Six Guiding Principles to Achieve
Sustainable PPP Arrangements

By Cledan Mandri-Perrott
Senior Consultant, IP3

About the Author...

Cledan Mandri-Perrott is a Senior Consultant with IP3 in Washington, DC. He is an expert in the development of PSP structures and regulatory frameworks in the water sector and has worked in a number of countries throughout Eastern Europe, Africa, the Caribbean, and South America. Prior to joining IP3, Mr. Mandri-Perrott was an independent consultant and served as a Director of a local joint venture company for an international water operator for a three-year management contract in Trinidad and Tobago. Recently Mr. Mandri-Perrott served as the Project Manager for the privatization of Tallinn Water Company in Tallinn, Estonia, valued at over US$75 million, where he was responsible for the design of the privatization structure and implementing the transaction. In addition to his work in Tallinn, Mr. Mandri-Perrott has been involved as transaction adviser for water PSP arrangements in Nepal, Nicaragua, Bulgaria, Uzbekistan, Argentina and Chile amongst others.

Abstract

The following article provides a brief overview of the basic principles that should be considered when designing a public-private partnership (PPP) arrangement. A successful transaction or contract will be judged by a mix of factors, ranging from an effective design structure to a program that manages the risk and complexity of the change that is envisaged and ensures real sustainability in the long term.

I. Introduction

The implementation of an international competitive process for the selection of an international operator to be engaged under any type of PPP contract is a complex exercise. It demands careful, thought-out, and elaborated methodologies that adhere to the following fundamental principles to ensure a successful outcome:

Managing any PPP transaction or contract is a high profile activity vis-à-vis the general public, the political environment and potential bidders / operators. Thus, managing risk and implementing change will be the key factors that determine the success of the program as a whole.

In addition, once an operator has been selected, it is important that the operator is monitored and the benefits achieved through the PPP contract are maintained over time and communicated to stakeholders. The regulatory function plays a critical role in this and therefore the ability to sustain the change following the completion of the transaction will be critical. Major cultural, organizational, legal and institutional change is required to ensure that the potential benefits of PPP are achieved in both the short and longer term.

The diagram above shows a series of 'bubbles' that illustrate the inter-related aspects of any given PPP arrangement. In each bubble the main change imperatives in any given transaction are represented. The overall approach to the implementation of a successful and sustainable PPP arrangement should be designed to address these dominant change imperatives.

II. Six Guiding Principals

1. Design the contract to deliver a balanced risk profile between Government & the Private Operator

A successful contract will balance the risk between the Government and the operator. When PPP arrangements are designed in a manner that allocates project risks to that party best placed to handle that risk, they provide greater purpose and clarity for everyone involved - from government to potential bidders - regarding the desired outcomes and benefits. However, it is also critical to clearly communicate the outcomes and benefits to the key stakeholders.

Rigorous risk management is important throughout the life of the contract, as the costs to Government of not implementing the best strategy or having a failed PPP strategy will be extremely high - not only politically, but also to customers and to the economy as a whole. Risks must be defined and addressed continuously.

2. Win the commitment of critical stakeholders and operators

The implementation of the PPP project must be thoroughly and skilfully presented and marketed within Government, to the utility management, staff and labor, to the labor sector generally, and to the public-at-large. The benefits of reform and privatization must be developed and well presented if they are to be understood and accepted by all stakeholders. The success of the reform and PPP exercise will be greatly enhanced by successful marketing of the concepts involved. In addition, the commitment of potential bidders / operators will need to be gained and the design of the structure, its transparency and overall management (during and post transaction) will have a critical bearing in an operator's decision to participate in any PPP arrangement.

3. Develop a strong contract between Operator and Government

Sustainability of the transaction is of paramount importance. For Government's objectives to be met and for the operator to perform adequately, the 'rules of the game' need to be set. Clarity of roles and responsibilities between the parties are essential ingredients to achieve long and sustainable results.

4. Drive the Bidding Program

Change must be introduced at a pace that the marketplace can accommodate, maximizing buy-in at all levels in order to minimize the risk of failure. The process of developing buy-in will also involve consultations with Bidders at the beginning (when designing the structure of the transaction) and during contract development, and procurement.

5. Demonstrate improved service delivery in terms of customers and infrastructure

The key objective of the introduction of the private sector in the infrastructure sectors is generally to meet Government's policy objectives of:

• Improvement, quality, cost and access to infrastructure, and
• Ensuring the financial viability of infrastructure at minimum cost to Government

Clearly, in meeting the above objectives, Government will have a positive social and economic impact.

6. Sustain change to deliver long term benefits

All the levers (processes, fairness, transparency of process, international best practice, stakeholder participation, regulation) must be used to embed the changes into the privatization to ensure that benefits continue to be delivered and the changes sustained after the transaction has been completed.

III. Conclusion

In conclusion, this short article provides an overview of the main factors or change imperatives that are typical in any given PPP transaction. The diagram represents the different aspects that constitute a successful PPP arrangement, ranging from a balanced bid and contract design that allocates risks fairly between the parties, to gaining commitment from different stakeholders including the bidders and potential operators, all the way to ensuring sustainability of the proposed PPP structure through the regulatory and legal environment in place.

Copyright 2005© Institute for Public-Private Partnerships, Inc. All rights reserved