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Old Tuesday, June 06, 2006
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Default Public Private Patnership

34. Public Private Partnerships
34.1. Introduction
Public-Private Partnerships involves the investment of private capital to design, finance,construct, operate, and maintain a project for public use for specific term during which a private investment consortium is able to collect revenue from the users of the facility. When the consortium’s limited term of ownership expires, title to the project reverts to the government at no cost. By then, the consortium should have collected enough revenue to recapture its investment and turn a profit on the investment. While privatization represents a take-over of a publicly owned entity, PPPs)are more like mergers, with both sides sharing the risks and benefits. For the state, the main attraction
is that the private sector can bear part of the financial burden of investing in infrastructure.
Since the private sector is expected to be more efficient than the state in running certain
concerns and is also likely to charge actual costs of services from customers, the burden of
subsidies can be minimized. The other attraction is that state resources can be freed to
provide funds in areas and sectors needed for the socio-economic uplift and stabilization of
the less advantaged citizens. The state can thus return to its core business of providing good
governance, enhancing knowledge and skills, and providing basic needs for its citizens. For
this it is necessary to restructure the role of government so that operation can be separated
from policy, and independent regulatory authorities can be established. Finally, the issues of
the degree of independence of regulators, the financing of long term debt instruments
needed for the private sector, and transparency in awarding contracts have to be addressed.
PPP is a viable option with a great potential which by combining skills, expertise and
other resources from different entities can help achieve outcomes that are unattainable by
independent action. There is growing realization in government about the significance of
such partnerships. There is also greater willingness and capacity among the private sector
today to engage in profitable partnerships with the government.
There are several reasons for the public sector to incorporate the private sector in
development projects and infrastructure development, and reasons vary among countries.
For instance, in the emerging economies of Asia, the main reason has been the scarcity of
government resources to finance the infrastructure. Other elements include efficiency
improvements and reforms and modernization of public services.
The opportunities for developing PPPs in Pakistan are considerable. Pakistan’s
public sector investment in infrastructure has declined as a percentage of GDP since the
early 1990s resulting in a huge backlog in the provision of infrastructure. Currently, the
public sector can only accommodate about half of the annual infrastructure requirements of
$ 3.5 – 4.0 billion per year. Accordingly there is need to obtain private resources and
improve efficiency of these investments. With a growing economy and government
commitment to decentralization and market solutions to infrastructure, there has been an
increase in local and international interest in PPPs. The government recognizes that there is
an urgent need to leverage public sector resources to deliver infrastructure if the MTDF
growth rates are to be sustained. Accordingly, private sector participation in general, and
PPPs in particular, are part of the strategic thrust of the Framework.

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34.2. Features of PPPs
Under PPPs, public and private sectors work together on the implementation of
projects, retaining their own identity and responsibilities. They collaborate on the basis of a
clearly defined sharing of tasks and risks to achieve benefits of added value and increased
efficiency. PPPs are a procurement tool where the contract payments are usually structured
in such a way that the public authority and/or users pay only for services rendered
satisfactorily. Project related risks are largely transferred to the private entity. In a PPP, the
focus of the government shifts to policy, strategy and monitoring role rather than service
delivery. In the short run a PPP may shift a financing requirement from the public to the
private sector, or may defer the costs incurred on the budget but does not increase the
quantum of services that the economy can accommodate. In the long term, the benefits are
in improved management and use of funds. Accordingly, affordability has to be the
cornerstone of the planning process.
The spectrum of options for PPPs from low to high private sector participation
includes works and services contracts, management and maintenance contracts, operation
and maintenance concessions, and full privatization.
34.3. International Experience and Lessons Learned
PPPs have become prominent over the last decade It is estimated by the World Bank
that an investment of US $ 890 billion was made globally in public – private infrastructure
projects during 1990-2003. The leading sectors have been telecom (47 per cent) and energy
(33 per cent), followed by toll-roads (8 per cent), water and sanitation (5 per cent), railways
(3 per cent), seaports (2 per cent) and airports (2 per cent). The share of South Asia in this
investment (6 per cent) has remained low and there is considerable potential for an increase
in the region. Between 3-6 per cent of the infrastructure PPP projects have either been
cancelled or investments have been under stress due to a variety of reasons including
inexperience, incomplete contracts and risk allocations, inadequate capacity of institutions,
factors affecting investment climate, issues relating to cost recovery and affordability, and
regulatory framework.
The United Kingdom was one of the first countries to start the private finance
initiative. The PPP programme was applied across a broad range of sectors (transport,
education, health, prisons, defence, leisure, government offices, environment, housing,
courts, technology and others) based upon long term arrangements and fixed price, output-
based contracts. About 80 per cent of the projects were completed on time and within
budget compared with 30 per cent in the public sector. PPPs have also been used
extensively in South Africa and Canada, and several developing countries with positive
results. Pakistan has also gained some experience in the telecom, energy and transport
sectors.
Issues and concerns that have emerged include the following:
i)
There is a serious concern that private contractors/operators cut corners in
order to maximize profits. This takes the form of cutting wages and benefits
of the employees, or shifting them into ‘contract’ appointments, where they
have fewer employment rights and benefits such as pensions.

Page 3
ii)
It is also argued that the long term cost of paying the private sector to run
certain municipal services is much more than what it would cost in the public
sector.
iii)
Local officials are liable to be held accountable for infrastructure services even
though they may no longer have direct control over the delivery of those
services.
The local authorities need to play an important role in partnership arrangements and
should facilitate, monitor, evaluate and control the performance of the private partner and
finally decide whether to extend or cancel contracts with private partners. Indicators should
be developed to measure the performance both in terms of efficiency and effectiveness, of
the private partner and these should be reflected in contractual arrangements to ensure
accountability.
Underlying all these concerns is a culture that requires direct control over service
provision in order to demonstrate public accountability. Only in this way, it is possible to
ensure that services are delivered at the appropriate time to the people having regard to
quality standards. Unfortunately there may be no formal measurements to judge whether
this is so. The position may be made worse with a traditional accounting system, which is
geared to a management control process designed to manage and audit expenditure against
budgets rather than to measure outputs and minimize costs.
Consequently, when government departments are asked to publicly demonstrate the
level of value for money they offer in the services they provide directly, they are often
unwilling to do so because the controls and processes are not designed to answer such
questions, and the management culture militates against a commercial approach. That is not
to say that the use of a private partner will change this. In fact only a devoted administration
with competent professional staff and adequately designated authority commensurate with
responsibility would be fully able to develop, negotiate, manage, monitor and enforce a
contract for service provision with a private sector organization.
The key points that have emerged from international experience for successful
implementation of PPPs include the following:
i)
High level political and institutional support for PPPs is crucial.
ii)
Government has central role in defining what it wants and as the regulator.
iii)
PPP deals must make sense in terms of delivering both the desired outcomes
and commercial returns.
iv)
Good PPPs involve optional risk allocation, demonstrable value for money,
clarity of affordability and certainty of public service payment obligations
based on delivery of outputs.
v)
Output based techniques are important for targeted and efficient subsidy
allocation.
vi)
A well defined policy framework is required that (a) sets out clearly the
processes, priorities and scope of PPP; (b) drives transparent procurement
processes; (c) includes a communication strategy to improve public and

Page 4
private sector understanding of PPPs; (d) provides clarity of long term
government obligations that work across federal and provincial levels; (e)
includes mechanisms to recognize implicit/explicit government liabilities and
public sector balance sheet requirements; and (f) includes mechanisms to deal
with incumbents.
vii)
A well defined legal framework is required that provides clarity, defines
contracting authority powers, minimizes procurement costs and timetables,
for example, through standard/model contracts, improves dispute reduction,
and accommodates future development.
viii)
Public sector capacity should be enhanced, among others through a centrally
located core of policy and implementation expertise including guidelines and
project evaluation and procurement expertise, and mechanisms to ensure
professional management and the purchase of relevant expert advice.
ix)
Private sector/supply side issues should be addressed including availability
of long term local currency finance, PPP bid capacity and financing skills, and
building capacity of local skills.
x)
Early identification of projects and prefeasibility studies for prospective
investors are important.
34.4. Status of PPPs in Pakistan
Pakistan, for a long time, has financed infrastructure and development projects
directly from budget allocations, and therefore lacks the institutional and regulatory
capacity necessary to facilitate private participation in infrastructure provision. There is also
need for a change in the mindset of public functionaries. The reasons why private sector
infrastructure projects have not materialized in Pakistan include: (i) reforms have not
progressed as fast as anticipated; (ii) present governance structures are not suited for the
broad participation by the private sector in infrastructure envisaged in liberalized
environment; (iii) the public-private interface needs substantial strengthening, including
enhancement of skills and institutional mechanisms within the Government for effective
interaction with the private sector; and (iv) it remains difficult to disaggregate and allocate
risks in the domestic capital market.
Currently, important pilot PPP transactions are being prepared and completed on
BOT including $ 300 million Karachi Mass Transit Project (which in conjunction with power
plant and real estate development could grow to a size of $ 600 – 700 million), Lahore-
Sheikhupura -Faisalabad provincial expressway, Lakhpass Tunnel, Karachi Wastewater
Reuse, Gujrat Solid Waste Composting, Karachi-Hyderabad Superhighway, Lodhran-
Khanewal Section of N-5, Tarnol Interchange at N-5, and many other important ground-
breaking efforts. However, these critical PPP pilot transactions are currently taking
considerable time and cost to prepare and to complete. The preparation periods and costs
must be significantly reduced or else the much-needed private investments in infrastructure
will not reach closure. Private Investors who have proposed PPPs in Punjab and Sindh
Provinces have noted that they are unable to pay for project preparation costs when it takes
several years to address issues related to legal and regulatory framework for PPP
preparation and implementation.

Page 5
34.5. Development of PPPs During MTDF
With PPP as a core focus of MTDF, the work to be undertaken as a matter of priority
would include; (i) establishing a policy framework and coordinating the PPP programme
across government agencies; (ii) establishing core centre of expertise; (iii) reviewing and
establishing legal framework; (iv) establishing a communications strategy; (v) identifying
prospective projects in line with market capacity; and (vi) identifying funding mechanisms.
Some aspects of further work on PPPs are elaborated below.
34.6. Legal and Regulatory Issues
During the MTDF period, a review and assessment of current and proposed
legislation in the country which affects the ability to carry out PPPs would be conducted.
The assessment will also include whether the existing laws and proposals are in harmony.
This will facilitate the process of drafting regulatory framework for PPPs, and provide an
“umbrella” enabling structure that would explicitly allow government agencies to enter into
PPPs for providing infrastructure and other services at the national, provincial and local
levels.
The regulatory framework will empower the Government to conduct, identify,
design, tender, evaluate, award and regulate PPP projects. First, it would be flexible enough
to cater to all kinds of PPPs across sectors and would provide the enabling environment
necessary to undertake simplest to most complex projects. Second, it will clearly lay out the
procurement process for PPPs and assign roles and responsibilities. Finally it will create a
central agency to regulate procurement of PPPs by establishing ‘gateways’ through which all
projects must pass through. The actual procurement, implementation and monitoring of the
projects would lie with relevant line ministries, departments, provincial or district
governments.
34.7. Institutional and Capacity Issues
International experience strongly indicates that PPPs are likely to be more successful
if governments move from an ad-hoc, case-by-case approach to creating a PPP Unit, staffed
with professionals with the skills to take PPPs through the entire project life cycle and
provide programme support. While every project is different, PPP projects share similar
features and can benefit from a consistent and structured approach to project identification,
design, tendering, evaluation, negotiation and award, which reflect best practices.
Governments in countries with successful PPP programs, such as the Philippines, Malaysia,
Ireland, Italy and South Africa have created PPP Units to provide the skills to take PPPs
through the life cycle. This results in stronger projects that have a better chance of being
implemented more quickly.
For the PPP Unit to be effective, it is necessary that it should be created in such a
public institution that has clout, credibility and effective coordination with all the ministries.
The process will not only need buy-in from other public sector stakeholder, but the private
sector must also perceive it as an arm of government that is serious and has the proper
mandate and credentials.
Based on international experience, a dedicated PPP Policy and Support Unit will be
established in the Planning Commission as a matter of priority to deal with policy,
programme and project activities. Project activities would be geared towards processing
specific PPP projects through the PPP cycle. Programme activities would be more general,

Page 6
cross cutting activities to support the portfolio of PPP projects. Project support activities for
PPP would include assistance in identification, design, preparation of Request for Proposal
and Request for Qualification documents, evaluation of proposals, negotiations, award, and
in cooperation with regulatory bodies, post award monitoring. Programme activities would
include stakeholder consultation, public awareness, marketing and credit enhancement. The
credit enhancement activities would include working with multilateral agencies to provide
financing and guarantees, as well as to identify government support measures that are
needed to bring the project to financial closure.
Skills that would be required for implementing PPP activities include legal, financial,
economic, procurement, project management and technical such as engineering and sector
specific skills in telecommunications, power, transport, water, social infrastructure and other
services, as required. Any centralized capacity that is developed would not eliminate the
need for Government departments to develop their own capacity and use their own expert
advisors. Rather, it would assist in building such capacities and developing a wider pool of
expertise, within and outside government, to bolster the implementation of PPPs in the long
run.
In order for the Planning Commission to comprehensively appraise/evaluate
projects proposed for PPPs, its capacity would be augmented to (i) assess complex project
finance based PPP structures and their implications in terms of contingent liabilities arising
out of guarantees issued, (ii) the cost of risk for risk retained by the Government, (iii) the
timing and payment of subsidies (and issues related to cost recovery) in a targeted manner
that offers value for money, and (iv) policy issues in terms of what is acceptable and not
acceptable in terms of guarantees and the risk undertaken. These policies can be fed into the
guidelines that would be developed by the PPP Policy and Support Unit.
The PPP Policy and Support Unit would have proper delegation in terms of relevant
legislation and would provide detailed guidelines for developing the project through the
entire project life cycle. Thus guidelines will be developed for each stage, including;
Inception, Needs Analysis, Options Analysis, Feasibility, Procurement (Drafting request for
Qualification Document, Request for Proposal Document, Bidding procedures and bid
evaluation procedures, most importantly the model concession agreement), negotiations,
and post award contract monitoring.
The Unit would have capacity to deal with transaction execution as well as
infrastructure planning at the federal level. The Unit would not initiate projects, but would
help implementing entities by providing hands-on technical assistance. Since many of the
PPP projects will be at the provincial and district/local level, the Unit will also provide
training to relevant officials. It would also assist in setting up provincial and district/local
level PPP implementation capacities.
The basic theme in having this strength developed at the federal level is to create a
focal point for PPPs throughout the country. This focal point will become a centre of
excellence for best practice and a resource into which every one can tap. The Unit would be
able to use the economies of scale provided by all sector entities to develop credit
enhancement and financing instruments that can be applied throughout the country. Thus
special funds or instruments could be created and negotiated with multilateral and financial
institutions on the strength and needs of the several projects that individually could not
have attracted much attention in terms of creating customized products.

Page 7
The development of PPP Unit would include the following:
i)
Charter for the Unit laying out its objectives, roles, responsibilities, authorities
and the overall structure to be created.
ii)
Terms of Reference for the positions identified in the organizational chart.
The positions would be paid market related salaries. The supervisory
positions would require experience in managing teams of multi-disciplinary
professionals, with appropriate status, profile and respect in the market.
iii)
Development of rules of business, guidelines and operating procedures.
iv)
Organizational structure, with matrix system of functional (such as financial,
legal and engineering) staff also having sector (such as transport, water and
sanitation) responsibilities.
34.8. Skill Requirements for the Proposed PPP Unit
The Proposed PPP Unit will have expertise in the following fields:
i)
Technical: Technical skills relate to sector specific skills, such as electrical
engineering and civil engineering, and water and sanitation systems.
ii)
Economics: Expertise in economics will be needed to conduct economic cost
benefit analysis of projects; develop tariff regimes; constructing forecasting/
demand modes; understanding fiscal space and liability issues arising out of
these deals; estimating infrastructure investment requirements in relation to
the fiscal space available; estimating the true cost of subsidies and contingent
liabilities and monitoring during project operation.
iii)
Legal and Regulatory: Expertise to address legal and regulatory policy
framework issues.
(iv)
Communications: Communication skills will be required to design and
publish brochures and for marketing designing, developing and maintaining
a website alongwith a database; interact with media; issues press releases and
organizing press conferences and road shows; and publish an informative
periodical.
The line ministries/executing agencies will have to develop the following expertise:
i)
Finance: The following three types of financial skills will be required.
(a)
Financial Analysis: Expertise in developing cash flow models,
conducting sensitivity analysis, costing risk (conducting value for
money analysis) and developing cost recovery models.
(b) Project Finance: In the project finance structure, the focus is on project
cash flows rather than collateral. Project finance being a very specialized
area, expertise will be required to create project finance models, but also
be able to analyze and negotiate over modes submitted by bidders.

Page 8
(c)
Corporate Finance: In certain sector/transactions financing may be done
on the balance sheet of an investor. Expertise is needed not only to be
able to evaluate such financial proposals, but also to understand the
risks and exposures that such proposals may have due to the bidding
firms’ own vulnerability.
ii)
Procurement: Procurement skills will be required to develop tender
documents such as the Request for Qualification (RFQ), Request for Proposal
(RFP) and most importantly Model Concession Agreement; interacting with
potential bidders and assisting their due diligence; designing a fair and
transparent bidding process; and receiving & evaluating bids.
iii)
(iii)
Legal : Legal expertise will help understand financial implications of
various legislations, the financial implications of various legal clauses (e.g.
ones pertaining to termination, penalties, risk, guarantees etc.), draft
contracts, negotiate contracts and developing standardized contractual terms.
34.9. Infrastructure Fund
An Infrastructure Fund would be created as a ring fenced Special Purpose Vehicle
(SPV)/ Account and managed by the Ministry of Finance/Fund Managers. The actual
implementation of projects will be decentralized. Transaction execution capacities will need
to be developed at the provincial and district/local level to structure transactions in a way
that can be taken to the market by creating bankability and business value. The capacity will
include taking the project through the entire project life cycle with technical assistance from
the PPP Unit. These capacities will be further supplemented by recruiting qualified
transaction advisors. The PPP unit will appraise, monitor and evaluate the PPP projects. The
projects after scrutiny jointly with the sponsoring/executing agencies will be put to
CDWP/ECNEC for clearance and then implemented through line ministries/departments.
The CDWP/ECNEC in taking any decisions would be informed of fiscal space available for
investments at any given time and made aware of the true costs and exposure in projects by
getting credible estimates for contingent liabilities and retained costs. Concession
agreements would be concluded by the line ministries/executing agencies with the private
operators.
The Fund would act as a financial intermediary that would extend funding in shape
of guarantees to fill viability gap of a project during its operations. Private Sector operating
PPP project would be able to encash the guarantee for meeting its shortfalls during the
operation phase of the project and once the project enters into profit making, the encashed
amount would be repaid back to the Fund.
It is envisaged that the Infrastructure Fund will be initiated through contributions by
the government and supplemented by financing from international development partners
including the World Bank and the Asian Development Bank. The Infrastructure Fund would
be used for (i) prefeasibility studies, (ii) equity contributions, if required, (iii) guarantees,
and (iv) grants, in exceptional cases, to fill the gap between income and expenditures.
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