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PPP Introduction and Overview

19. Introduction to the PPP Framework Concept and Initial Framework Considerations. Private Sector Concerns About Frameworks and Markets.

A framework is defined by the Oxford English Dictionary as “a basic structure underlying a system, concept or text”.

The Spanish dictionary defines framework as “limits or circumstances that surround an issue or a period of story”.

PPPs involve complex process management on a number of fronts (political, fiscal, financial, and social) that require a programmatic approach in order to establish PPPs as a recurrent option for appropriate projects. As in any programmatic action, or any action or approach that has a long-term aim, a framework is necessary.

This PPP Guide advocates a programmatic PPP approach to extract and protect overall VfM from the PPP tool as a strategic option to procure infrastructure. Most countries with a successful PPP programmatic approach have built that program on a sound PPP framework. As described by the PPP Reference Guide, V 2.0 (World Bank, 2014), “establishing a clear PPP framework publicly communicates the government´s commitment to PPPs”. It also defines how projects will be implemented, helping to ensure good governance of the PPP tool, that is, “promoting efficiency, accountability, transparency, decency, fairness, helping to generate private sector interest and public acceptance on PPPs”.

The complexity of the PPP tool makes it highly advisable to standardize processes and documents, which will save time and effort in the preparation and implementing/structuring of tasks that for PPPs are extraordinarily demanding. It is also advisable to homogenize those processes to ensure that the conditions to procure the PPP are met (for any PPP within a specific jurisdiction).

The nature of PPPs, in the sense of committing budget resources in the long-term (most of the time, beyond the term of a legislature) under the expectation of extracting higher efficiency in net terms, clearly requires a proper and specific governance approach as a responsibility of the government in managing public resources.

In addition, and especially when adopting (as advisable) a programmatic approach, it is paramount to attract and retain the interest of the private sector. This requires the existence of a proper and strong governance approach by means of a stable and durable framework.

The framework must be underpinned by official documents that bind the participants who will operate under the framework. Some authors even define the framework by describing the very documents and laws that de-limit and govern the framework.

Different countries have different approaches to framework documentation. The approach chosen will mainly depend on two factors: the legal system or legal tradition of the country (with the main difference consisting of countries with common law systems versus countries with civil code traditions), and the degree of development in terms of PPP experience and use (countries with a tradition in PPPs, usually in the context of concession-type projects versus countries with no tradition or previous experience).

The PPP framework is sometimes described as a group of sub-frameworks for specific elements surrounding the governance of PPPs. In this case, the PPP policy or PPP legal framework is another element of the framework. See also box 1.31.

BOX 1.31: What Constitutes a Framework according to Other Guides[114]?

· According to the WBRG, the PPP framework is constituted by the policy and legal framework. There are three main components or areas of regulation: process and institutional responsibilities, public financial management, and PPP program governance.

· The guide Attracting Investors to African PPPs (World Bank, 2009) proposes four areas when describing what constitutes a PPP framework: PPP policy, legal framework, investment framework (including approval process), and operating framework (which deals with the management abilities and work through the whole process).

 

This PPP Guide uses the definition of a framework proposed by the Public Private Partnerships Reference Guide V2.0 (World Bank 2014): the “PPP framework means the policy, procedures, institutions, and rules that together define how PPPs will be implemented — that is, how they will be identified, assessed, selected, budgeted for, procured, monitored, and accounted for”.

The following sections explain what constitutes the framework (section 9.1), reflecting on issues in the implementation and documentation of the framework (sections 9.2 and 9.3), and finally explaining the perspective of the private sector and how frameworks and programs are relevant to significantly engage the PPP industry in a competitive and stable manner.

What Constitutes a Framework for the Purpose of this PPP Guide? Contents or Areas of a Framework.

The framework that governs the PPP tool as a method for procuring and managing infrastructure has a number of elements which provide their own limits or rules.

The following elements are related to the main characteristics of the PPP as a procurement method.

  • PPP procurement relates to public procurement and therefore may be limited by procurement rules;
  • A PPP as an option for delivering and managing public assets and public services will be governed by public contract rules;
  • A PPP involves a private economic operator managing a business which will be subject to the same laws as any other private business;
  • PPPs are an alternative that provide long-term financing for the government, substituting for the public sector and general budget as the provider of funds to meet the financial need. Therefore, the process has to be integrated into fiscal management, control rules, or policy measures;
  • As a private finance area, it must meet private investor expectations throughout the process as well as from the framework perspective. This also implies the need for proper communication and public relations policies.
  • PPPs pertain to the arena of project decisions and project management which require a process management framework or operational framework; and
  • A PPP framework typically allocates responsibilities to different agents and departments within a government; therefore, it refers also to institutional architecture and organization.

Many of the elements and factors that influence the overall governance of PPPs overlap with each other, and some of them might be categorized in the same group.

To define in precise terms the components or elements of a PPP framework is an arbitrary thing. However, for the sake of a common ground for knowledge and understanding, this PPP Certification Guide proposes the following main elements as those which in essence constitute the PPP framework.

A PPP framework “necessarily” includes the following elements:

1. A set of strategic and foundational outlines that will both rule and de-limit the overall use of the PPP as a procurement option. This includes the overall objectives for using the tool, the scope (which type of projects and which sectors), and the “implementing principles” (how PPPs may be implemented), including procurement/tender process regulations. Some countries opt for specific laws to set out these strategic and implementing principles (these are commonly referred to as PPP laws), whereas other countries opt for specific policy documents (these are commonly referred to as PPP policies). In some countries, no specific PPP law or policy is required. In all cases, there will be a broad range of laws that may have a practical influence on the use and control of the PPP option (for example, sectoral laws), and all of these laws together form the PPP legal framework. There may also be a broad range of government policies that affect the use of the PPP option, in addition to any specific PPP law or PPP policy document;

2. A set of rules and procedures to identify, prepare, and assess/appraise the projects, develop the PPP contract structure and RFP structure, as well as the management of the tender process and contract management. These rules and procedures are commonly referred to as the operational framework or process management framework. Some elements of these rules and procedures may also be regarded as part of a public investment framework or planning framework, and other labels may also be applied. The rules and procedures are usually in the form of guidelines with different levels of enforceability;

3. A set of rules and/or procedures to control aggregated exposure to PPPs (and also influence the investment process, in terms of approvals). These are commonly referred to as the fiscal management framework;

4. An architecture within the government (for example, including legislative power) that may affect the management and governance of the PPP option. This is commonly referred to as the institutional framework; and

5. A range of other rules, procedures and responsibilities regarding other governance related matters, such as overall quality assurance of the PPP policy and projects, transparency matters, and communication.

In some cases, certain elements of the framework are also referred to as the government’s “PPP Program”.

These areas or sub-frameworks overlap significantly. For example, there is a clear potential overlap between the overall policy framework and the role of the PPP legal framework itself. Similarly, the institutional framework influences the operational rules and procedures for managing the PPP process, and the institutional responsibilities and architecture affects the system or approach for managing and overseeing the fiscal consequences of the PPP tool. Additionally, fiscal management will have influence in the specific project process as well.

How to implant or document a framework. Different legal traditions.

Regardless of whether we talk specifically about the general policy framework or about the framework in overall terms, rules (as in a framework) and procedures have to be implanted in a document that is binding, either through legal enforceability or through robust and consistently applied government processes.

This PPP Guide is intended to provide a reasonable standard of knowledge of the PPP concept and subject matter, proposing valid concepts and knowledge foundations for any country, or in a global sense. It is also necessary to recognize that in many aspects of PPP there are significant differences between countries that cannot easily be changed, as they are imposed by other general laws or very well established traditions. Therefore, it is also paramount to understand and appreciate how and why PPP frameworks may vary in different countries.

In this sense, the paramount factor that influences relevant differences, especially in terms of a PPP framework, is the legal tradition of the respective country.

This PPP Guide considers two main legal systems: those that are based on the common law tradition and those based on civil codes. In general and broad terms, when documenting PPP frameworks, the former type of jurisdictions relies more on “policy statements” or policy documents, whereas the latter relies significantly on laws.

Legal frameworks or frameworks based on laws are regarded as advantageous in terms of stability, although the converse of this is that they also introduce a negative factor — rigidity.

According to some guides, we may find a third option which is to implant or construct the framework in documentary terms: in other words provide definitive guidelines (World Bank 2014, page 71). However, it should be recognized that many such guidelines, particularly in civil code countries, are developed by relying on laws, being within the law, or being under a regulatory development of a law. In other cases, guidelines (in the form of “manuals” or “handbooks”) will not be part of a law or constitute a law. These can be changed from time to time, although the existing version is currently binding on public officials and PPP practitioners.

Likewise, in many common law countries, the policy is supplemented by guidelines which are often considered to be binding on the public officials and PPP practitioners unless approval to depart from the guidelines is given through the PPP approval and governance process.

The framework is already there, but must be refined or adapted for PPPs.

To a significant extent, the basics of the framework are the same as other procurement methods, for example, any jurisdiction that has established reasonably stable rules to procure public works and services. They have environmental authorities to rule on and control environmental impacts of infrastructure development. They have fiscal authorities/responsible departments to participate in decisions and approvals that may constitute public expenditures that affect or commit budget resources.

There are PPP frameworks that are cohesively developed, in a specific and comprehensive law or a comprehensive policy document, which covers:

  • What projects may be developed as PPPs;
  • How the contract and procurement process will be implemented;
  • What has to be done to prepare and appraise the project before launching; and
  • Who has the power to decide on what matters within the decision and approval process and thereafter during the contract life.

At the other extreme, there are jurisdictions where PPPs are simply accommodated within the existing general procurement laws. In these countries, government-pays PPPs are usually a novelty and are embraced on the basis that they can be regulated through the same rules as traditional concessions (that is, user-pays). In these cases, procurement rules may be just those generally applicable for any procurement, with no specific conditions prescribed for PPPs, or there may be rules regarding procedures and processes to assess projects, which are regulated regardless of form. Either way, there are no specific rules regarding long-term fiscal management of PPPs, and so on.

Regardless of how the framework is documented, PPPs (as an alternative option to procure infrastructure and services) involve significant challenges which demand specific treatment in many areas.

Therefore, the framework must, in many areas (legal/procurement, process management, institutional issues, fiscal management), be adapted to specifically cover PPPs or to embrace PPP specifics (see table 1.8 below).

Table 1.8 assumes that the existing framework allows the private sector to operate a public asset in some form, and that regulations exist on the transparent procurement of public works and services. The table explains the changes that may be necessary or useful in order to adapt the existing framework to accommodate PPPs.

The existence of a framework will not, in itself, ensure success, as the success of the PPP tool can only be measured through projects. Governments should carefully consider when to develop a framework and announce a program because the development of a framework should be promptly followed by the launching of a project or the announcement of a selection of projects, those that may be regarded as the “pathfinders” or pilot projects. Examples of this approach and clear policy management can be found in India and Mexico[115].

TABLE 1.8: Adapting Existing Frameworks to Enable PPPs – Either Recreating the Framework Document(s) or Amending Existing Diverse Legislation or Policies

Area

Changes and adaptations needed

Necessary or useful?

Legal framework procurement (allowed contract types and tender process)

Adapt the framework to embrace a contract form that encompasses multiple areas of obligations (DBFOM). This is more an issue for civil code countries rather than for common law countries.

Specifically, cover or include a DBFOM type of contract where revenues are in the form of government payments for a service.

In addition, it is good practice for the framework to include tender models based or centred on dialogue and interaction with the prospective bidders. This is important for complex projects that require a deeper interaction and feedback with a selected list of candidates.

Necessary.

Selection, preparation and/or appraisal

Guidelines to assess and select projects across the whole government and at all levels of administration (central, regional and/or local) are very useful, and those traditionally used or existing for any public procurement may be valid.

However, PPPs will require specific guidelines so as to protect affordability, commercial feasibility and Value for Money.

Necessary for proper governance and if using PPPs in a programmatic way.

Fiscal management (aggregated exposure of a PPP)

Pertains especially to government-pays PPPs. The government is committing long-term budgetary resources which may be a new issue in procuring public works.

 

This requires some degree of discipline (governance) to control the aggregate exposure.

 

Many countries only rely on public debt limits and/or public debt accountability, while accepting that some government-pays type of projects may be regarded as private financing (see previous heading).

 

This approach may be misleading and ignore the fact that “government-pays” projects involve a long-term commitment of budgetary resources, regardless of whether liabilities in relation to the project are recognized as public debt.

 

Appropriation: the long-term budgetary commitment may be a legal issue in some countries, as sometimes the budget may not be committed in advance (on a long-term basis).

Necessary for proper governance and if using PPPs in a programmatic way.

Institutional framework and architecture

A PPP as a procurement model, even if it is under a programmatic /strategic approach, does NOT require new agents or positions within the administration. The main roles (procuring agency /promoter of the project, the treasury/budget responsible, general attorney or similar figure) are the same as in any procurement.

However, due to the complexity of the tool (especially in terms of the process to select, prepare/appraise and implement the contract), it is useful and quite common (regarded as good practice) to create specialized bodies or agencies or at least teams inside the government architecture. Their purpose is to lead most of the assessment and preparation tasks or to support other bodies of the government in doing so.

Very useful for proper governance and if using PPPs in a programmatic way.

The need will depend on the level of work/relevance of the PPP as a tool and size of the potential pipeline of the specific government /administration.

 

BOX 1.32: Key Ideas about PPP Frameworks and Programs<br />
• The framework is about governance.<br />
• The PPP framework has several dimensions: process management, general policy, fiscal management, and ex post evaluation.<br />
• The PPP framework diminishes the risks of improper decisions and poor management of projects.<br />
• A proper framework also facilitates smooth processes, saving money and time.<br />
• The framework relates to the need to attract investors and retain their interest in the long term (reliability and good practice).<br />
• The foundations of a PPP framework — especially in terms of the legal and institutional framework — are originally the same as for any public procurement, but there is a need for significant adaptation.<br />
• The development of a framework should be accompanied by the prompt launching of “pathfinder” projects (one or more initial projects undertaken to demonstrate the application of the framework).<br />

Private sector/prospective bidders also care about the framework and programs.

As noted in section 8, the private sector is not only interested in the theoretical commercial feasibility of a single project (adequate risk/reward ratios and bankability), but it is also interested in and concerned about the entire PPP process in most if not all its dimensions.

Sound frameworks are the best way to ensure project success, so the private sector will also care about the existence of a proper framework. But to access the full benefit of the PPP option, it has to be addressed under a programmatic approach. Using PPP programs is not only directly beneficial from the perspective of general public management, but is of paramount importance in accessing the PPP industry. The purpose is to generate the interest of as wide a number of prospective investors as possible, and especially the interest of and access to reputable and experienced PPP developers[116].

The private sector (the PPP industry) is interested in markets rather than “projects”, therefore the following points are important.

  • Private developers are interested in markets that provide a pipeline, that is, multiple opportunities that generate economies of scale in terms of bid preparation and management of tenders and projects;
  • Consistency is important. A framework helps ensure that different projects are structured and managed in a consistent way, which lowers costs for the private sector and builds confidence in the market. In the absence of a robust framework, different ministries may act in inconsistent ways, which can be frustrating and result in the loss of some bidders;
  • The private sector will be concerned about the government’s ability to manage a pipeline in a programmatic manner. This is not just about the reliability of the specific project, but also about the reliability of the government as the manager of a pipeline and its use of PPPs as a strategic tool in the long term; and
  • The private sector will be concerned about such issues as long-term fiscal sustainability, political commitment to PPPs, social acceptance of the tool, talent/experience retention, and a minimum legal framework providing the ability to procure PPPs. Many of these affect the feasibility and readiness of each specific project, but they also affect the sustainability and reliability of the PPP tool and the existence of a proper pipeline.

The first three points relate to the concept of PPP programs[117]. In most countries, PPP programs make slower progress than they should, not due to a lack of finance or failure to meet commercial feasibility criteria, but because there is an insufficient quantity of suitable, well-prepared PPP projects. Therefore, having such projects is of paramount importance to governments wishing to promote infrastructure development through PPPs, as the inability to attract world-class players will only make them look elsewhere for opportunities. The result is that these governments may end up with unwanted participants and/or with programs highly exposed to corruption and therefore, ultimately, with failed projects.

To consistently capture the private sector’s long-term interest is paramount for the success of PPPs as a programmatic tool or route to boost infrastructure development. This demands a proper and clear PPP framework in all the main areas of PPP management.

The programmatic approach may create a virtuous circle based on one essential factor: a successful track record will increase the interest of the industry in projects, and more interest will provide more feedback that will help to improve the framework and PPP approach.

Table 1.9 presents a non-exhaustive list of conditions that a PPP framework and related programs should meet in order to gain the interest of the industry. This list assumes that the PPP program and the projects (and therefore the market) do not have material restrictions on access to long-term finance, and/or that country risk factors do not represent an unavoidable obstacle to attract foreign direct investment (FDI), or that program is adapted to the respective restrictions (as explained in section 5.6).

TABLE 1.9: Features Demanded by World-Class Private Sector Players Related to the PPP Framework, PPP Programs (and other characteristics of an attractive and well-regarded PPP market)[118]

Factors to succeed with a programmatic approach or strategic use of PPPs

Description

How the framework and policy may increase the attractiveness of the market

Relevant or significant (and identifiable) pipeline

There is market evidence of a significant pipeline or significant infrastructure needs/gap.

The framework and the policy can ensure there is a more structured and organized pipeline by establishing plans and/or PPP programs with a clear indication of the role of the PPP tool.

 

This must also be proactively communicated to the industry (communication management is a paramount part of the operational or investment framework).

Track record

There is a successful history of PPP projects, evidencing clean and fair resolution of disputes and other crises.

A successful track record may only be built by means of a proper framework and optimum management of risks and crises.

 

Beyond the project preparation, successful contract management requires a proactive attitude which should be institutionalized within the PPP framework (in the area of PPP process management).

 

For new PPP entrants or countries starting to develop their PPP approach, it is paramount to be scrupulous in project selection and management of the preparation and procurement process so as to avoid failures. It is also critical to work within a robust framework.

 

Strong PPP process framework: quality in standards and approaches to feasibility and structuring, management capacity and reliability in time and decisions

The management of multiple PPPs and the successful development of a program requires a clear operational framework that smooths the process, diminishes the risk of failure, and especially (from the private point of view) reflects commercial feasibility and private sector concerns. Proper management of PPP projects will produce long-term confidence in the industry beyond the particular successful PPP project in process.

This is one of the essential parts of a PPP framework that relates especially to the pre-tender process and management of the tender. These should rely on consistently applied best practice guidelines and standards, and be clearly identifiable by the private sector.

 

It is also dependent upon the institutional architecture.

Clarity in/of the legal framework in terms of PPP legality, procurement transparency and enforceability[119]

  • Transparency (access to reliable information, and transparent and equitable selection criteria and process).
  • Enforceable rights.
  • Dispute resolution process.
  • Appropriation risk.

Refers to the policy and legal framework, especially to procurement procedures, transparency and contract standards.

Strong political commitment and support

The presence of a "political champion" — a senior minister who strongly advocates the PPP program — matters to the PPP industry.

 

Relevant and complex projects should show clear signs of commitment by means of clear risk retention and sharing positions, and/or the mobilization of institutional finance tools. The policy and the PPP framework and programs should be accepted politically as widely as possible to gain reliability (which usually also depends upon the public acceptance of PPP programs).

Political championship is a matter of good practice in managerial frameworks, which is only possible with clear and sound PPP process guidelines.

 

General political support is only possible under a well explained and communicated PPP policy and programs. This should rely upon proper communication management which is also a sub-element of the PPP framework.

Public acceptability

International and local investors will show resistance to invest in PPPs in countries where there is still a negative perception of PPPs. This is apart from any particular concerns there may be about the acceptability of a specific project infrastructure.

Legal and/or policy frameworks in the sense of established and solid guidelines and a thoughtful/meditated approach to PPP requires public acceptance of the tool. PPP programs and specific projects may raise potential public opposition, which again is dealt with through proper communication management.

 

Transparency and accountability are paramount factors to gain public confidence: application of public audits, disclosure of project performance information, and so on has to be facilitated or institutionalized within the PPP framework.

Fiscal sustainability and rational management of the tool

The private sector may be concerned about a relaxed attitude to long-term aggregate exposure to PPPs, especially as this will be a sign of projects that will be improperly selected and rushed.

 

When assessing a government's credit rating, rating agencies will look at future liabilities under PPP contracts and factor these into their consideration. The government's credit rating in turn is considered by PPP investors and financiers when assessing their required equity return or interest rate.

 

In some countries, governments have needed to renegotiate PPPs because they had committed to excessive aggregate exposures. This is not a desirable outcome as it creates uncertainty for the private sector as to whether they will obtain the deal that they negotiated.

 

This is in essence that part of the PPP framework related to long-term aggregated management of fiscal exposure.

 

[114] See “defining PPP framework” in the World Bank PPP Reference Guide Module 2 (pages 66-68) and “setting the framework” in Attracting Investors to African PPP (World Bank,, 2014) (pages 13-18).

[115] World Bank - Farquharson, Torres de Mästle, and Yescombe, with Encinas (2011) include a case study on the “Hospital del Bajío” (page 50), illustrating how the government developed the PPP policy for health projects, defined a PPP health program, and prepared the first health PPP so as to launch it promptly.

[116] An example of a well-regarded program is the National Highways Development Program in India, which is described in World Bank - Farquharson, Torres de Mästle, and Yescombe, with Encinas (2011). A brief description of some relevant PPP programs may be found in WEF (2010), page 17 (Mexican real toll roads program), and page 18 (Chilean PPP road program). See also the already cited case study on the El Bajío Hospital which relates to the PPP health program in México.

[117] EPEC explains the relevance of the program approach and its main features. Examples of European PPP programs can be found in A Programme Approach to PPPs. Lessons from the European Experience (EPEC, 2015).

[118] The “Infrascope” series produced by the Economist Intelligence Unit provides intelligence on factors and criteria for considering the capacity of a country to develop PPP projects and programs, not necessarily reflecting the private perspective but with a broader view. Evaluating the Environment for PPPs in Latin America and the Caribbean (February 2013), commissioned by FOMIN and sponsored by the Government of Spain, provides a general view on the evolution and degree of development of the countries of the region, comprised of around 19 indicators grouped in 6 categories. The series also includes analysis of the Asia-Pacific region and Eastern Europe and the Commonwealth of Independent States (CIS). 

[119] Regarding specifically the legal and regulatory framework of a country market, How to Engage with the Private Sector in PPPs in Emerging Markets (World Bank 2011) provides, on page 17, an extensive list of more concrete questions to be asked by investors and lenders.

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