i) Limitations of Public Private Partnership

• Not all projects are feasible (for various reasons: political, legal, commercial viability, etc.)
• The private sector may not take interest in a project due to perceived high risks, lack of technical, financial, or managerial capacity to implement the projects.
• A PPP’s projects may be more costly unless additional costs (due to higher transactions and financing costs) can be offset through efficiency gains.
• Change in operations and management control of an infrastructure asset through a PPP may not be sufficient to improve its economic performance unless other necessary conditions are met. These conditions may include appropriate sector and market reform, and change in operational and management practices of infrastructure operations.
• Development, bidding, and ongoing costs in PPP projects are likely to be greater than for traditional government procurement processes – the government should therefore determine whether the greater costs involved are justified. A number of the PPP and implementation units around the world have developed methods for analyzing these costs and looking at Value for Money, e.g., UK Treasury. For a broader discussion of Value for Money, go to Financing.
• There is a cost attached to debt – While the private sector can make it easier to get finance, finance will only be available where the operating cash flows of the project company are expected to provide a return on investment (i.e., the cost has to be borne either by the customers or the government through subsidies, etc.)
• Some projects may be easier to finance than others (if there is proven technology involved and/or the extent of the private sector’s obligations and liability is clearly identifiable), some projects will generate revenue in local currency only (e.g., water projects) while others (e.g., ports and airports) will provide currency in dollar or other international currency, and so constraints of local finance markets may have less impact.
• Some projects may be more politically or socially challenging to introduce and implement than others – particularly if there is an existing public sector workforce that fears being transferred to the private sector, if significant tariff increases are required to make the project viable, if there are significant land or resettlement issues, etc.
• There is no unlimited risk bearing – private firms (and their lenders) will be cautious about accepting major risks beyond their control, such as exchange rate risks/risk of existing assets. If they bear these risks, then their price for the service will reflect this. Private firms will also want to know that the rules of the game are to be respected by the government as regards undertakings to increase tariffs/fair regulation, etc. Private sector will also expect a significant level of control over operations if it is to accept significant risks.
• Private sector will do what it is paid to do and not more than that – therefore incentives and performance requirements need to be clearly set out in the contract. Focus should be on performance requirements that are output-based and relatively easy to monitor.
• Government responsibility continues – citizens will continue to hold government accountable for the quality of utility services. Government will also need to retain sufficient expertise, whether the implementing agency and/or via a regulatory body, to monitor and evaluate the PPP arrangements, to carry out its own obligations under the agreement, to monitor the performance of the private sector, and to enforce its obligations.
• The private sector is likely to have more expertise and after a short time have an
  advantage in the data relating to the project. It is important to ensure that there are
  clear and detailed reporting requirements imposed on the private operator to reduce
  this potential imbalance
•  A clear legal and regulatory framework is crucial to achieving a sustainable solution
  (for more, go to Legislation and Regulation)
• Given the long-term nature of these projects and the complexity associated, it is difficult to identify all possible contingencies during project development and events and issues may arise that were not anticipated in the documents or by the parties at the time of the contract. It is more likely than not that the parties will need to renegotiate the contract to accommodate these contingencies. It is also possible that some of the projects may fail or may be terminated prior to the projected term of the project, for a number of reasons including changes in government policy, failure by the private operator or the government to perform their obligations or indeed due to external circumstances such as force majeure. While some of these issues will be able to be addressed in the PPP agreement, it is likely that some of them will need to be managed during the course of the project.

(Any 4 points for 4 marks)

ii) Types of PPP

• Build Operate and Transfer: Here the private sector invests in the asset and will be granted the right to operate the asset for a specified period after which the residual asset is transferred to the public agency.
• Build Own and Transfer (BOO): Under BOO the private sector builds, possesses, and operates the facility and has control over profits and losses generated by the facility through time. This is similar to a privatization process except that the goods and services rendered remain public goods and services. For example, a private sector builds a bridge across a river, owned and operates it. The residual asset remains that of the private investor.
• Build Transfer and Operate: Under this arrangement, the private partner invests in building the asset and immediately concedes ownership to the public agency (usually because of the restricted nature of the asset) and the public agency transfers exclusive right of use to the private partner.
• Rehabilitate Operate and Transfer: The initial worn-out asset is provided by the public agency requiring the private partner to invest in revamping the asset and allowed to operate it for a specified period and residual asset transfer to the consolidated fund.
• Design Build Operate and Transfer: The private sector provides financing and design, then builds, possesses, and operates the project. The public partner only provides funding while the project is being used or is active.
• Service Concession: In this arrangement, the public agency engages a private company to operate and maintain the facility for a specified period of time under certain contract terms. Here the public agency concedes all exclusive ownership rights to the private company without transfer of ownership. While ownership remains with the public agency the private partner possesses owner rights over any addition incurred while being its own and operated under its domain.
• Maintain and Operate: Under this arrangement, the public agency invests and owns the project and the private company is responsible for operating and maintaining the project or asset for an agreed consideration. The residual asset remains the property of the government agency.

(1 ½ marks (½ for stating and 1 for explaining) each for any 4 types = 6 marks)