A Public-Private Partnership as defined by the National Council for Public Private Partnerships is a “contractual agreement between a public agency (federal, state or local) and a private sector entity. Through this agreement, the skills and assets of each sector (public and private) are shared in delivering a service or facility for the use of the general public. In addition to the sharing of resources, each party shares in the risks and rewards potential in the delivery of the service and/or facility”. In effect, the key defining elements of a PPP is the focus on service delivery and a real partnership that involves the sharing of risks and rewards.
PPPs have been used for delivery of services worldwide in sectors like, power, education, roads, aviation and even in some specific segments of defence services like facility maintenance and simulators procurement/training.
A typical example of a PPP in Nigeria is the contractual agreement between FAAN and Bi-Courtney Aviation Services for the Build Operate and Transfer (BOT) of MMA2 domestic airport terminal in Lagos.
There are three main reasons that motivate governments to enter into PPPs for infrastructure and service:
Under a service contract PPP, the public sector hires a private company or entity to carry out one or more specified tasks or services for a period, typically 1–3 years. The public sector remains the primary provider of the infrastructure service and contracts out only portions of its operation to the private partner. The private partner must perform the service at the agreed cost and must typically meet performance standards set by the Public sector. Under a service contract PPP, the government pays the private partner a predetermined fee for the service, which may be based on a one-time fee, unit cost, or other basis.
A management contract expands the services to be contracted out to include some or all of the management and operation of a public sector infrastructure service (i.e. utility, hospital, port facilities etc.). Although ultimate obligation for service provision remains with the public sector, daily management control and authority is assigned to the private partner or contractor. In most cases, the private partner provides working capital but no financing for investment. The private partner is paid a predetermined rate for labor and other anticipated operating costs. To provide an incentive for performance improvement, the private partner is paid an additional amount for achieving pre specified targets. Alternatively, the management contractor can be paid a share of profits. The public sector retains the obligation for major capital investment, particularly those related to expanding or substantially improving the system.
Under a lease contract, the private sector is responsible for the service in its entirety and undertakes obligations relating to quality and service standards, except for new and replacement investments, which remain the responsibility of the public sector. The private operator provides the service at his expense and risk. The duration of the lease contract is typically for or above 10 years and may be renewable. Full responsibility for service provision is transferred from the public sector to the private sector and the financial risk for operations and maintenance is borne entirely by the private sector. The private sector makes lease payments to the public sector as contractually agreed. Furthermore, the private operator is responsible for losses and for unpaid consumers’ debts.
A PPP concession contract is one that makes the private sector concessionaire responsible for the full delivery of the specified infrastructure services in a specified area, including operation, maintenance, collection, management, and construction and rehabilitation of the system. Importantly, the private sector is responsible for all capital investments. Although the private sector is responsible for providing infrastructure asset, such assets are owned by the public sector even during the concession period. The public sector is responsible for establishing performance standards and ensuring that the concessionaire meets them. In essence, the public sector’s role shifts from being the service provider to regulating the price and quality of service. The concessionaire collects the tariff directly from the system users. The tariff is typically established by the concession contract, which also includes provisions on how it may be changed over time. In rare cases, the government may choose to provide financing support to help the concessionaire fund its capital expenditures. The concessionaire is responsible for any capital investments required to build, upgrade, or expand the system, and for financing those investments out of its resources and from the tariffs paid by the system users. The concessionaire is also responsible for working capital. A concession contract is typically valid for 25–30 years so that the operator has sufficient time to recover the capital invested and earn an appropriate return over the life of the concession. The public sector may contribute to the capital investment cost if necessary. This can be an investment “subsidy” (ie. viability gap funding) to achieve commercial viability of the concession.
BOT and similar arrangements are a kind of specialized concession in which the private sector or private sector consortium finances and develops a new infrastructure project or a major component according to performance standards set by the public sector. There are many variations of BOT-type contracts in the literature and in use. Under BOTs, the private partner provides the capital required to build the new facility. Importantly, the private operator is said “to now own the assets for a period set by the contract” —sufficient time is therefore allowed for the private sector developer to recover investment costs through user charges. The public sector may in some cases agree to purchase a minimum level of output produced by the facility to guarantee the private sector's ability to recover its costs during operation. BOTs generally require complicated financing packages to achieve the large financing amounts and long repayment periods required. At the end of the contract, the public sector assumes ownership but can opt to assume operating responsibility, contract the responsibility of the operations to the developer, or award a new contract to a new partner. The distinction between a BOT-type arrangement and a concession—as the term is used here—is that a concession generally involves extensions to and operation of existing systems, whereas a BOT generally involves large “greenfield” investments requiring substantial outside finance, for both equity and debt.
Key benefits of PPP