There are a few key characteristics of typical public-private partnerships that are worth understanding:
- Asset type
- Responsibilities of the private party
- Key actors
- Revenue stream
1. Asset type
PPPs either involve new assets—often called greenfield projects, or are used to transfer responsibility for upgrading and managing existing assets to a private company—known as brownfield projects.
2. Responsibilities of the private party
A central characteristic of a PPP contract is that it bundles together multiple project phases or functions. The functions for which the private party is responsible vary, and can depend on the type of asset and service involved, but usually include the following:
- Design: developing the project from initial concept and output requirements to construction-ready design specifications.
- Build or Rehabilitate: constructing a new asset and install equipment, or rehabilitating/extending an existing asset.
- Finance: financing all of part of the necessary capital expenditure.
- Maintain: maintaining the asset to a specified standard over the life of the contract.
- Operate: depends upon the nature of the asset and associated service:
- operation of the asset and provision of a bulk service to a government off-taker, for example, a bulk water treatment plant
- operation of the asset and provision of services directly to users, for example, a PPP for a water distribution system
- operation of the asset and provision of support services, for example, a PPP for a hospital where the private provider provides laundry, catering and janitorial services, but the government is responsible for the delivery of clinical services to patients
3. Key Actors
- Contracting agency: A national or local government, a government agency or other regulatory authority. The contracting agency will need to have the authority to grant the project to a private entity, and may or may not be the public body that oversees, manages and regulates the services provided over the long term. There will be contractual agreements between the contracting agency and the project company, such as a concession agreement, an implementation agreement, and/or a government support agreement.
- Project Company: A company created for the purposes of the PPP for the purposes of contracting with the Contracting Agency. The contracting agency may encourage the project company to include local investors in order to improve transfer of technology, and provide jobs and training to local personnel. Shareholders of the project company will often be both shareholder in the project company and a contractor to the project company, for example the construction contractor may also be a shareholder. This conflict of interest will need to be managed amongst the shareholders, the contracting agency and the lenders.
- Lenders: The financial institutions that lend to the project company. The profile of a lender group can range from project to project, and may include a combination of private sector commercial lenders together with export credit agencies, and bilateral and multilateral finance organizations. Funding (in particular refinancing) is sometimes provided by project bonds, sold on the capital markets, or by sovereign wealth funds and other financial intermediaries. The lenders will generally maintain their review powers over the project with the assistance of a specialist technical adviser. In addition to their loan agreements with the project company, the lenders may require that direct agreements be entered between themselves and each of the project participants.
- Multilateral development banks: Multilateral development banks are owned and funded by their member countries. Can participate in projects by providing advisory services or financial instruments, including equity investments, or loans to the government or providing guarantees or insurance products to cover project related risks, either through the government or directly the private party.
- Bilateral agencies: similar to multilateral agencies in purpose, approach and financial instruments, but are funded by only one nation. They are generally mandated to provide support to specific developing countries, in the form of debt or equity investment.
- Export credit agencies: established by a given country to encourage explicitly the export of goods and services by its nationals. The can provide financing, insurance or guarantees for the goods and services exported by its country nationals. This financing is often significant, up to or exceeding 85 per cent of the total price of the export.
- Offtake purchaser: an entity (often public) that promises to purchase the use of the project or any output produced in order to divert market risk away from the project company and the lenders. For example, a publicly-owned utility agreeing to purchase power supplied by the project company, by means of a power purchase agreement, that requires the offtake purchaser to pay for a minimum amount of the project output or for all fixed costs no matter how much output it takes, thereby creating a secure payment stream.
- Input supplier: the entity that assumes the supply risk for an input necessary for the operation of the project, by ensuring a minimum quantity of input is delivered, at a minimum standard of quality and at a set price. Only certain types of projects will an input supplier, others will rely on market availability of inputs or may not need inputs at all (e.g. toll roads). Still others will require a service rather than an input, such as the removal of sludge from a waste water treatment facility.
- Construction contractor: The contractor that designs, builds, and commissions the project. This task is generally undertaken on a turnkey basis, placing completion and performance risk on the construction contractor.
- Operator: the entity that operates and maintains the project over an extended period, often from completion of construction, or the first completed section, until the end of the project period. The project company will look to link the operator's payment to the operator's performance of the project as much as possible but will be limited by the operator’s willingness to bear the risk of operation cost or actual output. These and other matters will normally be dealt with in an operation and maintenance (O&M) agreement.
4. Revenue Stream
The private party can be paid by collecting fees from service users, by the government, or by a combination of the two—with the common, defining characteristic of PPP that payment is contingent on performance:
- Under user pays PPPs: the private party provides a service to users, and generates revenue by charging users for that service. These fees (or tariffs or tolls) can be supplemented by subsidies paid by government, which may be performance-based (for example, conditional on the availability of the service at a particular quality), or output-based (for example, payments per user)
- In government pays PPPs: the government is the sole source of revenue for the private party. Government payments can depend on the asset or service being available at a contractually-defined quality (availability payments). They can also be output-based payments for services delivered to users—for example, a shadow toll road that is free for users, but for which the government pays a fee per driver to the operator.