1. Introduction to PPP
June 2010
Loay Ghazaleh, Advisor – Ministry of Works, Bahrain
MBA 2000 (Thunderbird); B.Sc. Civil Eng 1986 (Texas A & M)
973 36 711547,
loay.ghz@gmail.com; Loayg@works.gov.bh
Public Private Partnerships – Models 1
PPP Transactions – Sectors Examples 5
Managing Fiscal Risks in PPP’s 7
PPP Best Practices 8
Enabling PPP Business Environment 9
PPP Advisory Services 10
MENA PPP’s 2010 Projects Update 11

2. Public Private Partnerships – Models
With the increase in public debt, 100% privately funded initiatives emerged
- privatizations - and risks were transferred in whole to the private sector,
however, early successes of privatization programs were short lived and led
later to bailouts / subsidy of the private sector by Governments. PPP,s have
since taken momentum as a better way to allocate the risks between the
private and public sector, based on each entity’s ability to manage risks.
Thus PPP providing the service or facility more efficiently and at a lower
cost to the end user emerged in most infrastructure sectors like – Rail
Transport, Roads, Airports, Ports, Hospitals, Water and Sanitation, Utilities
& Energy / Power, Telecommunication Schools, Affordable Housing and
even Prisons.
In a PPP scheme, mainly four categories of risks can be presented:
Political and Legal Risks: These risks are typically taken by the Government
(with some guarantees if needed). They can be mainly of three natures: (i)
acts of force majeure, war, civil disturbance; (ii) change of legislation; and
government policy change, e.g., changes in regulatory regime, impossibility
or unwillingness of the Government to meet its contractual obligations.
Technical Risks: They are the construction or rehabilitation risks, which
include risks on completion, quality, delays, cost overruns and project
modification. These risks are typically assumed by the concessionaire.
Commercial Risks: The commercial risks arise because of the uncertainty of
demand levels due to the possible improvement of an alternative
infrastructure, facility or service. The commercial risks should in theory be
taken by the concessionaire. However, sometimes these risks may be too
high to be taken only by the concessionaire and therefore the allocation of
commercial risks remains project specific.
Economical and Financial Risks: These risks are due to the uncertainty of
economic growth, inflation rate, risk of interest rates, convertibility of
currencies, and exchange rate. They are assumed by the concessionaire.
However, some unforeseen change of circumstances might not always be
assumed by the private sector.
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3. Stakeholders and roles in PPP - Balance act among stakeholders
• Public sector - Specify requirements and guarantees
• Private sector (Investors / Operators) - Build facilities, support
service – expertise & skills
• Finance institutions – provide funds to the private sector
• End User (Consumers ) – the public or off taker – make payments
for the service
Risk Scales for Private Sector Participation with Government
• Privatization & Divestiture (Highest Private risk)
• DBFO & BO Concession contract - Revenue or off- take - (25 -30)
• DBOT, BOT (25 yrs)
• Lease / Afterimage contracts (5 – 10 yrs)
• JV, Partnerships (varies but has a life time with dissolving
mechanisms)
• Sale & lease back (8 – 15 yrs)
• Operation & Management ( O&M) Contracts (3-5 yrs)
• Service Contracts (1- 3 yrs w/ renewals)
• Technical assistance – discrete tasks - (Lowest Private risk)
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4. Popular PPP models
BOOT- Build Own Operate Transfer, variations - BOT, and BO
DBFO-Design Build Finance Operate, variations DBOT
BLT- Builds Lease Transfer
BMT-Build Manage Transfer
Concession Mechanisms
• A Classical concession - BOT model (Build-Operate-Transfer) - can
be defined as a system through which a public authority grants
specific rights to an organization (private or semi-public) to build,
rehabilitate, maintain and operate an infrastructure / asset for a
given period. The company bears the technical risk (during the
construction and the maintenance), the operation risk, most of
the commercial risk and financial risks. The infrastructure / asset
which are usually owned since the beginning by the public sector
revert to it at the end of the contract.
• Variations on the BOT include the BOOT (Build-Own-Operate-
Transfer) and BOO (Build-Own-Operate). In the latter case, the
contract grants the right to build and operate the infrastructure /
asset, which is not however subsequently transferred to the
public sector; there is an actual private ownership in this case and
the concession periods are extended indefinitely without a fixed
expiration date. The government only agrees to purchase the
services produced for a fixed length of time.
• Operation-Maintenance (OM) - The private sector is responsible
for all aspects of operation and maintenance.
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5. Two Common PPP Structures
1. Users Pay (Unknown Users)
• Traditional BOT model
• Revenues collected from users usually by the private partner(e.g.
tolls paid on a highway or bridge)
• Project is “off the Government budget” as revenues flow directly
to private sector
• Used only where there are substantial revenues that can be
directly charged to users
• It is estimated that about 10% of receipts relate to toll collecting.
2. Everybody / Known Users Pay
• Annuity scheme or availability model
• Revenue collected can be either from users directly to private
partner or may stay with government and Government opts to
make regular payments for making the service available
(availability / shadow payments)
• Project is often “on the Government budget” as revenues flow
through Government
• Can be used widely for services paid by known users, or for those
paid through taxes or in countries where tolling is not socially
acceptable.
• There is no expenditure for toll collecting
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6. PPP Transactions – Sectors Examples
Economic - Partnering to generate economic growth
1. Highways
• Direct tolled – i.e. users pay full cost or partial cost (Government
Subsidy) – compete on costs – e.g. Malaysia, Australia.
• Shadow tolled – users don’t pay directly but all pay indirectly via tax &
fuel surcharge etc – compete on subsidy amount – e.g. India
2. Air/Sea Ports
• Long term management contracts that may include capital works – e.g.
Australia, Srilanka, Cambodia
• Government may agree to minimum thru-put and provides core custom
& immigration functions
3. Power (IPP)
• Government agree on minimum uptake (usually 80 -90% the rest sold in
open market – e.g. Indonesia, Malaysia
• Government may agree to pass-thru cost on fuel.
Social - Partnering to provide community service
1. Hospital / Prison
• Private Partner to build the facility , manage it for a set time and operate
noncore service like catering, parking etc
• Government provides the doctors, nurse ,wardens etc and operates the
core services – e.g. Lesotho, Australia
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7. 2. School/Units/Sports Venue
• Private Partner bids on cost, design and facility management for a set
time & run noncore services – e.g. Australia
• Government runs core services of teaching / tutoring or agrees to use
the facility for an agreed period
3. Public / Government housing
• Private Partner to build, lease and maintain for a set period – e.g.
Malaysia
• Government agrees to minimum lease for a set period / off take and / or
allows co-developments on site
Environmental - Partnering to improve living environment
1. Landfills / waste treatment
• Private Partner to takeover waste treatment and landfill management ,
may include methane extraction – e.g. Malaysia , Indonesia
• Governments agrees to management fees and
• Governments usually approves combustion power plant on site for
internal use as well as sale to power grid
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8. Managing Fiscal Risks in PPP’s
PPP’s create fiscal obligation that are not captured by traditional measures
of government dept and are often long term and binding future
generations and tax payers. Accurate fiscal monitoring and good use and
design of PPP’s require that the fiscal cost and risk of the major contractual
obligations be identified, quantified and mitigated.
Typical fiscal risks:
Direct, debt-like obligations
• Availability payment for the use of facilities
• For PPP hospitals, schools, prisons and a like, PPP deal also requires
government to allocate funds for government doctors, nurses, and
teachers, guards who will run the facilities built, maintained & operated
by the private sector.
Explicit contingent obligations
• Government guarantees to repay investors cost and agreed returns
• Revenues and exchange rate guarantees.
• Shadow payments for assets provided by private sector.
Implicit contingent obligations
• Taking over private debt if developer becomes financially distressed
• Implicit use guarantees in PPA – Power Purchase Agreements, off take
agreements.
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9. PPP Best Practices
PPP projects should be goal-directed and focus on results; there should be
periodic progress monitoring during implementation; there should be an
independent project team reporting to a steering committee consisting of
top representatives from both the public and private sectors; political and
economic risks should be spread around at an early stage; there should be
adequate and clear working methods and agreements.
Factors that contribute to the achievement of best value in PPP projects;
Thorough and realistic cost/benefit assessment, technical feasibility,
detailed risk analysis / appropriate risk allocation and full life-cycle and
value for money (VFM) concepts adaptation. Well-organized and good
governance In PPP projects drive for faster project completion, curtails in
cost escalation, and keeps maintenance cost adequately accounted for.
Factors that impede the achievement of best value in PPP projects;
high cost of the PPP procurement process, lengthy and complex
negotiations, difficulty in specifying the quality of service, pricing of facility
management services, potential conflicts of interests among those involved
in the procurement, and the public sector clients' inability to manage
consultants.
Therefore the success formula for PPP projects is based on convergence of
government expectation and private sector requirements as follows;
• Government Expectation
- Maintaining strategic control on the service
- Increase in quality of service – safety & quality control.
- Affordable tariffs and social benefits.
• Private Sector Requirements
- Profitability assurance.
- Proportioned risk.
- Enabling environment.
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10. Enabling PPP Business Environment
While private developers are becoming more selective in choosing the
asset class - infrastructure, is still preferred - and in demanding higher
quality and more “bankable” guarantees - as financing new PPP’s is still
more on the debt side - with clearer forms of public support and risk
sharing, yet their interest in PPP’s can be enhanced by more enabling PPP
business environment.
Among the factors that impede Investors interest are the followings;
• Inconsistent Government / public policies
• Lack of transparency, reduced competition
• High tendering / bid process costs
• Complex negotiation processes, slow /long decisions cycle
• Lack of political & legislative support / high political debates.
• Fiscal & monetary reform agenda not in place.
• Public opposition / social issues.
• Low service volumes, low income levels, unwillingness to pay
commercial rates for service
• Tax and Customer reforms not in place / toll collections issues.
• Uncertain economic growth path (GDP , unemployment )
• Foreign investment regulation, trade flows not established.
• Unclear maintenance / operation standards
• Inadequate domestic capital markets capacity to manage
transaction; lack of mechanisms to attract long-term finance from
private sources at affordable rates.
• Local private sector non involvement
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11. PPP Advisory Services
Fee-based advisory services are sometimes needed to gain PPP traction by
building capacity via series of support programs with community
involvement to gain early buy-in. The fees are usually based on a retainer
and a success fee at closing of the PPP transactions. Typical advisory
services include;
Strategy - Making infrastructure PPP’s commercially viable
• Analysis of economic, regulatory and policy issues
• Market’s perception of project strengths and weaknesses
• Strategy definition, sustainability – stakeholder’s perspective.
• Solutions to social issues (retrenchment / retraining)
• Institutional reforms proposals.
• Assessment of long term country debt access and guarantees
• Project development studies – demand analysis ,environment and
social assessment, costs estimates, risks analysis
• Financial structuring (the correct risk sharing, PPP / tariff model),
technical, legal aspects and general procedures with continual
stakeholder’s feedback into transaction structure.
Bidding - Transparent international competitive contracts
• Pre-qualification criteria tailored to market realities
• Marketing of business opportunities to selected investors
• Examining bidders funding commitment – contributing banks
• Recommending appropriate concessionaire/s
Building support
• communication / media plan
• Political & legislative leadership / regulations outlines
• Project governance
• Building community support
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12. MENA PPP’s 2010 Projects Update
Completed Projects
• Saudi Arabia, hajj terminal: 20 years BTO for the rehabilitation and
expansion of the KAIA – King Khalid International Airport - Hajj
terminal was awarded in Dec 2006 to the Saudi Bin Ladin Group in
association with Airports De Paris .Size: us$250 m.
• Saudi Arabia, KAIA Desalination: 20 year BOT agreement to develop
a new 30.000 m3/day desalination plant to provide potable water
the Jeddah airport and its associated facilities was awarded to the
SETE consortium in Dec 2006. Size: us$ 35 m.
• Jordan, Queen Alia international airport: the rehabilitation and
expansion of the Qaia airport was awarded in April 2007 to a
consortium led by Airports De Paris management. Size: us$ 700
million.
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13. Ongoing Projects, 2010
• Saudi Arabia, airport cities: development of commercially oriented
“airport cities” around the airport of Jeddah, Dammam and Riyadh.
• Saudi Arabia, Medina airport: expansion and rehabilitation of the
prince Mohammed bin Abdul-Aziz airport.
• Egypt, new Cairo waste water and potable water: construction and
operation of a 250,000 m3/day waste – water treatment plant and a
500,000 m3/ day potable water plant for new Cairo.
• Egypt, Alexandria hospital PPP: construction and non-clinical
maintenance of two hospitals and a blood bank in Alexandria.
• Yemen IPP: construction and operation of an IPP of up to 400mw.
• Lebanon, IPP: sale/ concession of a 435 mw power plant at Deir
Ammaar, and the construction, operation, and maintenance of a new
450 mw IPP plant.
• Jordan, Amman ring road: implement the first road PPP in Jordan by
construction of a 118km expressway circling Amman.
• EGYPT, NEW SCHOOLS PPP: construction and management of 345
new schools on a PPP basis.
• Egypt, Cairo –Alexandria road: concession of the Cairo Alexandria
freeway, with possible inclusion of the Port Said- Marsa Matrouh
northern coastal road.
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