PUBLIC PRIVATE PARTNERSHIPS AND BUILD, OPERATE AND TRANSFER (BOT ...

PACIFIC ISLANDS FORUM SECRETARIAT
FORUM ECONOMIC MINISTERS MEETING
Honiara, Solomon Islands
03-05 July 2006
OUT OF SESSION PAPER
PUBLIC PRIVATE PARTNERSHIPS AND BUILD, OPERATE AND
TRANSFER (BOT) AND SUCHLIKE SCHEMES
The attached paper, prepared by the Forum Secretariat, presents information on Public-
Private Partnerships, and the use of Build, Operate and Transfer (BOT) and suchlike
schemes as arrangements within these, as alternative options for infrastructure financing
and highlights regional and international experiences - in particular Fiji and South Africa
- in this regard.
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PACIFIC ISLANDS FORUM SECRETARIAT
FORUM ECONOMIC MINISTERS MEETING
Honiara, Solomon Islands
03-05 July 2006
PUBLIC PRIVATE PARTNERSHIPS AND BUILD, OPERATE AND
TRANSFER (BOT) AND SUCHLIKE SCHEMES
Purpose
This paper presents information on Public-Private Partnerships, and the use of
Build, Operate and Transfer (BOT) and suchlike schemes as arrangements within these,
as alternative options for infrastructure financing and highlights regional and
international experiences - in particular Fiji and South Africa - in this regard.
Background
2. At FEMM 2005, Ministers requested, amongst other things, that the Pacific
Islands Forum Secretariat (PIFS) compile a set of case studies and practical experiences,
from within and outside the region, for the information of members in the use of “Build,
Operate and Transfer” (BOT)/“Build, Own, Operate and Transfer” (BOOT) and suchlike
schemes.
3. Given that BOT/BOOT schemes are designed and implemented as Public-Private
Partnership (PPP) arrangements, the approach adopted in covering this issue has been to
focus on BOT/BOOT schemes within the broader context rather than as a separate issue.
Issues
Public-Private Partnerships
4. The private sector is playing an increasingly crucial role in the financing and
provision of services that were traditionally the domain of the public sector. One of the
key reasons is that governments are unable to cope with the ever-increasing demands on
their budgets. Most infrastructure expenditures in developing countries have been funded
directly from fiscal budgets but several factors such as macroeconomic instability and
growing investment requirements have shown that public financing is volatile and, in
many countries, rarely meet crucial infrastructure expenditure requirements in a timely
and adequate manner. 1
1 Ferreira and Khatami (1996)
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5. Furthermore, there are efficiency gains arising from innovation, management and
marketing skills offered by the private sector and greater incentives for the control of
construction, operating and maintenance costs. More so, the provision of additional
finance for infrastructure projects enables projects to be brought forward in time, thus
generating earlier economic benefits. 2
6. The diagram below illustrates the continuum of options for involving the private
sector in the provision of infrastructure delivery. 3
Diagram 1: Range of Private Sector Options
7. At the left are supply and service contracts, which tend to be of short duration and
require less private commitment than the options higher in the continuum. The private
contractor is not directly responsible for providing the service, but instead for performing
specified tasks, such as supplying inputs, constructing works, maintaining facilities, or
billing customers. At the left are the longer term arrangements which require significant
private sector commitment.
Options for PPP
8. There is a range of options for involving private sector participation that vary with
regards to ownership, operations and maintenance, financing, risk allocation and
duration. A summary of these options can be viewed in Table 1.
Table 1: Allocation of key responsibilities under the main private sector participation options
Option Asset
Ownership
Operations
and
Maintenance
Capital
Investment
Commercial
Risk
Duration
Service Public Public and Public Public 1-2 years
contract
Private
Management
contract
Public Private Public Public 3-5 years
Lease Public Private Public Shared 8-15 years
Concession Public Private Private Private 25-30 years
2 Haley (1996)
3 World Bank (1995)
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Option Asset
Ownership
Build
Operate
Transfer
Divestiture
Private and
public
Private or
private and
public
Source: World Bank (1997)
Service contract
Operations
and
Maintenance
Capital
Investment
Commercial
Risk
Private Private Private
Duration
20-30 years
Private Private Private Indefinite
(may be
limited by
license)
9. Under this option, the private sector performs a specific operational service for a
fee, for example meter reading, billing and collection.
Management contract
10. In this option, the private sector is paid a fee for operating and maintaining a
government-owned business and making management decisions.
Lease
11. Under the lease option, the private sector leases facilities and is responsible for
operation and maintenance.
Concession
12. Under concessions, the private sector finances the project and also has full
responsibility for operations and maintenance. The government owns the asset and all full
use rights must revert to the government after the specified period of time.
Divestiture
13. This option can take two forms – partial or complete divestiture. A complete
divestiture, like a concession, gives the private sector full responsibility for operations,
maintenance and investment, but unlike a concession, a divestiture transfers ownership of
the assets to the private sector.
14. Discussion on the build, operate and transfer (BOT) options is covered more fully
in the next section.
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BOT/ BOOT Schemes
15. The build, operate, transfer (BOT) approach has in recent years played a growing
role in the implementation of industrial and infrastructure projects such as toll roads,
water supply and treatment facilities in both industrialised and developing countries.
They are designed and implemented as Public-Private Partnership (PPP) arrangements.
16. In the FIC region, the need to develop and implement innovative project financing
methods such as BOT is more pronounced given the costs of providing infrastructure
services are naturally high. Small scale, dispersed populations, remoteness and
susceptibility to natural disasters mean that “[Pacific countries] don’t benefit from the
economies of scale infrastructure normally offers, services are often more costly to
produce and maintain, and it is costly to increase access to rural areas”. 4
What is BOT?
17. BOT is the terminology for a model or structure that uses private investment to
undertake the infrastructure development that has historically been undertaken by the
public sector. 5 In a BOT project, a private company is given a concession to build and
operate a facility that would normally be built and operated by the government. The
private company is also responsible for financing and designing the project. At the end of
the concession period, the private company returns ownership of the project to the
government (although this need not be the case). The concession period is determined
primarily by the length of time needed for the facility’s revenue stream to pay off the
company’s debt and provide a reasonable rate of return for its effort and risk.
Other types of BOT
18. The acronym BOT is often used interchangeably with BOOT or build-ownoperate-transfer.
Variants include BOO (build-own-operate without any obligation to
transfer); BT (build and transfer); BLT or BRT (build, rent or lease and transfer); BT
(build and transfer immediately), BTO (build, transfer and operate) 6 , DBFO (design,
build, finance and operate); and DCMF (design, construct, manage and finance); MOT
(modernize, own/ operate and transfer); ROO (rehabilitate, own and operate); and ROT
(rehabilitate, own and transfer).
19. The table provided below reviews the BOT option and its variants, describes
some characteristics of these different procurement arrangements and depicts the
relationship between these different procurement methods and the financing of the
project.
4 Castalia (2005)
5 UNIDO (1998)
6 Possibly subject to installment payments of the purchase price.
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Table 2: BOT project procurement structures
BOT Project Type Characteristics
Build Own Operate Transfer (BOOT)
• The service provider is responsible for
design and construction, finance,
operations, maintenance and commercial
risks associated with the project.
• The service provider owns the project
throughout the concession period
• The asset is transferred back to the
government at the end of the term, often at
no cost.
Build Own Operate (BOO)
Design Build Operate (DBO)
Lease Own Operate (LOO)
Source: Arndt (1999)
• Similar to BOOT projects, but the service
provider retains ownership of the asset in
perpetuity.
• The government only agrees to purchase
the services produced for a fixed length of
time
• A design and construction contract linked
to an operation and maintenance contract.
• The service provider is usually responsible
for financing the project during
construction.
• The government purchases the asset from
the developer for a pre-agreed price prior
to (or immediately after) commissioning
and takes all ownership risks from that
time.
• Similar to a BOO project but an existing
asset is leased from the government for a
specified time.
• The asset may require refurbishment or
expansion.
20. In a BOT project, the host government decides on the need for the project and its
scope, requires that the design, performance and maintenance of the project be tailored to
the country’s objectives and selects the private company by means of an appropriate
bidding or evaluation process in order to arrive at a price that is fair to both the host
government and the company.
21. BOT projects, when properly designed, offer significant potential for technology
transfer and local capacity building as well as helping develop national capital markets.
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Advantages and Challenges of the BOT Approach
22. The BOT approach has many potential advantages, some of which have been
alluded to above, and is a visible alternative in most countries to the more traditional
approach using sovereign borrowings or budgetary resources. These are captured in the
box provided below.
Box 1: Potential advantages to the host government of using the BOT approach
� Use of private sector financing to provide new sources of capital, which reduces public
borrowing and direct spending and which may improve the host government’s credit rating.
� Ability to accelerate the development of projects that would otherwise have to wait for, and
compete, for sovereign resources.
� Use of private sector capital, initiative and know-how to reduce project construction costs,
shorten schedules and improve operating efficiency.
� Allocation to the private sector of project risk and burden that would otherwise have to be
borne by the public sector.
� The involvement of private sponsors and experienced commercial lenders, which ensures an
in-depth review and is an additional sign of project feasibility.
� Technology transfer, the training of local personnel and the development of national capital
markets.
� In contrast to privitisation, government retention of strategic control over the project, which is
transferred to the public at the end of the contract period.
� The opportunity to establish a private benchmark against which the efficiency of similar
public sector projects can be measured and the associated opportunity to enhance public
management of infrastructure facilities.
Source: UNIDO (1998)
23. Some challenges that should be taken into consideration include the length of time
required to develop and negotiate BOT schemes, the need for a suitable political and
economic climate, and a defined regulatory environment. In short, the BOT approach
requires an environment that is conducive to private sector investment.
24. The economic costs associated with BOT projects include the following:
• Costs due to imbalance in experience. Governments with little experience in BOT
contracts are advised to initiate BOT projects on a manageable scale and seek
professional advice to compensate the often greater experience of the private
sector.
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• User costs imposed for the first time or increased to match market rates. The
economic costs of public services, once covered by the Government, then become
financial costs for the user.
• Overpriced supplies. Potential conflicts of interest on pricing among the project
sponsors must be monitored. Care must be taken to ensure that sponsors who
supply goods or services to the project do so on a fully competitive basis.
• High financing costs. Financing costs for BOT projects tend to be high, as the
legal fees associated with their contractual arrangements are much higher than
those of standard commercial contracts. The complexity of the credit means that
lenders need more time than usual to assess a project’s merits and will tend to
charge higher fees.
25. Given the importance of infrastructure investment to national development it is
essential that the wider socio-economic costs and benefits associated with a BOT scheme
are taken into account when designing the legal framework to promote private sector
investment in such projects.
Box 2: Bringing water to all consumers in Chengdu, China
The Chengdu Water Supply project involved the construction of a treatment plant and the establishment of
a 27 kilometer transmission line to provide the population of Chengdu, an industrial city in southwest
China, with an additional supply of 400, 00 cubic meters of treated water daily. Prior to this, urban water
supply projects were funded by central or municipal governments, on a grant basis. Insufficient government
funding meant that water shortages occurred, particularly in rapidly growing metropolitan areas. As the first
BOT water supply project in PRC, the Chengdu Project demonstrated that this approach can be successfully
implemented at the municipal level, and externally financed without government guarantee. ADB’s private
sector operations extended a direct loan of $26.5 million for the project, and through ADB’s
complementary financing scheme, ADB made possible commercial debt funding of $21.5 million.
Source: ADB (2004)
Case Study : Fiji’s PPP Policy 7
26. The Fiji Government recognises that PPP is a good solution to its continual search
for better value for money and better ways of delivering public infrastructure and related
services. Government endorsed its PPP policy on 21 July 2001. 8
27. Fiji’s economy is now sufficiently developed and matured to sustain PPPs. This
is particularly so in view of the following:
7 Information for the case study has been compiled in consultation with the Ministry of Public Enterprise
and Public Sector Reform, Government of the Fiji Islands
8 Cabinet Decision 315/ 2005
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� Fiji has an open and competitive economy. Various reforms are being pursued in
civil service, financial management, and public enterprises. This will all contribute to
competitiveness for Fiji economy, thus adding stimulus to PPP;
� there is a medium to long-term pipeline of projects, which could be subjected to PPP;
and
� an institutional regulatory and legal framework to promote PPP projects is being
developed.
Current Government Policy
28. A key priority of the Fiji Government is to raise the annual level of investment to
at least twenty-five percent of gross domestic product. It intends to achieve this goal by
increasing public investment – particularly in physical infrastructure and human capital –
and by stimulating and facilitating higher levels of private investment.
29. Furthermore, one of the Strategic Priorities of Fiji’s Strategic Development Plan
(SDP 2003-2005) is “Structural reforms to promote competition and efficiency”. Public
Private Partnerships or PPPs are an appropriate solution to this priority as well as the
Governments continual search for better value for money and better ways of delivering
public infrastructure and related services.
Scope of Public Private Partnerships
30. A PPP is an arrangement between the public and private sectors (consistent with a
broad range of possible partnership structures) with clear agreement on shared objectives
for the delivery of public infrastructure and/or public services by the private sector that
would otherwise have been provided through traditional public sector procurement.
31. A particular arrangement or project may constitute a PPP where the following key
objectives have been met:
(i) Better value for money and optimal allocation of risk, for example, by
exploiting private sector competencies (managerial, technical, financial
and innovation) over the project’s lifetime and by promoting the crosstransfer
of skills between the public and private partners;
(ii) Shared responsibility for the provision of the infrastructure or services
with a significant level of risk being taken by the private sector, for
example, in infrastructure projects linking design and construction with
one or all of the finance, operate and maintain elements; and
(iii) Encourage and promote resource owners participation in infrastructure
development.
32. There is a clear distinction between a PPP arrangement under which the private
sector partner supplies public infrastructure and public services on behalf of the state for
the contract period and the sale (i.e. privatisation) to the market sector of specific state
assets. This policy reflects the former arrangement and is not regarded as being
privatisation.
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33. In Fiji’s case, the PPP arrangements will be formed through competitive, open,
public bidding in order to achieve the stated key objectives mentioned above.
Goals and Benefits of Public Private Partnerships
34. Identification of the goals of PPP and the prospective benefits from individual
projects provide more certainty, in particular, for those (e.g. local communities) whom
PPP projects are expected to serve. These goals and benefits include the following:
(i) Speedy, efficient and cost-effective delivery of projects;
(ii) Creation of added value through synergies between public sector and
private sector, in particular, through the integration and cross-transfer of
public and private sector skills, knowledge and expertise;
(iii) Alleviation of capacity constraints and bottlenecks in the economy
through higher productivity of labour and capital resources in the delivery
of projects;
(iv) Competition and greater construction capacity (including the participation
of overseas firms – especially in joint ventures and partnering
arrangements);
(v) Accountability for the provision and delivery of quality public services;
(vi) Innovation and diversity in the provision of public services; and
(vii) Effective utilisation of state assets to the benefit of all users of public
services.
Statement of Principles
35. The fundamental principles determining a PPP policy have emerged from
consultation with key stakeholders in the public and private sectors.
36. These key principles, summarised in the following section, are the foundation for
this policy framework and are central to the achievement of the goals and objectives
mentioned above including the establishment of sustainable partnerships in the
development of Fiji's PPP programme. These key principles have been approved by
Cabinet will be embodied in the enabling legislation for PPP.
Principle 1: PPPs will be progressed within the context of national policy
37. The SDP sets out national priorities relating to the timely and cost-effective
delivery of economic and social infrastructure priorities and quality public services:
(i) Structural reform to promote completion and efficiency;
(ii) Raising investment levels for jobs and growth; and
(iii) Reforming the public sector to reduce the cost of doing business.
Principle 2: Stakeholders must be consulted throughout the process
38. There must be extensive consultation and open communication with all
stakeholders in respect of PPP projects. Stakeholders include employees and their trade
unions, the public, the people who will use the assets and services provided, local
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community groups and sector interest groups. In selecting, developing and implementing
PPP projects, the economic, social and environmental concerns of those directly affected
at local level should be taken into account along with the statutory rights and legitimate
economic interests of stakeholders.
39. All parties to a PPP arrangement in Fiji should have regard to appropriate industry
norms in terms of pay and conditions and of prevailing national and/or industry-wide
agreements including Environmental Management Act 2004, Financial Management Act
2004, Foreign Investment Act 1999, Occupational Health and Safety Act 1996, Social
Justice Act, and other statutes. Such an approach should be consistent with protections
provided under the 1997 Constitution.
Principle 3: Public to be kept informed
40. The success of the PPP programme requires widespread public support. A PPP
communications and awareness strategy will be pursued by Government directed at key
stakeholders, officials of public service procuring agencies, employees in sectors where
PPPs will be developed and the general public.
Principle 4: Virtually any development project will be implemented using a PPP
arrangement
41. This includes power plants, roads, ports, airports, dams, water supply, irrigation,
telecommunications, railroad and railway, passenger transport systems, reclamation
projects, industrial estates or townships, government buildings, tourism, slaughterhouses,
warehouses, public markets, solid waste management, information technology networks
and data base infrastructure, sewerage, drainage, dredging, farms and any other
infrastructure and development projects that may be considered appropriate by the
Government.
Principle 5: Two broad variants of a PPP contractual arrangement will be allowed
42. Two types of contractual arrangement will be considered:
(i) Outsourcing and management contracts which is well understood and is used to
introduce the private sector to the process of delivering government services.
This type of PPP includes performance-based operations and maintenance
contracts, design-build and turnkey contracts.
(ii) Concession Contracts that is used for the provision of new rehabilitated or
upgraded infrastructure. Under a concession contract the private sector is
normally contracted to finance, construct, operate and maintain the project for a
specified time period after which it is transferred back to the State in a near new
condition. The contract is usually a concession to collect user charges that are
used to reimburse the private company for the construction, operating and
maintenance costs. Under a concession contract arrangement the ownership of
the asset will remain with the Fiji Government over the full concession period.
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43. Full privatisation of government owned assets will not be considered under this
PPP policy. Existing legislative frameworks are in place to accommodate this
arrangement.
Principle 6: Investors will be allowed to earn a market-based rate of return
44. Two important provisions will be considered to allow a market based rate of
return. These include:
(i) The rate of return should not be subject to any legislative ceiling on
profits.
(ii) The sources of revenues should be adjusted annually.
45. However a cap on the rate of return will be maintained for projects that are natural
monopolies, operate as public utilities, and entered into through a negotiated contract,
that is, an unsolicited proposal. In this way user charges will be regulated and provide
protection to the users of the facility.
Principle 7: Recognising that there may be a need for the Fiji Government to share in the
risks and costs of a project to make it financially viable, a variety of government
undertakings will be allowed under carefully prescribed conditions
46. Cost sharing arrangement between the public and private sectors will be
considered and a limit of 50% set for the public sectors contribution to the total project
cost. The public sectors contribution could be financed from a number of sources
including direct government appropriations, official development assistance and
provision of support facilities to the PPP project such as:
(i) Facilitation in assisting the private sector in obtaining access and
customary rights held by resource owners; and
(ii) Fiscal incentives allowable under the Government’s Investment Policy
such as tax holidays, duty free importation of equipment or the relaxation
of foreign staff restrictions, risk sharing measures or credit enhancements
such as minimum throughput, take-or-pay contacts, performance
undertakings and foreign exchange risk cover.
Principle 8: The approving authorities for PPP arrangements should be specified and the
procurement process must be transparent
47. All PPP projects will be referred to Cabinet for approvals.
48. PPP projects will be procured in an open and transparent fashion consistent with
standard procurement rules that will be contained in the Implementing Regulations to the
enabling legislation and with the need to ensure effective competition. Special
considerations will be given to accommodating projects and proposals under the
affirmative actions policies of Government.
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Principle 9: For public utilities, a franchise to operate the new, rehabilitated or
upgraded infrastructure should be automatically issued to the selected PPP proponent
49. The successful proponent who finances and develops the public utility
(infrastructure) will be given the right to operate the facility for a period not exceeding 50
years. This right will be included in the PPP agreement between the public and private
sector.
Principle 10: Fiji ownership requirements will be imposed on the operator of public
utilities for projects contracted under any of the concession contract variants
50. The facility operator under a concession contract could be a company which may
or may not be the project proponent and which is responsible for all aspects of operation,
maintenance of the facility including collection of user fees, that is, an operations
company. Direct ownership of a public utility operation company will be 51 percent held
by Fijian interests. This provision ensures that local investors will have a majority
shareholding in companies that operate public utilities. This will also provide the ability
for international expertise to be transferred to local companies through joint venture
companies.
Principle 11: The private sector will have the flexibility to initiate new project ideas or
concepts by allowing directly negotiated contracts for unsolicited proposals
51. Conditions that will be attached to this type of proposal include:
(i) The proposed project Involves a new concept or technology;
(ii) The proposed project is not part of the list of priority projects for public
bidding;
(iii) No direct government guarantee, equity, or subsidy is required; and
(iv) To ensure competition the implementing authority will invite proposals
from other proponents to be submitted within 3 months of it receiving the
unsolicited proposal. If another proponent does submit a lower price or
better proposal, the original proponent will have the right to match that
price or proposal within 2 months.
Principle 12: Negotiated contacts will be allowed for unsolicited proposals and for
publicly bid projects where there is only one complying bidder
52. A Public Sector Comparator (PSC) will be undertaken and compared to the one
complying bid received from the private sector. The contract will be awarded to
whichever proposal achieves the best value for money to the government. Any dispute
arising out a contract will be resolved in accordance with the Arbitration Act [Cap: 38]
and the contract will be govern by the laws of Fiji.
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Principle 13: In the case where the contract is terminated by the Fiji Government
unilaterally, or by the proponent in case where the Fiji Government defaults on its
obligations, the proponent will be compensated for actual expenses incurred on the
project plus a reasonable rate of return
53. This “comfort” provision is required to attract the private sector to invest in large
and costly infrastructure projects that may have a long concession period. This is also a
disincentive for any future government to nationalise a PPP project or projects.
Principle 14: A permanent inter-governmental committee reporting to an Advisory Board
will periodically review and, as necessary, revise the implementing regulations
54. The Public-Private Advisory Board will consist of equal representation of key
stakeholders from the public and private sectors. The permanent inter-governmental
committee will be made up of the Chief Executive Officers of the Ministries of Finance
and National Planning, Public Enterprises and Public Sector Reform and Commerce,
Business Development and Investment as well as the Attorneys Generals Office. This
will ensure the provision of dynamic regulations that can be periodically revised to
respond to changing needs.
55. The inter-governmental committee, while reporting to the Public-Private
Advisory Group, must also draw on private sector expertise as appropriate to address and
resolve issues and make recommendations to the Advisory Group with the primary
objective of establishing the degree of standardisation needed to create an attractive
market for PPPs across all sectors of public capital infrastructure and public services.
Implementing the PPP Policy
56. It is essential to ensure a standardised approach consistent with this policy
framework to the development of the PPP programme overall, while recognising the need
for flexibility to accommodate diversity at project level. Guidelines and procedures as
part of the Implementing Regulations and will need to be developed and finalised prior to
the passing of the legislation.
57. The first stage of implementing the PPP policies was the enactment of the
PPP Act. The commencement date of the Act was the 3rd of April 2006. The Act is
essentially the embodiment of the policies. In the course of drafting this legislation the
Ministry consulted widely with various stakeholders both from the private sector as well
as the public sector. The comments and suggestions of all our stakeholders have been
incorporated in the Act.
58. Furthermore, Cabinet in its last meeting on the 7th of June, 2006 approved the
establishment of a Public Private Partnership Unit (‘PPP Unit) within the Ministry of
Public Enterprises 9 . The Unit will be tasked with the responsibilities of conducting
awareness programmes, identifying possible PPP projects and conducting pre-feasibility
studies of these projects. As PPP is an emerging concept of funding infrastructure
9 Cabinet Decision 224/ 2006
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development, there is a plethora of evolving issues that will need to be addressed. Thus,
the Ministry will continue to engage consultants initially to provide arms length advice in
order to provide effective and appropriate solutions as these issues evolve.
59. In summary the PPP Unit, working together with the other public and private
sector interests, will give a high priority to:
(i) Delivery of the PPP programme;
(ii) Developing a standardised approach in terms of tendering procedures,
model contracts and documentation, in step with progress in the
programme;
(iii) Ongoing development and review of PPP policy; and
(iv) Resolving outstanding obstacles to the wider use of PPPs (including legal,
taxation, financial and other issues).
60. This will ensure that PPP becomes a standard element of Government
procurement method and a stream of PPP projects is developed and a sustainable and
dynamic PPP market is created in Fiji in the long term.
South Africa Case Study – Lessons Learnt 10
61. South Africa like many other countries is faced with the problem of infrastructure
backlogs and budget constraints. The government through its Department of Finance
recognised the need to partner with the private sector in order to address this problem.
Consequently various PPP initiatives in various sectors were considered as an alternative
way of delivering services. This case study examines one initiative that has been
implemented for the provision of public services by the private sector through Asset
Procurement and Operating Partnership Systems (APOPS). The Department of Public
Works (DPW) engaged in the APOPS programme in 1996. This programme lies within
the broader PPP framework.
62. The Department of Public Works – APOPS Directorate is currently engaged in
pilot projects for the procurement of correctional facilities structured along the design,
build, finance and operate (DBFO) approach.
63. The private sector consortium is responsible for the design, build, finance and
operation of the facility and at the end of the concession period which is 25 years, the
facility will be transferred back to the State. The government pays the private sector
(referred to as the concessionaire) periodically for the services rendered. In the APOPS
programme, the three main objectives to be considered are to secure value for money,
optimal risk allocation and affordability and these objectives have important implications
with regards to the financing of the projects.
10 CSIR (2001)
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Value for money
64. This is an important criterion and the private sector must be able to ensure that
they deliver the services required at a lower cost than the public sector would have
delivered the same level of service. In the current ongoing APOPS pilot projects for the
procurement of prison facilities, the private sector is expected to provide a higher level of
service or same level of service at lower costs than the government would have provided
these services. The Public Sector Comparator (PSC) was used to ascertain whether value
for money has been attained.
65. APOPS projects have adopted a similar definition of the public sector comparator.
The details on how to calculate the PSC number is detailed by the Treasury Taskforce. In
the APOPS pilot projects this process of deriving a PSC was complex due to the fact that
the new Correctional Services Act specifies a higher level of service than was previously
provided in public sector prisons. The aim of the PSC number was to compare and
illustrate the operating costs for private and public sector operation of the facility under
the level of service stipulated in the Request for Proposals (RFP).
66. The degree of risk allocated to public and private sectors in different procurement
methods. In APOPS, the principle is to transfer the risks to the party that is most able to
manage them. The issue of risk transfer was an important aspect when considering the
financing of the project because the private sector consortium had to consider the
associated costs due to large amounts of risks transferred to them. The public sector on
the other hand had to be careful in their risk allocation because transfer of too much risk
to the private sector would have made the project unaffordable. It was therefore crucial to
develop a model for optimum risk sharing between the parties bearing in mind
affordability and value for money considerations.
Box 3: Carefully structuring project risk: Power in Bangladesh
In 2001, ADB approved a US$50 million loan for Bangladesh’s first private sector power project. ADB
helped generate a further US$90 million for the project from commercial banks. A government-owned
financial institution put up another US$80 million and the US independent power producer AES made an
equity investment of another US$80 million. ADB helped the Government of Bangladesh design the
project specifically to increase private sector participation in the power sector. This was also the first
project in which ADB used its political risk guarantee (PRG) scheme to leverage funds, raising US$70
million in this way for the US$300 million project. The PRG offers protection against political risks that
may arise in connection with a project, such as nationalization, foreign exchange moratoria, and the
government’s failure to honor its payment obligations.
Keeping tariffs affordable: The Meghnaghat power project of Bangladesh
This was the first power generation project to be financed by the private sector in Bangladesh. It has a
450MW capacity and supplies power to agriculture and industry in the northern bank of the Meghna
River. The project was assisted by ADB through technical assistance to prepare a master plan; for a
feasibility study; engineering design; site selection; and the solicitation of bids and structuring of the IPP
agreement.
This is the first build-own-operate power generator in Bangladesh and has the lowest power tariff in the
world.
Source: ADB (2003)
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Affordability
67. Prior to embarking on an APOPS project, the public sector client had be sure that
the project was affordable and that they will be able to manage the payment streams. This
is extremely crucial due to the long duration of the projects (25 years). The affordability
considerations began right at the preliminary stages when the public sector advisors were
preparing the business case. Due to the fact that the public sector can borrow at lower
rates than the private sector, the advisors had to develop models incorporating innovative
ways of financing, design and construction of the projects in order to prove that the
projects were affordable and justify the need to use the APOPS - DBFO approach as
opposed to the traditional procurement method.
68. PPP projects can be complex in terms of implementation. There are indications
that certain challenges have been faced in the South African case. These challenges relate
to issues such as the costs of the process, the need for a clear consistent definition on the
various private sector participation options, organisational differences between public and
private sectors teams, the issue of stakeholders and forming empowerment partners.
Conclusion
69. This paper has demonstrated that the use of PPP approaches has resulted in a
deviation from the traditional procurement method with regards to the financing of the
project.
70. The South African case study presented in the paper has illustrated that to use
alternative financing besides the fiscal budget, an appropriate procurement method had to
be adopted for utilising private sector finance mechanisms.
71. As discussed above, the fact that the use of PPP approaches in South Africa, like
in other countries, offers the benefits of additional finance for infrastructure and
efficiency gains in construction and operation while allowing the public sector to retain
long-term strategic control of infrastructure cannot be debated. However, it is important
that the government and the private sector should not pursue PPP approaches without
understanding their potential merits and demerits; and requirements for their success.
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