification on terminology (section 3), offer refinement of the scope of assets for which PPPs are commonly used as a method for procuring new infrastructure (section 4), and provide a description of the typical structure of a PPP.

BOX 1.6 Key Points Regarding the Introduction to the PPP Concept

  • PPP is an option to procure infrastructure (infrastructure PPPs) and services (service PPPs), which may provide some incremental benefits in addition to being a means to access private financing for the promoting governments.
  • The focus of this PPP Guide is on PPPs as a tool to develop new infrastructure (or upgrades) in an efficient manner. Specifically, the PPP Guide focuses on PPPs relying on significant private finance (private finance PPPs).
  • There is no universal definition of PPPs, but there is a reasonable consensus on some key features for when a contract is regarded as a PPP: long-term contract, significant transfer of risks and responsibilities from the government to the private sector, and remuneration linked to performance and/or demand for the services of the infrastructure asset being built.
  • PPPs may be classified as user-pays PPPs (funding of the payments is based in charges to users – tariffs) or government-pays PPPs (funding of payments is based on the public budget).
  • PPPs may be referred to using a variety of terms, the most common alternative nomenclature being concessions (for user-pays PPPs) and PFI (for government-pays PPPs).
  • Private finance is not a necessary condition for a contract to be regarded as a PPP. However, involving the private sector in financing may not only help to accelerate infrastructure development, but it also adds incremental benefits in the form of efficiency (in the right projects and under certain requirements and conditions).
  • PPPs are not the same as privatization.

[4] Generally, the public partner or public contractual counterparty in the PPP contract will coincide with the procuring authority that tenders and executes the contract. For convenience, this is assumed by this PPP Guide to be the common situation. However, there may be cases in which the procuring authority that tenders and awards the contract is not the public body or institution that signs or executes the PPP agreement, but is a public entity related to the same government.

[5] An SPV is not a necessary condition for a contract to be regarded as a PPP. Section 6 further explains the rationale of SPVs and other alternative forms of constitution of the private partner.

[6] A different case is when a public company or SOE is owned by a different government  than the one which procures the project. It operates in the market like any private economic operator (that is, competing for the market), so that the risk transferred to that SOE is effectively transferred out of the procuring government.

[7] From a broad perspective, any financing provided by the private sector might be regarded as private finance.  However, “private finance” may be considered a regulatory matter: from a national accounting and reporting perspective, private finance means financing that is not regarded as public debt (that is, it is not consolidated in the government sector balance sheet). However, this PPP Guide considers “private finance” as any finance provided by the private sector that is at risk, that is, it is dependent on the performance of the project-contract. This view is aligned with the concept of the economic ownership of the asset, which is used by some standards and guides to assess whether a PPP asset should or should not be consolidated or recorded in the government balance sheet. More refined or specific criteria are applied in some countries according to standards which define whether the asset should be regarded as public.  Chapter 2 provides more information on the matter of accounting and reporting for PPPs in national accounts and public financing statistics.

[8] PPPs provide a focus on all of the costs during the useful life of the infrastructure, or during the life of the contract that regulates the management of the infrastructure. This includes the initial investment/costs of construction and any other maintenance work required to maintain the asset in an acceptable, constant technical state or condition, or in a state necessary to meet the performance requirements established in the contract.

[9] As with many other characteristics, this may include exceptions in the form of part of the compensation or payments to the private partner being received during construction, depending on the financial structure of the PPP (see co-financing in section 7.3).

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