Public–private partnerships in metropolitan government: perspectives on governance, value for money and the roles of selected stakeholders

Figures & data

Table 1: Forms of public–private partnership

Form of PPP	Description
1. Build–operate–transfer (BOT)	An agreement where the private sector takes primary responsibility for financing, designing, building and operating the PPP project or concessionaire for the period of the concession (15–25 years). After the private sector has earned its capital and profit, it then transfers the control and ownership to the metropolitan government.
2. Build–own–operate (BOO)	An agreement where the private sector finances, designs, builds, operates, controls and takes ownership of the PPP project in perpetuity.
3. Leasing	The financial risk is transferred to the private sector. The municipality designs and builds the facility and leases it out or contracts it to the private sector, which takes primary responsibility for operating and maintaining the facility. A leasing or affermage contract is the most usual form of PPP in the six metropolitan governments.
4. Joint ventures (JV)	Both the private and public sectors, with specific reference to the metropolitan government, form a partnership to jointly finance, own and operate a facility or project for a specific duration. The Japanese government considers JVs a ‘third sector’ approach to local economic development, with the public sector considered to be the ‘first sector’ and the private sector the ‘second sector’, respectively.
5. Management contract or operations	The private sector is partially involved in providing infrastructure-related services or partially manages the operations of the facility for a period specified in the contract. Management contract or operations can take the following forms of PPPs: design, build, finance and operate (DBFO); operate, maintain and manage (OMM); or operate and maintain (OM). The length of the management contract ranges from 5 to 15 years.
6. Cooperative arrangements or public–private cooperation	These are informal partnerships between the public sector, in this case the metropolitan government, and the private sector. The metropolitan government provides fiscal incentives and guarantees to attract the private sector to invest in physical or infrastructural development in their respective areas.
Source: Grimsey and Lewis (2004:10–12).

Table 2: Classification of infrastructure capital by type

Classification	Hard	Soft
Economic infrastructure	Roads, motorways, bridges, airports, electricity or power generation and distribution, ports and railways.	Vocational training, financial facilities for business (payments, credit, equity, derivatives and venture capital), R&D facilitation, technology transfer, export assistance and productive cooperation among individuals, government and business entities.
Social infrastructure	Clinics, hospitals, schools, water supply, housing, child care, prisons, aged care homes.	Social security, community services, environmental agencies.
Source: Grimsey and Lewis (2004:21).

Table 3: PPP-induced risks and causes

Type of risk	Causes
1. Economic	Devaluation risk, foreign exchange risk, inconvertibility of local currency, inflation risk, interest rate risk, and small capital market.
2. Legal	Inefficient legal process or disregard of legal process by the processing party, legal barrier, and changes in [relevant] laws, regulations and policies.
3. Operational	Incapability of investors, infrastructural risk due to low quality of or limited physical infrastructure, demand and supply risk, improper regulation, liability risk, price escalation, management risk as a result of high operating costs and maintenance costs, and technical risk that is due to engineering and design failures.
4. Political	Internal resistance of employees to change and transformation, labour or union resistance to privatisation or PPP initiatives and programmes, a move by government towards nationalisation in the middle of the PPP project, political influence by the ‘lefts or rights’ to liberalisation, uncertainty of government policy, instability of the political environment, which results in internal instability, and unsupportive government policies.
5. Transactional	A delay in privatisation, improper privatisation, ineffective or incompetent administration, limited number of (interested) investors, and unfavourable investment conditions.
6. Force majeure	War and other natural calamities and acts of God.
7. Construction	Faulty construction techniques and cost escalating or delays in construction.
8. Revenue	Traffic shortfall or failure to extract resources, the volatility of prices and demand for products and services sold leading to revenue deficiency.
9. Financial	Inadequate hedging of revenue streams and financing costs.
10. Environmental	Adverse environmental impacts and hazards.
11. Project default	The PPP project fails because of a combination of any of the above.
Source: Grimsey and Lewis (2004:172).

Table 4: Risk matrix

Type of risk	Source	Risk management by
1. Site risk	Ground conditions, supporting structures	Private party (the construction constructor)
• Site conditions	Site redemption, tenure, pollution/discharge, obtaining permits, community liaison, and pre-existing liability	Private party (the project company)
• Site preparation	Native title and cultural heritage	Metropolitan government
• Land use
2. Technical risk	Fault in tender specification	Metropolitan government
	Contractor design fault	Private party (the construction constructor)
3. Construction risk	Inefficient work practices and wastage of materials, changes in law, delays in project approvals	Private party (the construction constructor)
• Cost over-run	Lack of coordination of contractors, failure to obtain standard planning approvals	Private party (the project company/investors)
• Delay in completion	Insured force majeure events	Private party (the construction constructor)
• Failure to meet performance criteria	Quality shortfall/defects in construction/commissioning test failure	Private party (the insurance company)
		Private party (the construction constructor)
4. Operating risk	Project company request for change in practice	Private party (the project company/investors)
• Operating cost over-run	Industrial relations, repairs, occupational health and safety, maintenance, etc.	Private party (operator)
• Delays/interruption in operation	Government change to output specifications	Metropolitan government
• Shortfall in service quality	Operator fault	Private party (operator)
	Government delays in granting or renewing approvals, providing contracted inputs	Metropolitan government
	Operator fault	Private party (operator)
5. Revenue risks	Contractual violation by (metropolitan) government owned support network	Metropolitan government
• Increase in input prices	Contractual violation by private supplier	Private party (supplier)
• Change in taxes and tariffs	Fall in revenue	Private party (the project company/investors)
• Demand for output	Decreased demand	Private party (the project company/investors)
6. Financial risks	Fluctuations with insufficient hedging	(Metropolitan) government/private party
• Interest rates	Payments eroded by inflation	(Metropolitan) government/private party
• Inflation	Floods, earthquake, riots and strikes	Shared
• Force majeure risk	Construction period	Private party (the construction constructor)
• Regulatory/political risk	Operating period	Private party (the project company with metropolitan government compensation as per contract
• Changes in law	Breach /cancellation of licence	Metropolitan government
• Political interference	Expropriation	Metropolitan government/private party (investor/insurance company)
• Project default risks	Failure to renew approvals, discriminatory taxes, import restrictions	Metropolitan government
	Combination of risks	Equity investors followed by banks, bondholders and institutional lenders
	Sponsor suitability risk	Metropolitan government
	Technical obsolescence	Private party (the project company)
	Termination	Private party (the project company/investors)
	Residual transfer value	Metropolitan government, with compensation for maintenance obligations
Sources: Adapted from Grimsey and Lewis (2004:180–2), Charoenpornpattana and Minato (1999:436).

Table 5: Risk analysis model

Institution	Risk perspective	Key variables	Major risk	Risk analysis
Metropolitan government	1. Value for money	Net present value of contract	Bid qualifications	Expected cost and sensitivity risk
	2. Contingent risks up to financial close		Interest rates
Private party	Impact on return	Equity IRR	Demand factors	Monte Carlo simulation
			Mid-life CAPEX
			OPEX
			Performance
Investor	Default/delays on interest and principal	Debts service covers ratios	Demand factors	Downside sensitivity
			Mid-life CAPEX
			OPEX
			Performance construction
Source: Grimsey and Lewis (2004:188).

Table 6: Framework for assessing PPP

Definition	Dimension	Characteristics
Rights: the various rights given by metropolitan government to a private entity in return for carrying out a specified set of obligations	Possession	Real assets, intellectual assets, equity, ownership
	Revenues	Whole or part allocation of rights
		Basis for generation and allocation to parties
Obligation: the promises that the private entity and the government agree to be bound by the agreement	Development	Planning, design, construction and improvements
	Operating Environment Financing	Operation and maintenance
		Biophysical (air, marine & terrestrial)
		Social (labour issues, provincial benefits and business impacts)
		Extent of financing, source of security and government guarantee
Liabilities: the real and potential liabilities and risks assumed by either party under the agreement	Legal liability	Tort liability, business interruption and physical loss
	Risk	Construction, business, financial and force majeure
	Taxes	Exemptions and liability assumption
Source: Grimsey and Lewis (2004:88).

Table 7: Roles of the local government

Role	Description
Concession granter	Authorises contracts
Network planner	Evaluates infrastructure needs
Funder	Provides support services and funding for the project
Customer	Defines and sets performance outcomes and standards
Project manager	Carries out detailed procurement planning/process
Inspector	Ensures that facilities are constructed, used and maintained in a satisfactory manner for the benefit of all
PPP overseer	Must require compliance with set project standards and specifications
Contract manager	Monitors business and financial viability
Protector of the environment	Assesses environmental impacts
Representative of the public	Must guarantee community access to all PPP projects and thus achieve the objective of the (local) government and municipality's social policy
Source: Grimsey and Lewis (2004:128).

GRIMSEY , D and LEWIS , M K . 2004 . Public private partnerships: the worldwide revolution in infrastructure provision and project finance , Cheltenham : Edward Elgar .

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CHAROENPORNPATTANA , S and MINATO , D . Privatisation-induced risk: state-owned transportation enterprise in Thailand . Proceedings of the CIB 92 and CIB TG 23: Profitable Partnering in Construction Procurement . Chiang Mai, Thailand. Edited by: Ogunlana , S O . London : E & FN Spon .

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