What is a public-private partnership

Several definitions of what a public-private partnership (PPP) has emerged. PPP Knowledge Lab (2015) defines 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. Similarly, Commonwealth Australia (2008) defines PPP as a long-term contract between the public and private sectors where the government pays the private sector to deliver infrastructure and related services on behalf, or in support, of government’s broader service responsibilities.

The next three definitions emphasized relationships in PPP. ADB (2008) describes PPP as a range of possible relationships among public and private entities in the context of infrastructure and other services. The Commission on the European Communities (2004) refers PPP to forms of cooperation between public authorities and the world of business which aim to ensure the funding, construction, renovation, management or maintenance of an infrastructure or the provision of a service. While the Canadian Council for Public-Private Partnerships (2015) defines PPP as a cooperative venture between the public and private sectors, built on the expertise of each partner that best meets clearly defined public needs through the appropriate allocation of resources, risks and rewards.

Hence, PPP is generally characterized by partnership between the public sector and a private entity to deliver public good or service in a long-term contract.

In the Philippines, PPP is similarly defined as a contractual agreement between the Government and a private firm targeted towards financing, designing, implementing and operating infrastructure facilities and services that were traditionally provided by the public sector (Public-Private Partnership Center, 2015b).

Characteristics of a PPP

According to the Asian Development Bank (2008), PPPs have the following three key characteristics:

  1. a contractual agreement defining the roles and responsibilities of the parties,
  2. sensible risk-sharing among the public and the private sector partners, and
  3. financial rewards to the private party commensurate with the achievement of pre-specified outputs.

Advantages of PPP

1. Encourage private sector capital

With a limited budget, a government may tap private sector resources to deliver public goods and services (Public-Private Partnership Center, 2015b, Asian Development Bank, 2008, PPP Knowledge Lab, 2015a, Asian Development Bank, 2011).

2. Makes projects affordable

A PPP project lessens government’s spending since the private sector funds their share of the project (including operation and maintenance) during the duration of the concession. PPP projects consider the whole of life costing approach (whole lifecycle costing) which ultimately lowers capital and operating costs (Public-Private Partnership Center, 2015b).

3. Providing better value for money

PPPs provide value for money by reducing costs or improving quality (PPP Knowledge Lab, 2015b, Public-Private Partnership Center, 2015b). A PPP project yields value for money if it results in a net positive gain to society which is greater than that which could be achieved through any alternative procurement route (European Investment Bank, 2015b).

4. Risks sharing

In PPPs, risks are assumed by the party that is best able to manage and assume the consequences of the risk involved (Public-Private Partnership Center, 2015b). In general, the private sector is better placed to assume commercial risks (supply and demand risks) while the public sector is better placed to assume legal and political risks (the legal framework, dispute resolution, the regulatory framework, government policy, taxation, expropriation and nationalization, among other) (European Investment Bank, 2015a).

The Asian Development Bank (2008) added that with proper implementation, PPP should result in a lower aggregate cash outlay for the government, and better and cheaper service to the consumer. Further saying that it holds true even if the government continues to bear part of the investment or operational cost since government’s cost obligation is likely to be targeted, limited, and structured within a rational overall financing strategy.

5. Government’s focus on outputs and benefits

Project preparation activities are more rigorous in public-private partnerships to ensure project is highly bankable and can stand public scrutiny. Better project preparation and execution will result in adherence to project design within the agreed timelines. In PPPs, the government focuses on providing quality infrastructure and services by setting each project’s minimum performance standards and specifications (Public-Private Partnership Center, 2015b).

6. Quality assurance

In PPPs, project execution will be more rigorous as project ownership belongs to the project proponents. The public sector only pays when services are delivered satisfactorily. During the implementation stage, an independent consultant is hired to ensure that both public and private parties adhere to the terms of the contract/concession agreement (Public-Private Partnership Center, 2015b).

7. Encourage sector reform

By allowing private sector participation in providing public goods and services, it emphasizes the role of private sector in the society (Asian Development Bank, 2008)

8. Promote innovation

PPP maximizes the innovative skills of the private sector (Asian Development Bank, 2011, Public-Private Partnership Center, 2015b). The private sector can also help improve infrastructure project selection by undertaking their own project analysis based on their experience and strong, profit-driven incentive to carefully assess benefits and costs (PPP Knowledge Lab, 2015b).

9. Sharing of responsibilities

Depending on the expertise of each party, the government and the private sector share the responsibilities of delivering a service (Asian Development Bank, 2011)

Potential risks of PPPs

The Public Private Partnership in Infrastructure Resource Center (2015) outlined the potential risks associated with PPPs, as follows:

  1. Development, bidding and ongoing costs in PPP projects are likely to be greater than for traditional government procurement processes – the government should, therefore, determine whether the greater costs involved are justified. A number of the PPP and implementation units around the world have developed methods for analyzing these costs and looking at Value for Money.
  2. There is a cost attached to debt – While private sector can make it easier to get finance, finance will only be available where the operating cash flows of the project company are expected to provide a return on investment (i.e., the cost has to be borne either by the customers or the government through subsidies, etc.)
  3. Some projects may be easier to finance than others (if there is proven technology involved and/ or the extent of the private sectors obligations and liability is clearly identifiable), some projects will generate revenue in local currency only (e.g. water projects) while others (e.g. ports and airports) will provide currency in dollar or other international currency and so constraints of local financial markets may have less impact
  4. Some projects may be more politically or socially challenging to introduce and implement than others – particularly if there is an existing public sector workforce that fears being transferred to the private sector, if significant tariff increases are required to make the project viable, if there are significant land or resettlement issues, etc.
  5. There is no unlimited risk-bearing – private firms (and their lenders) will be cautious about accepting major risks beyond their control, such as exchange rate risks/risk of existing assets. If they bear these risks then their price for the service will reflect this. Private firms will also want to know that the rules of the game are to be respected by the government as regards undertakings to increase tariffs/fair regulation, etc. The private sector will also expect a significant level of control over operations if it is to accept significant risks
  6. The private sector will do what it is paid to do and no more than that – therefore incentives and performance requirements need to be clearly set out in the contract. The focus should be on performance requirements that are output based and relatively easy to monitor
  7. Government responsibility continues – citizens will continue to hold the government accountable for the quality of utility services. The government will also need to retain sufficient expertise, whether the implementing agency and/ or via a regulatory body, to be able to understand the PPP arrangements, to carry out its own obligations under the PPP agreement and to monitor the performance of the private sector and enforce its obligations
  8. The private sector is likely to have more expertise and after a short time have an advantage in the data relating to the project.  It is important to ensure that there are clear and detailed reporting requirements imposed on the private operator to reduce this potential imbalance
  9. A clear legal and regulatory framework is crucial to achieving a sustainable solution Given the long-term nature of these projects and the complexity associated, it is difficult to identify all possible contingencies during project development and events and issues may arise that were not anticipated in the documents or by the parties at the time of the contract.  It is more likely than not that the parties will need to renegotiate the contract to accommodate these contingencies.  It is also possible that some of the projects may fail or may be terminated prior to the projected term of the project, for a number of reasons including changes in government policy, failure by the private operator or the government to perform their obligations or indeed due to external circumstances such as force majeure.  While some of these issues will be able to be addressed in the PPP agreement, it is likely that some of them will need to be managed during the course of the project

Forms of PPP

The Asian Development Bank (2008) enumerates the following PPP contract types, namely: service contracts; management contracts; affermage or lease contracts; build-operate-transfer (BOT) and similar arrangements; concessions; and joint ventures.

Table 1. Summary of key features of the basic forms of PPP, adopted from Heather Skilling and Kathleen Booth, 2007.

  Service Contracts Management Contracts Lease Contracts Concessions BOT
Scope Multiple contracts for a variety of support services such as meter reading, billing, etc. Management of entire operation or a major component Responsibility for management, operations, and specific renewals Responsibility for all operations and for financing and execution of specific investments Investment in and operation of a specific major component, such as a treatment plant
Asset Ownership Public Public Public Public/Private Public/Private
Duration 1–3 years 2–5 years 10–15 years 25–30 years Varies
Operation and Maintenance Responsibility Public Private Private Private Private
Capital Investment Public Public Public Private Private
Commercial Risk Public Public Shared Private Private
Overall Level of Risk Assumed by Private Sector Minimal Minimal/moderate Moderate High High
Compensation Terms Unit prices Fixed fee, preferably with performance incentives Portion of tariff revenues All or part of tariff revenues Mostly fixed, part variable related to production parameters
Competition Intense and ongoing One time only; contracts not usually renewed Initial contract only; subsequent contracts usually negotiated Initial contract only; subsequent contracts usually negotiated One time only; often negotiated without direct competition
Special Features Useful as part of strategy for improving efficiency of public company; Promotes local private sector development Interim solution during preparation for more intense private participation Improves operational and commercial efficiency; Develops local staff Improves operational and commercial efficiency; Mobilizes investment finance; Develops local staff Mobilizes investment finance; Develops local staff
Problems and Challenges Requires ability to administer multiple contracts and strong enforcement of contract laws Management may not have adequate control over key elements, such as budgetary resources, staff policy, etc. Potential conflicts between public body which is responsible for investments and the private operator How to compensate investments and ensure good maintenance during last 5–10 years of contract Does not necessarily improve efficiency of ongoing operations; May require guarantees

PPP in the Philippines

The PPP in the Philippines is based on Republic Act 7718 and other pertinent laws and is administered by the Public-Private Partnership Center – an attached agency of the National Economic and Development Authority.

General Forms of PPP

The Public-Private Partnership Center (2015) enumerated two forms of PPP that exists in the Philippines, these are, namely: availability and concession-based PPPs. They are distinguished from each other on the roles the partners assume.

1. Availability PPP

In this PPP, the public authority contracts with a private sector entity to provide a public good, service or product at a constant capacity to the implementing agency for a given fee (capacity fee) and a separate charge for usage of the public good, product or service (usage fee). Fees or tariffs are regulated by contract to provide for recovery of debt service, fixed costs of operation and a return on equity.

2. Concession PPP

This form of PPP, the government grants the private sector the right to build, operate and charge public users of the public good, infrastructure or service, a fee or tariff which is regulated by public regulators and the concession contract. Tariffs are structured to provide for recovery of debt service, fixed costs of operation, and return on equity.

Contractual Arrangements

Prescribed in RA 7718 (amended BOT Law), there are nine broad contractual arrangements possible, namely: build-operate-and-transfer (BOT), build-and-transfer (BT), build-own-and-operate (BOO), build-lease-and-transfer (BLT), build-transfer-and-operate (BTO), contract-add-and-operate (CAO), develop-operate-and-transfer DOT), rehabilitate-operate-and-transfer (ROT), and rehabilitate-own-and-operate (ROO).

Below is a summary description of each of the contractual arrangements.

Table 2. Summary description of contractual arrangements

PPP Modality Private Sector Role Government Role Notes
Build-Operate-and-Transfer (BOT) Finances and constructs; operates and maintains facility for a fixed term; collects fees and charges to recover investments plus profit; transfers facility at the end of cooperation period (maximum of 50 years). Provides franchise (if required) and regulates activities of BOT contractor; acquires ownership of facilities at the end of cooperation period. Includes a supply-and-operate scheme, a contractual arrangement whereby the supplier of equipment and machinery for a given infrastructure facility, if the interest of the Government so requires, operates the facility.
Build-and-Transfer (BT) Finances and constructs; turns over ownership of the facility to government after project completion Acquires ownership of facility after construction; compensates proponent at agreed amortization schedule May be employed in any project, including critical facilities which, for security or strategic reasons, must be operated by the Government.
Build-Own-and-Operate (BOO) Finances, constructs and owns facility; operates and maintains facility in perpetuity (facility operator may be assigned); collects fees and charges to recover investments and profits. Provides authorization and assistance in securing approval of BOO contract; possesses the option to buy the output/service provided by the BOO operator. All BOO projects upon recommendation of the NEDA-Investment Coordination Committee (ICC) shall be approved by the President of the Philippines.
Build-Lease-and-Transfer (BLT) Finances and constructs; turns over project after completion; transfers ownership of facility after cooperation/lease period. Compensates proponent by way of lease of facility at agreed term and schedule; owns facility after cooperation/lease period.  
Build-Transfer-and-Operate (BTO) Finances and constructs on a turn-key basis; transfers title of facility after commissioning; operates the facility under an agreement. Owns facility after commissioning.  
Contract-Add-and-Operate (CAO) Adds to an existing facility; operates expanded project for an agreed franchise period. Collects rental payment under agreed terms and schedule; regains control at the end of lease term. There may or may not be a transfer arrangement with regard to the added facility provided by the project proponent.
Develop-Operate-and- Transfer (DOT) Builds and operates a new infrastructure; transfers property/facility at the end of the cooperation period. Regains possession of property turned over to investor after cooperation period. Project proponent enjoys some benefits the initial investment creates such as higher property or rent values; akin to BOT with the option to develop adjoining property
Rehabilitate-Operate- and-Transfer (ROT) Refurbishes, operates, and maintains facility; facility is turned over after the franchise period. Provides franchise to ROT company; regains legal title of property/facility after franchise period Also used to describe the purchase of facility from abroad, importing, refurbishing, erecting and consuming it within the host country.
Rehabilitate-Own- and-Operate (ROO) Refurbishes and owns facility; operates facility in perpetuity as long as there is no franchise violation. Turns over facility and provides franchise to operate; may opt to share in the income of ROO company. Period to operate is dependent on franchise agreement.

Eligible types of PPP projects

RA 7718 and its implementing rules and regulation enumerate the following activities that may be undertaken as PPP:

  1. Highways, including expressways, roads, bridges, interchanges, tunnels, and related facilities;
  2. Railways or rail-based projects that may or may not be packaged with commercial development opportunities;
  3. Non-rail based mass transit facilities, navigable inland waterways, and related facilities;
  4. Port infrastructures like piers, wharves, quays, storage, handling, ferry services, and related facilities;
  5. Airports, air navigation, and related facilities;
  6. Power generation, transmission, sub-transmission, distribution, and related facilities;
  7. Telecommunications, backbone network, terrestrial and satellite facilities and related service facilities;
  8. Information technology (IT) and database infrastructure, including modernization of IT, geospatial resource mapping and cadastral survey for resource accounting and planning;
  9. Irrigation and related facilities;
  10. Water supply, sewerage, drainage, and related facilities;
  11. Education and health infrastructure;
  12. Land reclamation, dredging, and other related development facilities;
  13. Industrial and tourism estates or townships, including ecotourism projects such as terrestrial and coastal/marine nature parks, among others and related infrastructure facilities and utilities;
  14. Government buildings, housing projects;
  15. Markets, slaughterhouses, and related facilities;
  16. Warehouses and post-harvest facilities;
  17. Public fish ports and fishponds, including storage and processing facilities;
  18. Environmental and solid waste management related facilities such as, but not limited to, collection equipment, composting plants, landfill, and tidal barriers, among others; and
  19. Climate change mitigation and adaptation of infrastructure projects and related facilities.
Types of project proposals

RA 7718 enumerated two types of project proposals.

1. Solicited proposal

A solicited proposal refers to priority projects identified by the implementing agency. This type of proposal is formally solicited through public bidding and the selection of the private proponent is done through a public competitive process.

2. Unsolicited proposal

An unsolicited proposal refers to submission of project proposal to the government without formal solicitation. However, the unsolicited proposal may only be accepted and considered by the implementing agency if it complies with the following conditions:

  1. It involves a new concept or technology and/or it is not part of the list of priority projects in the Philippine Investment Program [Medium Term Public Investment Program, Comprehensive and Integrated Infrastructure Program] and the Provincial/Local Investment Plans;
  2. It does not include a Direct Government Guarantee, Equity or Subsidy;
  3. It has to go to ICC for the determination of reasonable Financial Internal Rate of Return and approval to negotiate with the Original Proponent; and
  4. After a successful negotiation, proceed to publication and request for competitive proposals according to Swiss Challenge Rules.
Processes

Below is a graphical representation of the stages and processes of PPPs.

Fiscal incentives

The following are the fiscal incentives the private sector will benefit from PPP (Public-Private Partnership Center, 2015a):

  1. Income Tax Holiday (ITH)
  2. Six years for projects with pioneer status and for projects located in a Less Developed Area;
  3. Four years for new projects with non-pioneer status;
  4. Three years for expansion/modernization projects.
  5. Duty exemption on imported capital equipment, spare parts and accessories;
  6. Exemption from wharfage dues and any export tax, duty, impost and fees;
  7. Tax exemption on breeding stocks and genetic materials;
  8. Tax credits on imported raw materials;
  9. Tax and duty-free importation of consigned equipment;
  10. Additional deduction for labor expense;
  11. Employment of foreign nationals;
  12. Simplification of customs procedures; and
  13. Access to bonded manufacturing warehouse.
Nationality requirements

RA 7718 has specified the nationality requirements in participating for any PPP project in the Philippines, as follows (Public-Private Partnership Center, 2015a):

  • Regardless of nationality, anyone is encouraged to invest and participate in the Philippine PPP Program.
  • For PPP, 100% foreign equity may be allowed in all areas of investment EXCEPT in case of infrastructure facility whose OPERATION requires public utility franchise.

In the construction stage of the infrastructure projects, the project proponent can obtain financing from foreign and/or domestic sources and/or engage the services of a foreign and/or Filipino contractor: provided, that, in case an infrastructure or a development facility’s operation requires a public utility franchise, the facility operator must be Filipino or if a corporation, it must be duly registered with the Securities and Exchange Commission and owned up to at least sixty percent (60%) by Filipinos.

PPP at the local level

Local governments (provincial, municipal or city) act according to Republic Act 7160 (Local Government Code of the Philippines). The Code provides the scope of authority of local government units in development planning and disposition of resources, revenue generation, basic services and facilities for which it is responsible, and a corporate governance system.

At the provincial and city/municipal levels, these are the responsibilities of the local government units with regards to PPPs (Public-Private Partnership Center, 2012).

1. Provincial level

  • Provides a venue in engaging private sector participation in local development planning process
  • Identifies areas of investments where private sector could come in
  • Designates location of development activities where private sector could operate
  • Provides local incentives for private sector investments
  • Engages the private sector as lead or partner of the government in implementing local development projects

2. City and municipal level

  • Provides a venue in engaging private sector participation in local development planning process
  • Identifies areas of investments where private sector could come in
  • Designates location of development activities where private sector could operate
  • Provides local incentives for private sector investments
  • Engages the private sector as lead or partner of the government in implementing local development projects
  • Generates funds and mobilizes resources to implement local development projects

3. Eligible local government unit projects

The summary below is taken from Book 1, Chapter 2, Section 17 of the Local Government Code of the Philippines; however, the list is non-exhaustive.

Table 4. Summary of eligible local government projects for PPP

Infrastructure Sector Eligible Projects
Agriculture and Fisheries Agricultural development facilities such as: agricultural produce storage and warehousing facilities; agricultural produce processing and post-harvest facilities; livestock facilities   Fisheries and aquatic resources facilities such as: public fish ports; fish ponds; fisheries storage facilities; fisheries processing facilities
Commercial and Industrial Development Local trading support infrastructure such as: markets; slaughterhouses Business district development facilities such as: business district establishment; business district expansion; business district revitalization/rehabilitation
Education Education and education support facilities such as: school buildings; education related facilities such as dormitories, hostels, hometels and student centers
Environmental and Solid Waste Management Environment and solid waste management facilities such as: solid waste collection equipment; composting plans and facilities; sanitary landfills; tidal barriers
Government Government buildings and operations centers
Forestry Community-based forestry projects
Health Healthcare and health-related infrastructure such as: hospitals; health centers; clinics; lying-in centers; pharmacies and drug stores; emergency medical stations; animal bite centers
Housing Housing projects
Information and Communication Technology (ICT) Systems and Facilities Information technology (IT) and database infrastructure that includes: IT modernization; geospatial resource mapping; cadastral survey for resource accounting and planning
Land Use Land reclamation and dredging
Roads and Bridges Provincial, city and municipal roads; bridges
Social Welfare Social welfare services and facilities such as: day care centers; emergency response units; social welfare distribution centers
Transportation Transportation facilities and infrastructure such as: transport management system; transport terminals
Water and Sanitation Local water supply systems, septage management or sewerage systems; drainage facilities
Projects Potential for PPP Financing

For more information about PPP, visit the PPP website.