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Sector: State Highway  |  Module 1: PPP Background

Overview of PPP modal variants

Project characteristics that affect the choice of PPP mode

The different modes and variants of them will be appropriate to different projects. This will depend in particular on the nature of the service or output required, which in turn depends on the sector and sub-sector, and the political and economic climate in which the PPP will be carried out.

The key aspects that define the PPP mode are:

  • Does the PPP involve building new assets to provide the service (capital expenditure project), or are the required services for operations and management only?
  • Which roles will the private sector carry out? For example, who will provide finance? Who will design and construct?
  • Who will have ownership of the assets during the PPP and when the PPP ends?
  • What will be the duration of the PPP contract?
  • How are the various project risks allocated between the private and public partners?
  • What will be the major revenue source for the project? For example, will it be from charges to users (direct tolls), or payment from Government (eg, shadow toll or annuity)?
  • Is demand for the infrastructure service expected to be stable over the period of the contract?

New (“Greenfield”) or existing assets – Greenfield developments, which include major capital expenditure to build new infrastructure, have different requirements to the rehabilitation or management of existing assets in Brownfield developments.

The scope of potential private sector roles is broader in greenfield projects. The chosen PPP mode will reflect whether the private sector will be responsible for the design, finance and construction of the project (eg DBO agreement or a variation) or only some of these roles.

Ownership flexibility – There may be legal restrictions on public ownership (as is the case in India for highways or port frontages). Other practical issues need to be taken into account in deciding ownership, such as political acceptability (eg due to resistance to public ownership of certain facilities that are seen as providing strategic or ‘vital’ services, such as may be the case in electricity).

Restrictions on ownership rule out PPP modes that specifically contain ownership aspects, such as Build-own-operate (BOO) and its variants (eg. BOOT). In this case other options such as lease management contracts, BOT, BTL, could be considered.

Lifetime of the asset and scale of capital costs – infrastructure assets that involve large upfront capital costs, such as roads, require long timeframes for cost recovery. Such assets may be suited to long-term contracts (eg BOT, BLT etc).

However, long timeframes also bring greater risk of future unknowns. The public sector may be required to take on some of these risks by providing some guarantee to cost recovery in order to attract private sector project finance. For example, for a road project where future traffic volumes are uncertain the PPP might be structured with annuity payments rather than being toll-based, to reduce the revenue risk to the private operator. Alternatively, if long-tenor finance from the private sector is not available public sector financing may need to step into the gap (eg IIFCL).

The willingness or ability of the public sector partner to meet these risks is a further factor to be considered in determining the length of contract. For example, if facilities to support long-tenor debt are not available shorter term contracts with renewal clauses may be appropriate.

The nature of the service to be provided and the supporting infrastructure assets – More broadly, the nature of the end-user service itself will tend to favour a type of contracting structure. This is related to the capital cost structure (scale and timing) and the nature of the assets (physically fixed to their location or transportable).

Large capital-intensive network infrastructure assets tend to be natural monopolies and require some form of institutional price and quality regulation, either within the terms of contract or by a dedicated regulatory agency.

By contrast, some services such as those that are provided on the network (eg municipal buses, electric energy) or solid waste collection, can be subject to market competition. A different contracting structure is possible in this case, including greater opportunity for shorter contracts and periodic competitive re-bidding to maintain pressure on costs.

Cost recovery options – Whether the revenue from the PPP will be from a user-charge or a management fee or annuity paid by the public sector has important implications for the nature of the risk sharing.

Stability of demand for the services required – long-term PPP contracts are best suited to the provision of infrastructure services which are not expected to change much through time. These projects have lower risk of unforeseeable outcomes compared with projects whose services are subject to change, for example in sectors that are subject to rapid technological change.

In some cases it may be necessary to provide the project with some protections from competition in order to reduce volume and revenue risk. For example, a roads project might have a guarantee from the public sector that an alternative route won’t be allowed nearby within a set number of years or until traffic has reached a specified level.

 
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