PPP (Public Private Partnerships)

Madinah offers consultancy on PPP Procurement Options

PPP is a long-term contractual collaboration between a Government body and the Private Sector. It may be that the Government body requires services that it cannot provide from within its own technical or financial resources. PPP projects would not normally be considered viable for schemes less than US$ 100 M. The initial costs of establishing the PPP are typically in excess of 5% OF THE TOTAL SCHEME SUM. The contractual collaboration period can be defined by duration, by total payment value, or other combination mechanisms deemed appropriate for the specific service provision. The Government body may be National Government (a Department, Bureau, Agency, etc.,) or a Municipality. Quasi-Governmental bodies may also create PPP projects. The Private Sector will be an investor (or consortium of investors) that has specific skills, technology or knowledge and finance that the Government body needs to develop a scheme. In such cases the Private Sector and the Government body create a form of ‘Joint Venture Partnership’ to develop the project or services. If the collaboration is primarily for the delivery of services, then normally the scheme would be described as a PPP. If the scheme is primarily for the development of a physical asset, then normally the scheme would be described as a PFI (Private Finance Initiative) [See PFI descriptor].

The Joint Venture Partnership

has a legal identity and management structure that is separate from yet defined by the JV parties. The JV shareholding is normally defined by the financial contributions of the parties. The net profits from the operation of the PPP are shared in accordance with this agreement. The JV collaboration effectively creates a single legal entity, often referred to as a Special Purpose Entity (SPE) which is responsible for, and technically and financially liable, for the delivery of the scheme. As the SPE has complete control over the delivery of the scheme it is essential that a Service Specification Schedule (SSS) is prepared that fully defines the quantity and quality of service delivery required, and the Payment Mechanism (PM) for the delivered and specified services. Under a PPP, the payments only commence when the service becomes operational.

The Service Specification Schedule (SSS)

would typically be drafted from the Government Body service requirements. Detailed attention to the exact specification is essential and the SSS should cover performance criteria, quantity and quality thresholds, and performance assessment and review methods.

The Payment Mechanism (PM)

specifies how the services will be paid for. There are many variants of payment mechanisms: Direct Payment by the User (of the Services); Payment by the Government Body; Shadow Tolls and Payments; Partial Direct Payment and Subsidy, and combinations of the above. Detailed attention to the exact PM is essential. The PM should also include mechanisms for non-payment evaluation for service provision failures.

The SPE has autonomy to deliver the Services in any way that meets the performance criteria specified in the SSS. This permits the SPV to innovate and apply novel solutions which may contribute to improved effectiveness and efficiency. 

The SPE also accepts legal liability for service failures, and this effectively provides risk transfer for the Government body.

So, in summary: The PPP is a mechanism for providing Value for Money (Services), with effective Risk Transfer (for the Government Body) within a Resilient and Affordable long-term contractual mechanism. 

PFI (Private Finance Initiative)

Madinah offers consultancy on PFI Project Procurement options.

PFI is a long-term contractual collaboration between a Government body and the Private Sector. It may be that the Government body requires physical assets that it cannot provide from within its own technical or financial resources. PFI projects would not normally be considered viable for schemes less than US$ 100 M. The initial costs of establishing the PFI are typically in excess of 5% OF THE TOTAL SCHEME SUM. The contractual collaboration period can be defined by duration, by total payment value, or other combination mechanisms deemed appropriate for the specific service provision. For PFI, a typical duration may be 25 years, and the maximum duration currently permitted under Turkish Law is 49 years. The Government body may be National Government (a Department, Bureau, Agency, etc.,) or a Municipality. Quasi-Governmental bodies may also create PFI projects. The Private Sector will be an investor (or consortium of investors) that has specific skills, technology or knowledge and access to considerable finance that the Government body needs to develop a scheme. In such cases, the Private Sector and the Government body create a form of ‘Partnership’ to develop the scheme. If the scheme is primarily for the development of a physical asset, then normally the scheme would be described as a PFI (Private Finance Initiative.) If the collaboration is primarily for the delivery of services, then normally the scheme would be described as a PPP. [See PPP descriptor]. There are instances of combined schemes, involving asset development and operational services, where the distinction is much harder to determine. The ‘Partnership’ has a legal identity and management structure that is separate from yet defined by the parties. The ‘Partnership’ shareholding is normally defined by the financial contributions of the parties. The net profits from the operation of the PFI are shared in accordance with this agreement. The collaboration effectively creates a single legal entity, often referred to as a Special Purpose Vehicle (SPV) which is responsible for, and technically and financially liable for, the delivery of the scheme. As the SPV has complete control over the delivery of the scheme it is essential that a Project Specification Schedule (PSS) is prepared that fully defines the physical quantity and quality of asset required, and the Payment Mechanism (PM) for the delivered and specified asset. Under a PFI, payments only commence when the asset is completed and becomes operational.

The Project Specification Schedule (PSS)

(PM) specifies how the assets will be paid for. There are many variants of payment mechanisms: Direct Payment by the User (of the Assets); Payment by the Government Body; Shadow Tolls and Payments; Partial Direct Payment and Subsidy, and combinations of the above. Detailed attention to the exact PM is essential. The PM should also include mechanisms for non-payment evaluation for asset provision failures. The SPV has autonomy to deliver the Assets in any way that meets the performance criteria specified in the PSS. This permits the SPV to innovate and apply novel solutions which may contribute to improved effectiveness and efficiency. The SPV also accepts legal liability for asset failures, and this effectively provides risk transfer for the Government body. So, in summary: The PFI is a mechanism for providing Value for Money (Assets), with effective Risk Transfer (for the Government Body) within a Resilient and Affordable long-term contractual mechanism.

If you need further details, or would like to arrange a consultation, then contact | info@mdinah.com