LPM 303:PUBIC-PRIVATE PARTNERSHIPS

UNIVERSITY OF NAIROBI

BACHELOR IN PROJECT PLANNING AND MANAGEMENT

LECTURER:JOHNSON KAZUNGU

CELLPHONE : 0721 234 507

EMAIL:[email protected]
 GENERAL COURSE OUTCOMES
At the end of this course, you should be able to:
1. Develop critical perspectives on fundamental arguments about what PPPs are,
how they work and why they matter.
2. Explain how and why PPPs have emerged over the past decades as a widespread
global development in governance.
3. Develop the analytical skills needed to analyze PPPs from a political perspective
and assess their opportunities, constraints and risks.
4. Assess the feasibility of Public private partnership projects
5. Manage public private partnership contracts
6. Determine the funding mechanism for public private partnership projects.
 LPM 303: PUBLIC PRIVATE PARTNERSHIPS
COURSE OUTLINE
CHAPTER TOPIC
1 INTRODUCTION TO PUBLIC PRIVATE PARTNERSHIPS
2 PUBLIC PRIVATE PARTNERSHIPS AND DEVELOPING COUNTRIES
3 MODELS OF PUBLIC PRIVATE PARTNERSHIPS
4 FEASIBILITY OF PUBLIC PRIVATE PARTNERSHIP PROJECTS
5 ESTABLISHMENT OF PUBLIC PRIVATE PARTNERSHIPS
6 STRUCTURING PUBLIC PRIVATE PARTNERSHIP CONTRACTS
7 MANAGING PUBLIC PRIVATE PARTNERSHIP CONTRACTS
8 FINANCING MECHANISMS FOR PUBLIC PRIVATE PARTNERSHIP
PROJECTS
 CHAPTER ONE
INTRODUCTION TO PUBLIC - PRIVATE
PARTNERSHIPS

UNIT: LPM 303- PUBLIC-PRIVATE PARTNERSHIPS

COURSE: BACHELOR IN PPROJECT PLANNING AND MANAGEMENT

 Objectives for lecture 1 of 2
By the end of the lecture, you should be able to:

1.Define PPPs and associated concepts.

2.State different Models of PPPs
3.Discuss the Philosophies and Theories of PPPs
 1.1 Definitions and Concepts of PPPs
Definitions of PPPs ~ 1 of 5
There is no universally accepted definition of PPPs concept. However
some of the definitions include:
(1)By OECD: PPP is an agreement between government and one or
more private partners (as operators or financiers) in which the private
partner delivers services so that the service delivery objectives of the
government are aligned with the profit objectives of the private partners.
Furthermore the effectiveness of the alignment depends on a sufficient
transfer of risk to the private partners.(Organization for Economic Cooperation and
Development)
 Definitions of PPPs ~ 2 of 5
(2)By IMF:
PPP refers to arrangements in which the private sector supplies
infrastructure assets and services that traditionally have been provided by
the government. In addition to private execution and financing of public
investment,PPPs have two other important characteristics: an emphasis
on service provision and investment by the private sector hence a
significant risk is transferred from the government to the private
sector(International Monetary Fund)
 Definitions of PPPs ~ 3 of 5
(3) By EUROPEN COMMISION:

PPP refer to forms of cooperation between public authorities and the

world of business which aim to ensure the funding, construction,
renovation, management and maintenance of infrastructure for the
provision of a service( EU’s politically independent executive arm).
 Definitions of PPPs ~ 4 of 5
(4) By WORLD BANK: PPP is a long term contract between a public
party and a private party for the development and/or management of a
public asset or service, in which the private agent bears significant risk
and management responsibility through the life of the contract, and
remuneration is significantly linked to performance, and/or the demand
or use of the asset or service.
Definitions of PPPs ~ 5 of 5
(5) BY WEIMER AND VINING: A PPP typically involves a
private entity financing, constructing, or managing a project in
return for a promised stream of payments directly from
government or indirectly from users over the projected life of
the project or some other specified period of time.
More definitions of PPPs
(iv) BY KENYA: In Kenya a PPP is defined as a performance –based
contract under which the private sector supplies public service over
time and is paid by the public sector, end user or a hybrid of both.
Output is specified by contacting authority while input is the
responsibility of the private sector.
 Concepts of PPPs~1 of 4
Although there is no universally recognized definition of PPP, its objectives
undisputedly are service provision by government and investment by the
private sector.
From the above definitions it follows that there are three essential
characteristics of PPPs:
(i) Agreement or contract between a public and private sectors
(ii) Service delivery by public sector and profit making by private sector
(iii) Risk sharing whereby the private sector assumes more risks than the
public sector.
 Concepts of PPPs ~2 of 4
PPPs are contractual arrangements between government and the private
sector for the purpose of providing public infrastructure, community
facilities and related services. PPPs are therefore contractual means to
deliver public assets and public services.
If the contracts involve development and management of new
infrastructure or upgrading existing infrastructure ,such constitute
infrastructure PPPs, and those in which the private sector only manages
existing infrastructure ,or only provides or operates public services
constitute service PPPs
Concepts of PPPs ~ 3 of 4
Common themes of PPPs are the sharing of investment, risk,
responsibility and reward, and the development of innovative,
long-term relationships between the public and private
sectors.
In PPPs, the private sector enters into a contract with the
government for the design, delivery and operation of the
facility or infrastructure and the services provided.
Concepts of PPPs ~4 of 4
In PPPs ,the private sector finance the capital investment and recover
the investment from the project proceeds over the course of the
contract. The asset is transferred back to the public sector at the end of
the contract.
PPPs in infrastructure are financed under the concept of “Project
Finance” whereby finance is arranged on project basis. In a case where
debt(loan) was obtained, lenders look to the cash flows of the project
for repayment.
 1.2 Models of PPPs
PPPs models refer to the various forms in which the contract between the
parties to a public private partnership project is structured.

There is no single model that can be prescribed as the best model.

However, the choice of a model depends on the:

1. Prevailing circumstances and

2. Nature of the project that is to be undertaken.

 Commonly used PPPs models
1. Service contracts - The private party procures, operates and maintains an asset
for a short period of time. The public sector bears financial and management risks

2. Operation and management contracts -The private sector operates and

manages a public owned asset. Revenues for the private party are linked to
performance targets. The public sector bears financial and investment risks

3. Leasing-type contracts - The private sector buys or leases an existing asset from
the government, renovates, modernizes, and/or expands it, and then operates the
asset, again with no obligation to transfer ownership back to the government

NB: TO BE COVERED IN DETAILS IN CHAPTER THREE

 Commonly used PPPs models
4.Build-operate-transfer (BOT) - The private sector designs and builds an
asset, operates it, and then transfers it to the government when the operating
contract ends, or at some other pre-specified time. The private partner may
subsequently rent or lease the asset from the government.

5.Design-Build-Finance-Operate (DBFO) - The private sector designs,

builds, owns, develops, operates and manages an asset with no obligation to
transfer ownership to the government. These are variants of design-build-
finance operate (DBFO) schemes.

NB: TO BE COVERED IN DETAILS IN CHAPTER THREE

 1.3 Philosophies and Theories of PPPs ~ 1 of 3
Philosophies associated with PPP projects center around the benefits that can accrue
as a result of a sound implementation of projects. Some of the Philosophies of PPPs
include:

1. PPPs enable the public sector to harness the expertise and efficiencies that the
private sector can bring to the delivery of certain facilities and services
traditionally procured and delivered by the public sector.
2. PPPs may be structured so that the public sector body seeking to make a capital
investment does not incur any borrowing. Rather, the PPP borrowing is incurred
by the private sector vehicle implementing the project.
 1.3 Philosophies and Theories of PPPs ~ 2 of 3
PPP is a complex arrangement that involve several participants beside the
government and private sector. One of the most important participants is the special
purpose vehicle(SPV).

An SPV is a special company typically formed by a private sector consortium to

develop, build, maintain and operate the asset for the contracted period. In cases
where the government has invested in the project, it is typically (but not always)
allotted an equity share in the SPV.

A consortium(plural: consortia) is an association of several companies participating

in a common activity or pooling their resources together to achieve a common.
 1.3 Philosophies and Theories of PPPs ~ 3 of 3
In infrastructure PPPs the consortium is usually made up of a building contractor, a
maintenance company and equity investor(s). It is the SPV that signs the contract
with the government and with subcontractors to build the facility and then maintain
it. In the infrastructure sector, complex arrangements and contracts that guarantee
and secure the cash flows make PPP projects prime candidates for project financing.

A typical PPP example would be a hospital building financed and constructed by a

private developer and then leased to the hospital authority. The private developer
then acts as landlord, providing housekeeping and other non-medical services while
the hospital itself provides medical services.
Typical PPP Structure
 Meaning of special purpose
vehicle(SPV)
A special purpose vehicle(SPV) also known as special purpose entity(SPE) is
legal entity usually a limited company or a limited partnership created to fulfil
narrow, specific or temporary objectives.

The use of SPV scheme is used by companies to isolate the firm from
financial risks in that a company will transfer assets to the SPV for
management or use the SPV to finance large project thereby achieving narrow
set of goals without putting the entire firm at risk. SPVs are also used in
complex financing to separate different layers of equity infusion.
Establishment of SPV
Like a company, an SPV must have promoter(s) or sponsor)s) who hive off
assets or activities from the rest of the company into an SPV. This isolation of
assets is important for providing comfort to the investors. In this case the assets
or activities are distanced from the parent company: hence the performance of
the new entity will not be affected by the ups and downs of originating entity.
On the other hand the SPV will be subject to fewer risks and thus provide greater
comfort to lenders. However there must be a distance between the sponsor and
the new entity for it to be an SPV otherwise it will end up only being a
subsidiary company. A good SPV must be able to stand on its feet, independent
of sponsoring company.
 Reasons 1-3 for creating SPVs
1. Securitization – SPVs are commonly used to securitize loans or other
receivables. For example a bank wishing to issue a mortgage-backed security
whose payments come from a pool of loans, will create an SPV and then
transfer the loans from the bank to the SPV.This action legally separate loans
from other obligations of the bank and ensure that the holders of the
mortgage-back securities have the first priority right to receive on the loans.
2. Risk sharing – corporate may use SPVs to legally isolate a high risk project
or asset from the parent company and to allow other investors to take a share
of the risk.
3. Finance – Multi-tiered SPVs allow multiple tiers of investment and debt.
Reasons 4- 5 for creating SPVs
4.Asset transfer- Many permits required to operate certain assets(such as power
plants) are either non-transferable or difficult to transfer. By having an SPV own
the asset and all permits, the SPV an be sold as a self-contained package, rather
than attempting to sign over numerous permits.
5.For competitive reasons – an SPV may be created to prevent competitors. For
example ,when Intel and Hewlett-Packard started developing IA-64(Itanium)
processor architecture, the created an SPC owned by the intellectual technology
behind the processor hence prevent competitors such as AMD accessing the
technology through pre-existing licensing deals.
6.Financial engineering – SPVs are used in complex financial engineering
schemes with the aim of tax avoidance or manipulation of financial statements.
Reasons 7-8 for creating SPV
7.Regulatory reasons – An SPV can sometimes be set up within an orphan
structure to circumvent regulatory restrictions, such as regulations relating to
nationality of ownership of specific assets.
8.Property investing – some countries have different tax rates for capital gains
and gains from property sales. For tax reasons, letting each property be owned by
a separate company can be a good thing. These companies can then be sold and
bought instead of the actual properties, effectively converting property sale gains
into capital gains for tax purposes.
THE END
Pamoja Tuangamize Korona

“By washing our hands with soap regularly, wearing masks and maintaining
social distance in public and”

Be safe THANK YOU