Development of Policy, Legal, and Insitutional Framework for - ppiaf

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Development of Policy, Legal, & Institutional Framework for the PPP Program in Malawi Final Report III.B. Principles of Public-Private Partnerships Affordability to Consumers and Government Affordability to Consumers shall be assessed by conducting a Consumer Demand, Affordability, and Willingness to Pay Survey, which must be conducted by all Project Sponsors. The Survey does not have to be exhaustive, only an indication of how consumers are likely to respond to the services to be provided by the project, whether they will be able to afford the services if offered at projected prices, and under what service conditions they will be willing to pay those prices. When budget resources permit, independent consultants shall conduct such Surveys. Surveys are required because PPP projects must be demand driven. This is quite different from traditional procurement, in which Government makes decisions regarding the projects to be implemented and the prices to be paid. In PPP, the emphasis is on service delivery so consumer preferences dictate which projects will be implemented and what prices will be paid. The responsibility of Government is to respond to such consumer preferences, to the extent that resources permit, and leverage those resources by partnering with the private sector. Affordability to Government shall be assessed by determining whether the proposed PPP project is included in the Public Sector Investment Plan (PSIP) maintained by MoEPD, or fits within a category of projects defined as eligible for inclusion within the PSIP. Once it is determined that the proposed project can fit within the PSIP, the Ministry of Finance will be Government’s representative in determining what public resources will be committed to the project. The MoF contact point for this process will be the Debt Management Office’s Risk Management Unit. If the proposed PPP project is not listed in the PSIP, and does not fit within the kinds of projects defined in the PSIP to be appropriate for support by Government’s budget, the MoEPD is to be consulted (with technical assistance from the PPP Unit, if requested) for discussions on how the project might be included in the following year’s budget. This can be a very time-consuming process, and Project Sponsors contemplating a new project are cautioned to start the consultative process with MoEPD well in advance of performing detailed feasibility analysis. Allocation of Risks between the PPP Partners Risk allocation is at the essence of PPP. In traditional procurement, Government takes all the design and service delivery risks, while the private sector provider is responsible only for the construction and operational risks. In PPP, much of the design and service delivery risks are transferred to the private sector, and Government focuses on managing the risks that it is best equipped to manage, i.e. political risks. Similarly, the private sector partner manages the risks that it is best equipped to manage, i.e. commercial risks. In practice, the dividing line between political risks and commercial risks is not so clear. Some kinds of risk have to be shared, for example design and engineering risks when the preliminary design and engineering has been conducted by Government and the final design and THE INSTITUTE FOR PUBLIC-PRIVATE PARTNERSHIPS 20
Development of Policy, Legal, & Institutional Framework for the PPP Program in Malawi Final Report engineering has been completed by the private partner. Other risks may or not be shared depending on the policy environment, e.g. exchange rate risk. The guiding principle in allocating risks is that the role of Government is to ensure that the interests of all stakeholders are protected. That includes consumers, who are protected by the service standards, and also the private sector partner, for whom the protection of a “level playing field” must be provided. The role of the private sector is to deliver the services at the specified levels of quantity and quality, at prices consumers can afford. Quantity and quality of service delivery is known as the Service Delivery Standards. Prices necessary to maintain the Standards are defined by tariff formulae in the PPP contract, and are usually limited by an Investor’s Equity Financial Internal Rate of Return that has been agreed upon during contract negotiations. In PPP contracting, there are as many as three parties representing Government. The first is the Contracting Authority. This is the entity that executes the PPP agreement, and which has full responsibility for Government’s obligations under the agreement. The second is the Executing Agency. This is the entity responsible for implementing the acts for which Contracting Agency is responsible under the PPP contract. The third is the Regulator. This is the entity that serves to protect the interests of all stakeholders to the PPP agreement, i.e. Government, the private sector partner, and the consumers. There should be inter-agency written agreements that clearly convey the Contracting Authority’s right to legally obligate the other agencies to obligations they have in the PPP contract. The Regulator should be politically and financially independent. It is essential that the roles and obligations of these parties be clearly defined in the contract. Value for Money to Leverage Fiscal Resources From a fiscal budgeting standpoint, the concept of value for money is at the core of the PPP approach. It is difficult for Government to build and operate all required infrastructure and provide required services without private investment to leverage public fiscal resources. The concept of value for money is that the projects to be selected will be those that will provide the highest quantity and quality of service provision for a given amount of public expenditure. In evaluating bids for PPP projects, the focus is different from traditional procurement, which is to select the bidder that can provide the specified product or service at the lowest price. In PPP, the winning bidder should be the one that provides the highest quantity and quality of service delivery, given a particular level of public expenditure, not necessarily the bidder with the lowest cost to Government. For example, a bidder offering a high level of service delivery at the maximum level of Government investment allowed could prevail over a bidder that offered a significantly lower level of service delivery at a cost to Government that is less than the maximum allowed. III.C. Role of the National PPP Unit and PPP Nodes in PPP Projects An important aspect of the PPP program is that all stakeholders have a key role to play in the PPP project development process. While the National PPP Unit represents the nation’s key focus of expertise in PPP, the Government institutions that propose PPP projects play a critical THE INSTITUTE FOR PUBLIC-PRIVATE PARTNERSHIPS 21
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