In the News: What are PPPs?

One of the notable items highlighted by President Benigno S. Aquino III in his first State of the Nation Address (delivered on 26 July 2010) was the new administration’s focus on public-private partnerships (or PPPs) as a possible means of addressing the country’s needs.  After painting a rather bleak picture of the government’s finances, Mr. Aquino stated that the government would nevertheless be able to fulfill its mandate by entering into PPPs.

The potential projects mentioned by Mr. Aquino include an expressway from Manila to Cagayan Valley; the leasing out and commercialization of the Philippine Navy’s headquarters on Roxas Boulevard and in Fort Bonifacio; and an efficient railway system.  According to Mr. Aquino, by undertaking these projects through PPPs, the government would meet Filipinos’ needs without spending, and also earn hundreds of millions to fund other projects.

But what are PPPs?

There is no law or regulation that pigeonholes PPPs into a strict legal definition.  Perhaps the arrangement most commonly associated with PPPs is the build-operate-transfer (BOT) contract, where a private party assumes responsibility for financing and developing a new infrastructure project (e.g., builds a power plant) and retains ownership thereof for a specified period, during which it operates the same (and the government agrees to purchase a minimum level of output – the infamous “take or pay” provisions which are often blamed for high power costs).  Upon the expiration of such period, ownership of the facility is transferred to the government, which may then choose to operate the facility itself or engage the same or another private party for such purpose.

In practice, however, PPPs are not limited to BOTs, but are also generally understood to include an entire range of possible arrangements between the government and the private sector, whereby the tasks, obligations, risks and benefits of an undertaking (usually an infrastructure project or other undertaking involving public interest) are allocated among the public and private partners in an optimal way.  For example, the government could be tasked with providing the private partner access to the land comprising the site of the project and assistance in obtaining the necessary permits and approvals; the private partner, on the other hand, would contribute its expertise in management, operations and innovation.  Each party is responsible for the component of the project that it is best suited for, thereby maximizing efficiency and hopefully resulting in greater benefits for the public.

Other possible PPP arrangements include the following:

  • service contracts –the government hires a private company to carry out one or more specified tasks over a defined (though typically relatively short) period.  An example would be contracts entered into by the Department of Public Works and Highways with private contractors to repair national roads after the rainy season; this sort of activity does not require large amounts of capital and yet, might be more efficient than the government’s hiring and training its own stable of engineers and workers.
  • management contracts – the government contracts out some portion of or the entire responsibility for the operation and management of a public service.  In other countries, for example, it is not uncommon for governments to contract out the management and operation of public health care facilities (and even penal institutions) to private entities, which do not take ownership of the facilities but are required to provide working capital.  The foreign experience is evidently that such arrangements result in significant gains in terms of efficiency and also improve working conditions for the facilities’ employees.
  • concessions – a private company is made responsible for the full delivery of services in a specified area, including operation, maintenance, collection, management and construction and rehabilitation of the system.  For example, the Metropolitan Waterworks and Sewerage System granted concessions to separate private entities to operate the water and sewage systems in Metro Manila and its surrounding areas.
  • joint ventures – the infrastructure is co-owned and operated by the public sector and private partners (e.g., through the formation of a new company in which both partners own shares and assume joint ownership of the undertaking through an unincorporated joint venture).  In the Philippines, several toll ways and expressways were developed through joint ventures between the government and the private sector.  This form of PPPs has been under criticism lately, however, as the more relaxed procurement procedures applicable thereto are alleged to be susceptible to corruption.

The description of PPP arrangements above is not rigid, however, and it is possible to tweak and/or combine such arrangements to meet the needs of the particular project at hand.

Does the Philippines have a legal and regulatory framework in place to facilitate such PPP undertakings?  We will deal with this topic in our next post.

This post is based to a large extent upon the Asian Development Bank’s Public-Private Partnership Handbook (2008) and International Advisory & Finance’s note on Project Finance:  Risks Analysis and Structuring (2009).