Complexities behind structuring a Public Private Partnership

Complexities behind structuring a Public Private Partnership

Public Private Partnerships or PPPs are rapidly gaining ground as the public sector reaches out to the private sector for its expertise in putting together an operation, running it, then handing it over back to the public sector.

Over the years, I have observed hundreds of PPPs formed with the purest of intentions, however very few PPPs survive the test of time. Those that do survive, are not able to meet the objectives that were set out for them in the beginning. A key reason behind PPPs not reaching its objectives is that they are not structured properly. Although all PPP architects know that their PPP should follow some variation of DBFO model (Design-Build-Finance-Operate) or a DBO model (Design-Build-Operate), the issue of  “financial sustainability” and “contingency financing” is very loosely defined by the architects.

In the DBFO model (which is most commonly used), the PPP’s private provider is responsible for raising the financing, running,  and maintaining the project to the specifications of the public sector. The private provider expects a payout for its efforts, and this is where the problems start appearing. If the private provider is not experienced in raising capital then it will not be able to get an optimal yield, as a result the operation will be running inefficiently (lack of capital does that to businesses). Very soon the private providers expect to start receiving their payouts, and the efficiency of the project drops further because focus is more on the payout. The best way to avoid such situations is for PPP architects to define the right responsibilities and to factor in the right contingencies for both the debt and equity financiers in the SPV (Special Purpose Vehicle).

Another way to manage risks with the SPV is to ensure that loop holes are not rampant. Each PPP has a section in the contract that discusses issues relating to deductions and penalties, step-in to take over operations, and contract terminations, however, that same contract also has another section called mechanisms for variation, which is usually rich with loop holes.

PPP architects can further reduce the risk of failure if the right ownership structure is selected. Of the two ownership structures COCO (Contractor-Owned, Contractor-Operated) and GOCO (Government-owned, Contractor-Operated), GOCO has a higher element of risk. If a PPP is structured as a GOCO in a developing country, then the risk for the SPV escalates because if there is a change in government, it may mean a shift in policy, which may put the SPV’s investment of time and material at risk. Fortunately there are ways to mitigate these.

From the desk of


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