By Chongo Sombo Mulenga (MCIArb)
What are PPPs?
Public Private Partnerships (“PPPs”) are generally understood to be long term contracts between a private party and a government entity, for developing public infrastructure and providing public services. The private party primarily brings funding and expertise into areas that are normally the responsibility of Government. In PPPs, the private party bears significant risk and management responsibility and remuneration is linked to performance.
What is traditional public procurement?
By comparison, traditional public procurement pertains to the acquisition of goods or construction works or services for the development of public infrastructure using public funds sourced through the Treasury or debt. Under traditional public
procurement, the funding, operation and maintenance of public assets remains the responsibility of the public body.
What are the key differences between PPPs and traditional public procurement?
Off the cuff, it may be challenging to distinguish between PPPs and traditionally procured infrastructure projects as both share the common thread of private sector involvement. However, there are material disparities, some of which are highlighted below:
Legal Framework
In highlighting the fundamental differences between PPPs and traditional public procurement, a good starting point would be the legal framework. In Zambia, PPPs are governed by the Public Private Partnership Act No. 14 of 2009 (as amended) whereas traditional public procurement is governed primarily by the Public Procurement Act No. 8 of 2020 with reference also to the Public Finance Management Act No. 1 of 2018 as read with the relevant subsidiary legislation.
Financing
One of the major differences between PPPs and traditional public procurement is the source of financing. PPP projects are generally capital intensive and the partnership approach is intended to alleviate pressure on the Government treasury. As such,
PPP projects are typically financed by the private sector through debt or equity. Conversely, traditionally procured infrastructure projects are financed by the Government through available financial resources or, in the alternative, public borrowing.
Tenure
Traditionally procured public infrastructure is usually governed by contractual agreements whose term averages around 5 years for large facilities whereas PPP contracts subsist for a longer period of about 20 to 30 years or possibly more. As PPPs seek to leverage private sector financing, the private party typically recoups its investment through the operation of public infrastructure and collection of user fees. For this reason, PPP agreements tend to run for a longer period of time in comparison with traditional public procurement where the public body makes direct payment(s) to the private party using public funds.
Performance Indicators
With regard to traditionally procured public infrastructure, the private party’s performance is basically measured by conclusion of construction whereupon the works are tested and this forms the basis of remuneration. Under a PPP arrangement, the public body concerns itself more with the private party’s ability to provide the contracted public or social service. In many PPP arrangements, the private party is responsible for designing, funding, constructing and operating the infrastructure (i.e. service provision). Accordingly, traditionally procured infrastructure projects are said to be input based whereas PPP projects are considered to be output based.
Risk Sharing
In PPP arrangements, significant project related risks are usually transferred from the public body to the private party on the risk sharing principle which guides that risks should be borne by the party that is best suited to manage the risk. Such risks include design costs, construction risks, time overruns, demand risks and operation and maintenance risks, among others. Where public infrastructure is procured conventionally, the public body designs the infrastructure, stipulates the specifications and pays the private party for construction. The public body retains responsibility for the operation and maintenance of the infrastructure and the private party takes no responsibility post construction, outside the construction warranty period.
Formation of Special Purpose Vehicle
A common phenomenon in PPPs is the formation of a special purpose vehicle which is simply a separate entity incorporated by a preferred bidder as the entity that enters into a PPP agreement with the Government for the purpose of undertaking a project.
In essence, formation of a special purpose vehicle seeks to ringfence the project assets and revenues by isolating the PPP project from any potential financial and legal risks connected to the initial corporate entity (i.e. the preferred bidder). Owing to the clear-cut nature of traditional public procurement agreements, formation of a special purpose vehicle for the performance of contractual obligations by the private party is needless.
Conclusion
In closing, the line between PPPs and traditionally procured infrastructure projects may appear blurry at first glance. However, close scrutiny reveals that there are fundamental distinguishing factors between the two. Notably, some scholars conclude that PPPs are an alternate and distinct form of public procurement.
Resource Materials:
1. United Nations Economic Commission for Europe, Training Module: Introduction to Public Private Partnerships (2012)
2. Guidance Note: Procurement arrangement applicable to Public Private Partnership (PPP) contracts financed under World Bank projects (2010)
DISCLAIMER: Any views or opinions expressed in this article belong solely to the author and do not represent those of people, institutions or organizations that the author may or may not be associated with in a professional or personal capacity, unless explicitly stated. Any views or opinions are not intended to malign any religion, ethnic group, club, organization, company or individual.
All content provided in this article is for informational purposes only and is not intended as a substitute for professional advice. Therefore, while the author strives to ensure that the information in this article is complete and accurate, the author assumes no responsibility for any errors or inaccuracies. All liability with respect to actions taken or not taken on the premise of this article are hereby expressly disclaimed.
Any image(s) used in connection with this article are not the property of the author and maybe subject to copyrights held by the originator.
