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PPP Introduction and Overview

12.4. Other Private Involvement in Public Infrastructure and Services

Privatized Companies and Companies operating in a liberalized and regulated market — “Regulated Investor owned utilities”.

There is often confusion between privatization and PPPs (especially with user-pays PPPs). But there is a clear difference between these two forms of private sector engagement. See table 1.1.

As proposed earlier, in its true sense, privatization involves the permanent transfer to the private sector of a previously publicly-owned asset and the responsibility for delivering a service to the end user, whereas a PPP necessarily involves a continuing role for the public sector as a “partner” in an ongoing relationship with the private sector (World Bank - Farquharson, Torres de Mästle, and Yescombe, with Encinas 2011).

In many countries (including Australia, France, the United Kingdom [UK], the US, and others), utility type infrastructure (such as electricity generation and distribution systems, and telecommunication systems) can be owned outright by private entities (rather than being subject to concessions) in schemes that may be regarded as “regulated investor-owned utilities”. Although these schemes also inherently grant to the investor the right to charge users (as in a user-pays PPP), they are not procurement methods. The public sector is not contracting the private agent for the specific purpose of developing and managing a public asset, but granting the private sector the right or authorization to conduct a business under certain regulated conditions for an unlimited period of time.

TABLE 1.1: Privatization versus PPPs

Privatization

PPP

The private sector owns the full property of the asset.

Normally the legal owner of the asset is the government and the asset has to be handed back when the contract expires.

There is no contract in strict terms, but authorizations and conditions are set in the regulation of the respective market sector.

There is a detailed contract specifically ruling the rights and obligations of each party.

Time to operate the asset is unlimited.

Time is limited by contract.

Privatization involves no strict alignment of objectives since it usually means that the government is not involved in the output specification of the privatized entity. It is of course the private providers that set the quality and quantity of the goods delivered, while they also specify the design and set the price (possibly after negotiating with their clients). (OECD 2008).

 

 

The government specifies in detail both the quantity and quality of the service that it requires.

The privatized entity will have much more liberty to set the price to be charged to users.

 

The company will receive the agreed price for the service (government-pays) or user-charges (in user-pays PPPs) which will be defined by government or agreed by the contract with no or very limited flexibility.

 

 

Some typical examples of privatization are in the telecommunication and energy sectors, when a government decides to liberalize the specific sector. The government usually owns a monopoly, and when liberalizing the market (that is, opening the market service to regulated competition), it will sell the company to a private investor (or sometimes to different investors after splitting the asset to boost competition).

In such liberalized markets where operators are subject to specific regulation, no contracts between the government and the operators are required to develop further infrastructure. There is a natural incentive for each operator to further develop its assets, including infrastructure/networks, at its own risk.

Public Domain Concession and Public Authorizations for Investment and Operating Public Interest Infrastructure under Regulated Conditions

In addition to the privatization of existing assets in a regulated market, there may be specific infrastructure development projects where a private promoter is authorized to develop infrastructure or a plant, and operate the asset under regulated conditions, sometimes including subsidies and regulated prices.

An example of this may be an independent power producer of renewable energy, where the private party buys land and asks for authorization to produce wind energy under a subsidized system. There is neither a contract nor any direct requirement from the government to the developer, rather there are general regulatory conditions that allow the private party to sell the power to the system. Conversely, when there is a public counterparty that commits to pay for the power generated and intentionally launches a tender for DBFOM of the plant under specifications against the committed payment — usually under a long-term, off-take contract called a Power Purchase Agreement (PPA) — this is regarded as a PPP.

Other similar situations are those related to the concept of “public domain concessions” in some civil code countries. This is where the use of land is granted for a long term (potentially up to 99 years), but the use is limited to (for example) developing port facilities that will be operated under certain regulations and will revert back to the government after that period.

These arrangements are not PPPs because, similar to privatizations and other liberalized businesses related to public interest infrastructure, there is no contract and the government acts as a relatively passive regulator (unlike a PPP in which the government actively manages the contract).

Partial divesture of public operators

Finally, a distinct situation of private participation is private sector participation in the shareholdership of an existing public company/operator that has the responsibility of operating certain infrastructure. However, there is no contract (in the strict sense) between the government and the operator, private investor, or investors. These situations may be regarded as “partial privatizations”, and they are commonly structured through an initial public offering (IPO), with all or the majority of the privatized shares floated on the stock market. These situations do not constitute a case of PPP contracts, as there is no contract in the strict sense, sand private investors do not have any control of the service and operations delivered by the public company (an example being the partial privatization of the Spanish airport operator AENA in 2014).

Table 1.2 describes the most relevant of infrastructure procurement that have been discussed in this section and explains how they do or do not fit with the main features of a PPP contract.

 

TABLE 1.2: Features of a Private Finance PPP and What is Missed in Other Infrastructure Procurement Methods

 

PPP Feature

DB

DBOM

DBF

 

DBFOM / Concession (user pays)

DBFOM or DBFM / PFI (public pays)

1

Is implanted in a contract (between private and public parties)

Yes

Yes

Yes

 

Yes

Yes

1B

Long-term nature

No

Yes, normally

Sometimes

 

Yes

Yes

2

Includes DB and OM bundled

No

Yes

No

 

Yes

Yes

3

There is significant risk transfer over the asset life cycle

No

Sometimes

No (only construction risks)

 

Usually

Usually

4

Includes finance by private sector

No

No

Yes

 

Yes (under project finance)

Yes (under project finance)

5

Revenues are linked to performance and/or use

No

Sometimes (usually by means of penalties or liquidated damages

No

 

Yes (use)

Yes (performance / quality)

Note: DB= Design-Build; DBF= Design-Build-Finance; DBFM= Design-Build-Finance-Maintain; DBFOM= Design-Build-Finance-Operate-Maintain; DBOM=Design-Build-Operate-Maintain; PFI= public finance initiative; PPP= public-private partnership.

BOX 1.11: Key Points Summarizing Types and Forms of Private Participation in Public Infrastructure and Services

  • Private participation in infrastructure may be under public contract procurement (where the government remains the ultimate owner of the infrastructure and/or service, controlling the asset and/or service to different degrees with higher or lower private involvement in the asset cycle) or may be under liberalized and regulated conditions (liberalized markets and/or privatized assets and services such as telecommunications or energy in a number of countries).
  • Infrastructure contract procurement may range from traditional contracts for construction (B, DB and other similar forms) to wider and longer involvement by the private sector (DBOM and DBF), and to the widest scope where the private sector delivers and manages the infrastructure (and its potentially related services) under a public procurement contract (DBFOM and similar forms such as BOT and so on).
  • DBF contracts are regarded as an infrastructure PPP model in some jurisdictions. However, only DBOM and DBFOM (and similar forms such as BOT and so on) include the obligation for long-term maintenance to be bundled with the construction obligation. These are also usually the only contract forms in which remuneration is based on the performance of the asset.
  • DBFOM (or DBFM) contracts are the most typical form of private finance PPPs.
  • Variations of DBFOM and DBFM include joint ventures (public and private parties co-owning the project company with material participation by the public party in managing the business), and co-financing PPPs (where the government is directly financing a portion of the asset investment from its budget).
  • Joint ventures where the procuring authority (or a related government entity) controls the project company is referred to as institutional PPPs or “publicly-controlled PPPs”. This PPP Certification Guide considers that they may be properly regarded as PPP only when there is significant private equity investment in a joint venture.
  • One hundred percent public company structures or “public-public partnerships” are not considered proper PPPs.
  • Independent Power Producers (IPPs) operating under a Power Purchase Agreement (PPA) are a PPP case, similar in scope to a DBFOM.
  • The PPP concept is also applicable to the management of existing infrastructure and the operation of public services, where there are long-term contracts transferring risks and where the remuneration of the private partner is based on performance of the asset or service (availability and/or volume of use). This is sometimes used to “monetize assets” or to “refinance” the public investment, previously done through conventional construction procurement, in a sequence of DB (and later on, FOM) contracts (mostly in self-feasible user-pays PPPs).
  • A PPP should not be confused with a privatization, nor is the term PPP appropriate in the context of economic operators acting in a liberalized and regulated market (for example, electricity distribution companies acting in an energy market that has been liberalized and open to competition) as long as there is not a specific procurement to build and/or manage the asset for a limited period of time under a public contract with such a private operator.

 

 

 

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