The World Bank PPP Knowledge Lab defines a PPP as “a long-term contract between a private party and a government entity, for providing a public asset or service, in which the private party bears significant risk and management responsibility, and remuneration is linked to performance”.
PPPs do not usually involve service contracts or turnkey construction contracts, which are known as public procurement projects, or the privatization of utilities where the public sector has a limited ongoing role.
Most PPP projects have a contractual term between 20 and 30 years; others have shorter terms; and some last longer than 30 years. The term should always be long enough for the private party to have the incentive to integrate the considerations of service delivery costs into the design phase of the project.
This also includes maintenance considerations, with a view to optimizing trade-offs between initial investment costs and future maintenance and operating costs.
The “whole-life” approach, taking into account entire-life costs and entire-life benefits, maximizes the efficiency of service delivery. It is at the core of the rationale for the use of PPPs for the delivery of public services. The exact duration of the contract depends on the type of project and the policy considerations.
Policymakers need to be satisfied that the demand for the services provided by the project will be sustained throughout the life of the contract; that the private party should be able to accept responsibility for the delivery of the service over the term of the contract; and that the procurement authority should be able to commit to the project for its duration. The availability and conditions of the financing may also influence the term of the PPP contract type.
Types of PPP Contracts
There are several different types of public private partnership contracts (often referred to as PPPs and P3s) or in the United Kingdom, the Private Finance Initiative or PFIs, depending on the type of project (for example, road or prison), the level of risk transfer, the level of investment and the desired outcome.
1.Build – Operate – Transfer (BOT Contract)
The first type of PPP contract is the BOT model which is generally used to develop a precise asset rather than a whole network, such as a toll road. This simple structure gives the private sector partner the most freedom during construction, and the public sector bears the risk of equity.
2.Build – Own – Operate – Transfer (BOOT Contract)
The private sector builds and owns the facility for the duration of the contract, with the primary objective of recovering construction costs (and more) during the operational phase. The facility is handed back to the government at the end of the contract.
This structure is appropriate when the government has a large gap in the financing of infrastructure, as capital and commercial risk remain with the private sector for the duration of the contract. This model is often used in school and hospital contracts.
3.Build – Own – Operate (BOO Contract)
This is similar to BOOT (below), but the facility is not transferred to the public sector partner. A BOO transaction may qualify for tax-exempt status and is often used for water treatment or power plants.
The design-build contract is awarded to a private partner for the design and construction of a facility or part of the infrastructure that delivers the performance specification of the PPP contract. This type of PPP partnership can reduce time, save money, provide stronger guarantees (as working with a single entity rather than a consortium) and allocate additional project risks to the private sector.
5.Design-Build – Finance
The private sector builds an asset and finances capital costs only during the construction period.
6.Design-Build – Finance – Operate (DBFO)
The private sector designs, finances and constructs a new facility under a long-term lease and operates the facility during the lease term. The private partner will transfer the new facility to the public sector at the end of the lease term.
7.Design-Build – Finance – Maintain – Operate (DBMFO)
Similar to BOOT, DBFO (and its variations) is more widely used in the United Kingdom for PFI (Private Finance Initiative) projects. The private sector designs, builds, finances, operates an asset, and then leases it back to the government, typically over a period of 25 to 30 years. The long-term risk of the public sector is reduced and regular payments make it an attractive option for the private sector.
8.Design – Construct – Maintain – Finance (DCMF)
Design, Construct, Maintain, and Finance are very similar to DBFM. The private entity creates the facility on the basis of the government body’s specifications and leases it back to them. This is generally the PPP prison project convention.
9.O & M (Operation & Maintenance)
In an O&M contract, a private operator operates and maintains an asset for a public partner, usually at an agreed level with specified obligations. Work is often subcontracted to specialized maintenance companies.
Payment for this contract is either by way of a fixed fee where a lump sum is paid to a private partner or, more commonly, by way of a performance fee. In this situation, performance is stimulated by a pain-share / gain-share mechanism that rewards the private partner for over-performance (according to agreed SLAs) or induces a penalty payment for work that has fallen short.
Transfer of a public asset to a private or quasi-public entity, usually under a contract to upgrade and operate the assets for a specified period of time. Public control shall be exercised through the contract at the time of transfer.
11. Operating License
A private operator shall be given a license or a right to build and operate a public service, usually for a specified term. Similar to the BBO arrangement. These are often used in telecommunications and ICT projects.