Governments enter into “public-private partnerships” with private enterprises to obtain goods, services, technology, expertise, capital investment and commercial risks. Principal types of public-private partnerships range include:
- Service contracts (including “Design-Build-Operate” agreements and “Operation and Maintenance Services Agreements”) that are basically class “fee for service” outsourcing contracts, giving the government access to technology, expertise, knowledge and a short-term financial commitment, but there is no private sector investment in new infrastructures, a limited incentive for innovation or change, and a limited commitment due to the short-term nature.
- Leasing (“affermage”) contracts transfer operations of the leased governmental infrastructure in return for a rent paid by the private sector operator. For the government, this substantially the same benefits and disadvantages as the classic outsourcing services agreement.
- Build-Operate-Transfer (“BOT”) (and sometimes “Rehabilitate-Operate-Transfer”, or “ROT”) likewise exploits private sector technology, expertise, knowledge and capital investment. In addition, under BOT/ ROT outsourcing models, the government customer transfers to the private sector commercial risks of design, construction and operations. However, individual projects or services governed by BOT/ ROT contracts are not well suited to integrating with a larger infrastructure framework. They tend to be “one-off” or “one-shot” deals for a particular service or infrastructure. Further, the public operation of the infrastructure after the “transfer” event requires the governmental customer to assume the financial risks of operations.
- Build-Own-Operate-Transfer (“BOOT”) differs from the BOT/ ROT model by infusing private sector capital to invest in the infrastructure. As a result, the private sector service provider assumes almost all commercial risks, including design, development, operation and financing.
- Concession is a model like facilities management, where the government authorizes a service provider to exploit governmental resources and derive an agreed percentage of profits. It resembles a franchise since the concessionaire pays a fee and must invest in its own infrastructure to support the general operations. The government monitors only the outputs and not the means of service delivery.
- Divestiture and Joint Venture. Divestitures of government infrastructures privatize ownership, transferring all commercial risks of system development and maintenance under a long-term contract needed to provide cash flow to finance the acquisition.
Legal Climate. Laws, rules, regulations and agreements do not paint the complete picture of public-private partnerships. Political risks include
- possible weak investment protection laws for investors;
- governmental inefficiency or unwillingness to change methods of providing governmental services to constituents,
- a judiciary that is overwhelmed with case loads, inefficient, slow or even lacking in independence from the executive branch; and
- corruption in the executive, judicial, legislative or judicial branches.
Accordingly, governmental procurement of outsourced services requires a continuing governmental commitment in all branches to sustain the private sector’s involvement in the government sector. To build such agreements, key stakeholders need to show support for private sector involvement, and highly qualified legal advisors are needed to design and implement sophisticated financial instruments, financing techniques and business process management.
UNCITRAL Guide on Privately Financed Infrastructure Projects
European Bank for Reconstruction and Development: Core Principles on Concessions [SOURCE: http://www.ebrd.com/country/sector/law/concess/core/index.htm ]
Return to Sourcing Models