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Establishing a PPP Framework

21.5.3 How PPP Frameworks Build on and Incorporate Pre-Existing Government Frameworks

Regardless of the tradition within which a PPP framework is constructed, it is not constructed in isolation. Rather, it builds on, incorporates, and modifies the pre-existing frameworks for contracting, procurement, and financial management in government. It makes sense to use as much of the existing frameworks as possible and to ensure that whatever is added that is specific to PPPs dovetails with existing systems. Among these pre-existing systems, the following are typically found:-

  • Administrative law: In many civil law countries, government agencies are governed by administrative laws that control their functions and decision-making process;
  • Procurement law: The transaction process for a PPP must typically comply with public procurement law and regulations, unless PPPs are specifically exempt;
  • Public financial management law: Institutional responsibilities, processes, and rules established in public financial management laws and regulations can contribute to the PPP framework. For example, this could include project approval requirements, fiscal limits, budgeting processes, and reporting requirements (see section 4.6.4 for PPP public financial management responsibilities);
  • Sector laws and regulatory frameworks: PPPs are often implemented in sectors that are already governed by sector-level law and regulatory frameworks. These may constrain the government’s ability to contract with the private sector, or provide rules for doing so. PPPs for regulated industries such as electricity distribution or water supply will need to consider tariffs and service regulation, the role of regulatory agencies, and how these interact with the terms of the PPP contract;and[55]
  • Other rules affecting the operation of private firms: These also apply to PPP companies, and they should be taken into consideration when defining PPP projects and processes:-

o Environmental law and regulations;

o Laws and regulations governing land acquisition and ownership;

o Licensing requirements, particularly for international firms;

o Tax rules;

o Employment law; and

o Accounting standards.

It is good practice to review the legislative and administrative context to ensure that it is not incompatible with key elements of the objectives of the PPP framework. For example, in both Brazil and India there are taxation rules which discriminate against private sector subcontracting of operations and maintenance in PPPs (see box 2.4). Similarly, discrimination against foreign investors (for example, convertibility, confiscatory taxes on repatriation of equity) should be reviewed in order to attract the participation of international/global investors and developers.

BOX 2.4: Distortionary Taxes of Operations and Maintenance (O&M) Contracts

The tax treatment of the project company, commonly referred as a SPV (discussed in chapter 5.3.) established by project consortiums to deliver a PPP project, favours one type of contracting structure which may not be the most efficient. Such is the case in Brazil and India.

· Brazil: Under the turnover tax system in Brazil, the operating cost of the Curitiba Metro in the state of Parana increases by an estimated 6 percent per year in cases in which there is a separate O&M contractor through a PPP. This compares with the fiscally neutral position in which the O&M is carried out by the Concessionaire

· India: The subcontracting of O&M services attracts services tax (currently at 12.36 percent, and set to increase to 14 percent), while the same service of O&M if performed by the concessionaire directly does not attract the services tax. This means that subcontracting becomes a burden on the PPP project, affecting its financial viability. Instead of subcontracting to specialists to mitigate risk and improve the quality of project delivery, the concessionaire is instead incentivized to undertake the works.

Sector regulation may also constrain how the government may develop and manage PPP contracts. For example, concessions for utility services may be governed by public utility regulation. Essential infrastructure may be subject to open access rules under competition law.

 

[55] Groom, E., Halpern, J. and Erhardt, D. (2006) Explanatory Notes on Key Topics in the Regulation of Water and Sanitation Services. World Bank Group, Bank Netherlands Water Partnership, Public Private Infrastructure Advisory Facility.

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