Why the Future Depends on Public-Private Partnerships?

A railroad station in Indonesia. Public-Private Partnerships can continue to connect the small island to the outside world through ports, railings, and other infrastructure projects.

T hroughout history, individuals have looked for governments to provide safe avenues for upward mobility and peaceful bridges of progress. With these paths, individuals will be able to bring their gifts and resources to the world. It is not enough for individuals to cast down their buckets where they are, if the buckets land on muddy roads of hopelessness and tracks of endless poverty. However, Pubic-Private Partnerships provide a beacon of light at the end of the tunnel where the financial resources of the private world are combined with the natural land of the government. Pubic-Private Partnerships planned correctly will benefit countries in primarily two ways: 1) the country may not have to pay to build the infrastructure project and 2) after roughly 20 years, the infrastructure project can be transferred to the country. In this paper, we discuss some of the legal advantages of Pubic-Private Partnerships and how all parties can minimize risk to ensure everyone benefits.

I. What is a Public-Private Partnership?

While the Pubic-Private Partnership definition varies, E.R. Yescombe offers a good definition: 

A Pubic-Private Partnership is a long-term contract between a public-sector party and a private-sector party; for the design, construction, financing, and operation of public infrastructure by the private-sector party; with payments over the life of the PPP Contract to the private-sector party for the use of the Facility, made either by the public-sector party or by the general public as users of the Facility; and with the Facility remaining in public-sector ownership, or reverting to public-sector ownership at the end of the PPP Contract.

Many developing countries have limited funds for infrastructure investments, yet these countries face pressure to increase spending and improve the quality of public services. Public-Private Partnerships are a great way to improve the quality of the infrastructure. In most cases, the Governments do not use public funds for construction because the Private-Sector finances the construction of the infrastructure project. Once the infrastructure is constructed, the Private-Sector is either paid by the general public that uses the infrastructure (e.g. tolls on roads) or through routine payments from the Government over the length of the Public-Private Partnership Contract. Public-Private Partnerships seek to bring value while bringing accountability and innovation from the private sector. 

Both the Governments and the Private-sector sign a Public-Private Partnership Contract that typically lasts at least 20 years. It is important that the infrastructure maintain value over a long time. After the Public-Private Partnership Contract ends the infrastructure project is traditionally transferred to the ownership of the Government, if it is not already in the Government's possession.

Workers on a Tea Plantation in East Africa. Public-Private Partnerships can help facilitate the creation of roads and ports to help farmers bring their tea to the international markets.

Workers on a Tea Plantation in East Africa. Public-Private Partnerships can help facilitate the creation of roads and ports to help farmers bring their tea to the international markets.

What is not a Public-Private Partnership?

It is important to understand that not every project between the government and the private sector is a Pubic-Private Partnerships. Pubic-Private Partnerships primarily involve infrastructure projects that last at least 20 years.

Projects based on the following are not Pubic-Private Partnerships:

1. Public infrastructure that is acquired or managed by the Private-Sector without making a major upgrade or large investment into the existing infrastructure,

2. Most joint-venture investment projects between the public and private sectors because a Pubic-Private Partnership Contract is typically not apart of the joint-venture,

3. Private-sector operating of soft infrastructure, (e.g. hospitals, financial institutions, and schools) that involves no significant investment in fixed assets because the fixed assets have been built, and

4. Technology projects because technology changes too quickly.

II. How is the Private Sector Paid from Public-Private Partnerships?

Private-Sector businesses finance and build infrastructure projects; and in exchange for building these projects, the Private-Sector business is paid through either the Private Finance Initiative Model or Concession Model.

Private Finance Initiative Model

The Private Finance Initiative Model involves the Government paying the Private-Sector for building infrastructure that will be used by the Government. The payments are regularly made throughout the life-cycle of the Public-Private Partnership Contract.

An example of a Private Finance Initiative Model would if the private sector builds a public hospital or prison. The Government would in return make regular payments to the private sector over roughly 20 years.

Concession Model

The Concession Model is where the Private-Sector builds the infrastructure project and charges the user or general public for using the infrastructure project.

A classic example of the Concession Model is when a road is constructed and drivers pay a toll fee to use the road. The road is transferred to the Government after the Private-Sector either recoups the agreed amount or once the Public-Private Contract ends.

Both the Private Finance Initiative Model and Concession Model follow one of the four types of Public-Private Partnership Operating Models.

III. The Four Business Models of Public-Private Partnerships

Public-Private Partnerships are generally constructed, financed, operated, and owned based on one of the four predetermined business models:

Fisherman at Sea. Public-Private Partnerships can help facilitate the creation of ports to help fishermen sell and export their seafood at the local and international markets.

1. Design-Build-Finance-Operate (DBFO)

2. Build-Transfer-Operate (BTO)

3. Build-Operate-Transfer (BOT)

4. Build-Own-Operate (BOO)

   Once the parties agree to a particular model, the terms of the model are clearly written into the Public-Private Partnership Contract.

Design-Build-Finance-Operate

A DBFO allows the Private-Sector to design, build, finance, and operate the infrastructure project. However, the Government will actually own the infrastructure. The Private-Sector is paid either through regular payments from the Government during the term of the Public-Private Partnership Contract or from fees from the general public that uses the infrastructure.

Build-Transfer-Operate

With a BTO, the private sector builds the infrastructure project. Once the project is completed, ownership is then transferred to the Government while the Private-Sector operates the project. This method benefits the Government and minimizes its risk by only acquiring a completed project. The Government does not have the risks and concerns with hazards and costly delays that often comes with construction projects.

Build-Operate-Transfer

This model allows for the Private-Sector to own the infrastructure project after construction, for the length of the Public-Private Partnership Contract. Once the Public-Private Partnership Contract ends, ownership is transferred to the Government. The Private-Sector is incentivized to build a quality and sustainable project because they will have to maintain the project in working condition throughout the life of the Public-Private Partnership Contract. While the Government transfers much of the risk to the Private-Sector, a department to monitor the infrastructure is typically created to ensure it is maintained in good operating conditions.

Build-Own-Operate

While this model is only used for a small number of cases such as the construction of Power facilities, it still remains an option for the Government and the Private-Sector. This is more similar to a concession because the government never takes ownership of the infrastructure.

Once the government determines its planned model to use, it will work the project through the four life-cycle phases of Public-Private Partnership.

IV. What is the Life-Cycle of Public-Private Partnerships?

It is important to follow the best practices to ensure a successful Public-Private Partnership. These best practices generally involve four life-cycle phases:

Worker in a rice field. Public-Private Partnerships can help sell this staple food with the creation of roads, bridges, and ports to export steady supplies to Continental Africa.

1. Initial Feasibility

2. Procurement Phase

3. Construction Phase

4. Operation Phase

Initial Feasibility

This stage involves determining which infrastructure project to pursue and whether a Public-Private Partnership would be the ideal method to finance the project. There is a presentation of the project to all needed governmental authorities to ensure there is full support and approval from the Government. The Government then creates the necessary project management structure to manage the process of Public-Private Partnership, beginning with the Procurement Phase.

Procurement Phase

During this stage, bids are requested and received from the general public. After deliberation, a winning bid is chosen. After a winner is chosen, all of the contracts are negotiated and a Special-Purpose Project Company is formed.

The Government completes a thorough due diligence process, prior to closing, to minimize its risk while ensuring the Special-Purpose Project Company has the necessary contracts drafted such as:

1. Financial Agreements,

2. Insurance Agreements,

3. Subcontractors Agreements,

4. Maintenance Agreements, etc

The Procurement Phase ends with the Financial Closing. At this point, all of the funding requirements and other conditions have been met and construction can begin.

Construction Phase

Construction of the infrastructure involves many parts including subcontractors, financing, and legal compliance specialists to ensure the project is meeting the requirements of the Public-Private Partnership Contract. The Government’s key role is monitoring the infrastructure project to ensure it is completed according to the terms of the Public-Private Partnership Contract and in a timely manner.

Operation Phase

A completed infrastructure project now serves its role according to the Public-Private Partnership Contract. During this stage, the lenders are repaid for any loans and the investors receive a return on their investments. The Government continues to monitor and ensure the project is operated and maintained according to the Public-Private Partnership Contract.

Lawyers play a major role in helping both the Private Sector and Governments during all stages of the Public-Private Partnership.

V. What is the Role of Lawyers in Public-Private Partnership?

Lawyers play a critical role in Public-Private Partnership primarily in 4 categories:

Shepherd watching his flock. Public-Private Partnerships can help bring the sheep’s valuable wool to the world with the creation of roads, bridges, and ports.

1. Contract Drafting

2. Negotiations

3. Compliance

4. Dispute Resolution

Contract Drafting

Whenever there is any significant amount of money involved, a contract needs to be signed. Public-Private Partnerships are no different and there are many contracts that need to be signed. Skilled lawyers draft legal documents such as:

1. Investor Agreements,

2. Loan Agreements,

3. Subcontractor Agreements,

4. The Public-Private Partnership Agreement, and

5. Creation of the Special Purpose Project Company

Negotiations

The negotiations typically take place after a winning bidder is chosen to construct the project. When the contracts are drafted, both sides will negotiate the terms of all of the different agreements. The negotiations can last days or even months before everyone agrees to a set of terms. When the contracts are signed by both parties, they must monitor the project to ensure everything complies with the Public-Private Partnership Contract.

Compliance

Compliance with the Public-Private Partnership Contract term is mandatory. Failure to comply with the Public-Private Partnership Contract can lead to costly fines, penalties, lawsuits, and even rescission of the contract. Compliance is needed at all phases of the Public-Private Partnership.

At the Initial Feasibility Stage, lawyers can help the Governments draft Public-Private Partnership laws and regulations and help the Government to comply with any and all applicable laws. At the Procurement Stage, lawyers can monitor and ensure the procurement is open, honest, fair and transparent. In addition, companies seeking to win Public-Private Partnership bids can use lawyers to help them comply with all procurement regulations. Once all contracts are negotiated and signed, both the Government and the Private-Sector need to comply with the Public-Private Partnership Contract in order to avoid lawsuits and disputes.

Dispute Resolutions

Reasonable minds may differ on issues and sometimes a party may violate contract terms. This will lead to disputes and litigating issues can be very expensive. Lawyers will be needed to find Alternative Dispute Resolutions to help minimize the cost of the disputes and ensure the Public-Private Partnership pursues the ultimate goal of bringing value to the public.

VI. Conclusion

Without the light of possibility, the dark clouds of despair and defeatism will hover over entire communities. Therefore, it is necessary to think of solutions in terms of teamwork. Teamwork through Public-Private Partnerships can build the bridges, roads, power plants, and ports to connect the people to oceans of opportunity. The Private Sector is motivated by enterprise and the Governments should be motivated to enhance the welfare of its people.

Skilled lawyers are needed to help ensure the entire process of Public-Private Partnerships are handled smoothly. We can help with Public-Private Partnerships. Feel free to CONTACT US to discuss your legal needs.

*This blog post is for educational purposes only and not be used as legal advice.