Institutionalization of Public-Private Partnerships (PPP)

by
Emma Thomas
Staff Researcher, IP3

About the Author...

Emma Thomas is a Staff Researcher in IP3's internship program. Previously, she worked in the U.K. for Interservefm Ltd, where she managed new business opportunities for PFI (Private Finance Initiative) project bids in the health and education sectors.

Introduction

How can developing and emerging market countries attract investment in infrastructure in an increasingly competitive environment for private financing? Knowledge of the utility of PPP models for infrastructure financing is steadily growing, but how can this be translated into viable, bankable projects? Many government and donor agency officials are finding answers to these two questions by recognizing the clear need to institutionalize the "PPP process" into everyday government management and operation.

"Institutionalization of PPP" refers to the establishment of a standardized model of PPP, promoted by central or local government, and adopted across a range of government functions at different levels and departments. Responsibility for promotion and development of the standardized model rests with a specifically designated unit or taskforce.

Institutionalization is increasingly being recognized as the critical reason that some countries have been able to successfully develop sustainable projects that utilize private investment in infrastructure financing. Several case studies of PPP Units/Taskforces operating in the U.K, Ireland, Netherlands and Greece have made the benefits of this approach readily apparent. This trend is not just confined to developed countries: notable examples exist in South Africa, where the P3 Unit has stimulated an emerging PPP program and in the Philippines, the CCPSP-BOT Center has built expertise to become a technical assistance unit, a marketer of the PPP approach, and trainer of public officials. Donor officials have also begun to realize the need to promote a unified approach to PPP: this year saw the first meeting of the "PPP Alliance", set up by the United Nations Economic Commission for Europe, to tackle the slow progress of PPP projects in Central and Eastern Europe. The meeting's main topic was the "the creation of successful and dynamic PPP Units" and its outcome was to recommend their establishment. It is becoming increasingly clear that P3 Units focus commitment and resources to get PPPs off the ground and boost investor confidence. They provide a technical resource for public officials and bring together necessary input from the many government departments who have an interest in infrastructure development projects. With this in mind, it is no surprise that institutionalization of PPP is set to become a major focus for 2003.

Going Forward

The first practical step to achieving institutionalization of PPP is establishing a unit or specialist taskforce within government to deal with PPP. This has an immediate benefit, demonstrating government commitment to the process, which sends a message to investors and all branches of government that PPP is a option being seriously pursued and one in which the government is prepared to invest resources and expertise. For example, situating the Unit within the Ministry of Finance sends a signal that PPP forms part of the government's core financing and investment strategy and that financial decision makers in government are closely involved with the work of the Unit.

An appropriate legal framework that establishes the authority of the government to enter into PPP arrangements must be in place before a PPP program can be launched. Drafting appropriate legislation can be the first task of the PPP Unit. While the legal framework is being prepared, the PPP Unit should be identifying feasible projects to serve as pilots that enable transactional details to be worked out and "lessons learned" galvanized to form best practice guidelines. Successful pilot projects which enable development of repeatable models are a critical part of institutionalizing PPP: they function as advertisements to the investment community, to government departments, and to municipal authorities for the PPP process by providing tangible evidence that the process can work. Using these as a springboard for publishing advice and guidance on key issues builds knowledge within the public sector. The most important part of this process is the development of a standardized contract document, drawing on the best practice guidelines and advisory notes, which defines the structure of the PPP model to be used in all sectors of government. The development of such documentation is a significant advance in PPP programs: although each project will tailor its own finalized contract, it lets private investors and the public sector know what the broad risk profile will be for any PPP project; it speeds up negotiations and therefore reduces costs for all parties and most importantly, it ensures all projects are achieving a minimum standard in terms of contractual rigor.

PPP Units need to be mandated to educate, train and disseminate information amongst public officials in a comprehensive capacity building program. While knowledge of the PPP process is growing in most countries, detailed knowledge of transactions techniques, such as financial analysis and risk analysis are rare, as is experience of negotiating with the private sector. A central information unit that continually remains abreast of current market practice and has actively worked out in-country solutions is essential to provide the training to fill this knowledge gap.

For government departments and municipal authorities to take the step of initiating their own PPP arrangements, there must be a clear and transparent means of applying for funding from central government. A single decision making body with clear authority to approve projects lets investors and government officials know exactly where they stand and increases confidence from the private sector that up-front investment in the bidding process will be not be wasted. It will also assist the government in attracting bid fund assistance from donors through initiatives such as the Emerging Africa Infrastructure Fund, launched this year to help projects through the feasibility study and bidding stages.

Ireland's Public Private Advisory Group, in its publication Framework for PPPs best describes one of the great strengths of institutionalizing PPP:

"The creation of an environment supporting the development of PPPs extends beyond the application of contract law to the development of consensus and understanding of the main objectives of PPP including, in particular, the need for quality public services."

In other words, a centralized and managed approach to informing the public about the benefits of a PPP program can help build support amongst stakeholders.

Finally, institutionalization of PPP should involve a centralized monitoring function, which ensures PPPs continue to represent good value for money and ensures both the private and public sectors are meeting contractual obligations. This again, will develop confidence amongst the private sector that contract interpretation and application will conform to a recognized standard.

As the importance of private investment in infrastructure financing is a firmly established principle, the undeniable benefits of institutionalizing the PPP process will ensure it is a strong feature of funding initiatives and capacity building efforts in 2003. Establishment of PPP Units and fostering pilot projects will continue to be a priority for countries developing PPP friendly environments. Linked closely to that will be the development of an increasing number of "bid funds" being created in 2003, particularly on a regional basis, which will prioritize funds to governments who are serious about institutionalizing PPP.

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