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Old Thursday, November 21, 2013
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Wink Public-private partnerships with special reference to Pakistan

Definition of Public Private Partnership

Public Private Partnerships (PPP) involve the financing, development, operation and maintenance of infrastructure by the private-sector which would otherwise have been provided by the public sector. Instead of the public sector procuring a capital asset and providing a public service, the private sector creates the asset through a dedicated standalone business (usually designed, financed, built, maintained and operated by the private sector) and then delivers a service to the public sector entity/consumer in return for payment that is linked to performance. Therefore the public sector is able to redirect its efforts to serving other urgent social and economic needs. A PPP may include an equity joint venture between GOP and the private sector.

The capital and operational expenses incurred by the private investor can be recovered under the PPP modality by charging users for the service provided or via fixed (or partially fixed) periodic payments (annuities) disbursed by the public sector over the concession period, or by a combination of both.

PPPs allow each partner to concentrate on activities that best suit their skills. For the public sector this means planning and identifying infrastructure service needs and focusing on developing national, provincial and local sector-specific policies, but also to oversee these and to enforce the PPP agenda. For the private sector, the key is to deliver effectively the infrastructure and facilities required by the public sector and consumers at the project level.

Some sectors, such as power, have already developed independent and effective regulators, and these will be expanded across other sectors in the future. Meanwhile, in this initial phase, PPP Policy supported by contract will allow PPP to proceed on a project by project basis in most other sectors.

The benefits of PPP include the following:

a) Development of more infrastructure on time and within budget

b) Encouraging the private sector in innovative design, technology and financing structures and including increased international and domestic investment

c) Risk sharing by GOP with private sector partners

d) Ensuring good quality public services and their wider availability

e) Real financial benefits, and a better utilisation and allocation of public funds

f) Economic growth and increased and wider employment opportunities

C. Objectives of the PPP Policy

The key objectives of this policy are to:

a) Promote inclusive social and economic development through the provision of infrastructure

b) Leverage public funds with private financing from local and international markets

c) Encourage and facilitate investment by the private sector by creating an enabling

environment in PPP in infrastructure

d) Protect the interests of all stakeholders including end users, affected people, government and the private sector



e) Set up efficient and transparent institutional arrangements for identification, structuring and competitive tendering of projects

f) Develop efficient risk sharing mechanisms such that the party best equipped bears the appropriate level of risk

g) Provide viability gap funding where the projects’ viability is insufficient to attract private sector funding.

The PPP Policy is therefore targeted to provide a wider variety of better quality and timely services. This will be achieved through faster project implementation, maximum leveraging of public funds, enhanced accountability and a shift to life cycle costing and infrastructure management by the private sector:

D. Scope of the PPP projects:

1. Sector Eligibility
The PPP policy herein covers, but is not limited to, the following infrastructure sectors:

Transport and logistics including federal, provincial and municipal roads, rail, seaports, airports, fishing harbours as well as warehousing, wholesale markets, slaughter houses and cold storage.

Mass Urban Public Transport including integrated bus systems as well as intra and inter-city rail systems.

Local Government Services including water supply and sanitation; solid waste management; low cost housing, and healthcare/education and skills development facilities.

Energy Projects including hydroelectric and captive power generation projects

Tourism projects including cultural centres, entertainment and recreational facilities and other tourism related infrastructure

Industrial projects including industrial parks, special economic zones and related projects.

Irrigation projects some of these combined with power generation

Social infrastructure which includes education, culture, and health infrastructure.

Regardless of sector or level of government, PPPs will be pursued where they represent priority projects, are affordable to the government and consumers, and represent value-for-money, i.e. provide a better approach than public procurement.

Sector specific PPP policies may be further detailed to accommodate the needs of each specific sector consistent with the overall Pakistan PPP Policy. The federal government will also work with provincial and local governments to support their ongoing development of PPP frameworks.

2. Ownership

PPPs may be wholly privately owned or be a joint venture with the public sector as long as they are majority privately owned or privately operated.


3. Types of funding

There can be several potential sources of revenue or income depending on the type of PPP project and the likely financial performance of the project. These include:

i. Tariff Based PPP Projects

In the case of financially viable projects, project revenue derives solely from user charges/tariffs. Initial tariffs and subsequent tariff escalation are initially determined within feasibility studies prepared by contracting agencies to ensure an appropriate or market acceptable rate of return based on an efficient operation. Competitive bidding process aims to minimize the initial government estimated tariffs and the subsequent escalation.

ii. Unitary/Annuity Type Revenue

Unitary/annuity type payments wherein the Government contracts to pay the concessionaire for providing the infrastructure and related services either an agreed fixed amount each year of operation or an amount based on the future situation e.g. future traffic levels. Such payments can either be linked with user charges or can be independent of them.

The project feasibility study will recommend a system of annual unitary payments based solely on outputs (i.e. the meeting of specific project targets/outputs) by the concessionaire.

Iii Projects requiring subsidy

For projects that have been appraised as not being ‘bankable1’ without support, such support may be offered by GOP and can comprise various types and come from various sources. This is to ensure that with such support, the project is, ultimately, financially viable/bankable and is therefore attractive to the private sector. Any proposed subsidy will be finally determined through competitive bidding to ensure the lowest liability for Government.

E. Intended Government Support for PPP Projects

The GoP will support projects that are economically justified, but would be financially viable only with reasonable subsidy, determined and granted in a rule-based procedure. Such Government support to PPP projects can include the following;

i. Viability Gap Funding

The Government will provide viability gap funding for PPP projects that are economically and socially justified but fall short of financial viability. This would be an explicit subsidy that is performance driven (based on private party achieving measurable outputs) and if possible targeted towards socio-economically disadvantaged users or groups of users.

For this purpose, the MoF will issue VGF Guidelines setting the criteria for eligibility to receive funding from the Viability Gap Fund, the procedure for applying, approving, disbursing and monitoring the Fund, and the arrangement for managing, controlling and governing the Fund.

The MOF has set up a framework for; (i) providing for the procedure to be followed for submission, appraisal, approval, disbursement and monitoring of viability gap funding, (ii) approving viability gap funding for eligible PPP projects and (iii) disbursements and monitoring of viability gap funding.

ii. Longer Term Funding

Long term financing is required for infrastructure projects, but there are constraints in commercial markets including availability of financing for only lesser tenure, lack of fixed rate financing, lack of depth for financing of large scale projects and currency risk.

The GOP is committed to support PPP by providing access to long term financing for both large and small scale projects, to ensure that viable good quality PPP deals are concluded in a timely manner.

iii. Supporting Project Development

The GOP will support PPP by providing either financing or other technical assistance to the contracting public entities for developing and structuring PPP projects at different stages of the project cycle.

iv. GOP Incentives

PPP Projects will be eligible for current fiscal and other investment incentives, which will be listed and available to all interested PPP participants.

v. Other

In general the need for any other types of support would be established by the Government’s transaction advisers when preparing the project feasibility study. Guarantees are described in the section on Risk below, which would need to be approved by the GoP.

All potential bidders will be made aware of, and take into account, all potential Government support at the tendering stage.

vi. Ceilings for PPP Project Support

Ceilings will be established for support to PPP projects. Such ceilings could include those funds related to the VGF and Infrastructure Project Financing Facility (IPFF), or the fiscal space for guarantees and the maximum volume of the future annual annuity payments.

INSTITUTIONAL ROLES AND RESPONSIBILITIES

Key Institutions

The Government of Pakistan establishes clear and flexible institutional arrangements for the successful implementation of PPP program. These institutional arrangements need to support three broad, but separate, high level functions:

PPP policy development, dissemination, monitoring and enforcement.

Individual project sponsorship, design, preparation and execution.

Financial management of funded and contingent obligations.

The following institutions play key roles in these arrangements:

The Ministry of Finance (MoF) including various departments and bodies under MoF, specifically:

The inter-ministerial PPP Taskforce (TF) with working groups

The Infrastructure Project Development Facility (IPDF) and

The Debt Policy Coordination Office (DPCO),

Project Development Fund (PDF), Viability Gap Fund (VGF) and Infrastructure

Project Financing Facility (IPFF)
The Planning Commission and its Central Development Working Party

Line Ministries and relevant departments at federal, provincial and local levels as Contracting Authorities

Ministry of Finance

The Ministry of Finance is spearheading the development of PPP and responsible for developing the legal, institutional, regulatory framework and an implementation program at the federal level and building ownership at the highest level in the government for the PPP program. The MOF is responsible for: PPP Policy and Support to Implementation; taking financial commitments by GOP to support PPP; and for risk management.

Planning Commission

The Planning Commission reviews and approves Public Sector Development Program (PSDP), screens and proposes potential PPP projects from the PSDP. This is in consultation and coordination with the IPDF, and the line ministries and other Contracting Authorities.

Government Contracting Authorities

Line Ministries, Federal bodies and provincial and local authorities as well as State Owned Enterprises (SOEs) are the contracting parties on behalf of GOP with private parties. They will therefore be responsible, mainly or in conjunction with other bodies, for the identification,

selection, sponsorship, preparation, tendering and monitoring of PPP projects in their sectors. The line ministries that want to promote PPPs will prepare Model Concession Agreements for that particular sector.

Contracting Authorities will increasingly develop capability in PPP development, but strong support for them will be available, especially from IPDF, and other institutions such as MOF and the Planning Commission.

Task Force

The Task Force (TF) that is headed by the Minister of Finance, comprises senior officials from relevant Ministries and provincial governments is responsible for advising on overall PPP policy reforms guiding and approving respective legislative documents. The TF is aided by Working Groups tasked to focus on specific topics of that policy and formulate the required PPP framework. The TF is also supported by the IPDF which acts as a secretariat for the TF which in parallel fulfills other functions and responsibilities explained below. The recommendations of the Task Force will, in parallel with the operations of IPDF, steer the future development of the PPP framework in Pakistan.

Infrastructure Project Development Facility (IPDF)

The Government has set up the IPDF under the MOF with Board of Directors, headed by the Minister of Finance. IPDF is tasked to provide easy and timely access for Institutions, to ensure that viable good quality PPP deals are concluded in a timely manner.

The IPDF has the following responsibilities:

To help facilitate the promotion, generation and implementation of PPP projects by the contracting authorities, in order to increase the number and volume of PPP infrastructure transactions.

To provide guidelines to public sector implementation agencies, private sector sponsors, financers and advisors; in order to create an enabling policy environment and provide hands on knowledge transfer to the Public implementing agencies. The GOP disseminates information and Guidelines on PPP through the IPDF website ‘www.ipdf.gov.pk’.

To screen projects proposed by the contracting authorities and to propose them for PPP route to MoF, Planning Commission and the CDWP.

To either procure or provide itself, professional PPP services for contracting institutions to improve proposals, without itself becoming a contract signatory to those transactions.

To serve as a secretariat to the PPP Task Force.

The Debt Policy Coordination Office (DPCO)

The GOP has established the DPCO within the MOF under the Fiscal Responsibility and Debt Limitation Act 2005. The DPCO is responsible for ultimate management of any funded or contingent financial obligations, including guarantees, arising from the PPP program.

PPP PROCESSES

J. The PPP Project Life Cycle for government originated projects

comprises the following steps:

1st step: Project Needs Options Analysis. Government/Agencies conduct Needs and Options Analysis to determine the best solution to provide the service / build infrastructure i.e. traditional public procurement or PPP route.

2nd step: Initial Viability Analysis. Preparation of a Pre-Feasibility Study including possible location(s), alignment(s) and estimates of broad project costs and an initial indication whether the project is likely to be viable and affordable.

3rd step: Technical, legal, environmental and financial due diligence. Transaction Advisor conducts in-depth Legal, Technical, Site / Environmental, Market and Financial Due Diligence along with extensive stakeholder consultation.

4th step: Risk, Affordability and Value for Money test. The government assesses through information in Step 3 whether the proposed project is robust and meets GOP criteria for risk, viability, bankability, affordability and value for money. This includes estimates of viability gap and the need for subsidies.

5th step: Market Sounding. Transaction Advisor continuously conducts market sounding to determine under which conditions the market is willing to competitively tender for the services. IPDF can assist the Institution in undertaking the market sounding and the need for viability gap and other funding support by IPFF and determine the final PPP design parameters.

6th step: Tendering/Bidding. The Institution/contracting agency conducts a competitive bidding process. Criteria for selection include lowest tariff or financial benefit to government for viable projects and lowest subsidy/lowest VGF amount for those projects requiring support (See Guidelines).

7th step: Approval of Viability Gap funding (if required). Based on evaluation and Project Feasibility Committee endorsement, IPDF submits recommendation for subsidy to the Viability Gap Fund.

8th step: Signing of Agreement and Financial Close between the Institution, and the winning private partner, (tripartite to include the Viability Gap Fund, if VGF required).

9th step: Project Monitoring by Institution (Construction and Operational Periods). Also of milestone based disbursements if subsidies/annuities are involved)

Summary of ppp process:


Identification of Project
(Planning Commission, Line Ministry/ Relevant Department/IPDF)

Selection and hiring of Transaction Advisor (IPDF/Line Ministry/ Relevant Agency)

Approval for selection of preferred option(s) for feasibility study (IPDF/Line Ministry/Relevant Department)

Approval of Feasibility Report
(IPDF/Line Ministry/Relevant Department)

Pre-qualification and approval of bidder and PPP structure (IPDF/Line Ministry/Relevant Department)

Approval of Project
(ECC/ECNEC/CDWP and MOF and/or Board of Ministry/Relevant Department)

Award of Project and Contract Signing (Line Ministry/Relevant Department)

Execution of Project including financial close (Private Party)

Project Monitoring and Evaluation (Line Ministry/Relevant Department)
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