Delivery models, merits and demerits

Public Private Partnership means execution of public works (which are traditionally executed by governments) by private sector through private financing.

Nowadays, major changes are happening in the methods of project execution around the world. Research and experience indicate that selection of best project delivery system can reduce a project?s cost and time up to 12 and 30% respectively. Therefore, selection of a project delivery system is one of the most important project strategic decisions conducted at the end of feasibility studies and coincident with making decision about the project?s financial provisions. Hence, considering this important point and in order to select the appropriate system that best complies with the owner?s and project?s requirements, studying and distinguishing different project delivery systems is necessary.

Project delivery system is a general term which describes method of combination and organization of design, procurement, and construction services of a project in addition to operation, commissioning, and maintenance which can be executed by the owner or other parties. In other words, project delivery system determines sequence of project?s processes, contractual relationships, and area of obligations & commitments of main parties. The main difference between various types of project delivery systems is distribution of project?s risks between different parties who are involved in the project.

What is PPP?

PPP is a form of procurement introduced in 2004 under the Best Sourcing framework. Best Sourcing encourages public agencies to engage private sector providers in delivering non-core government services if it is more efficient to do so. Public agencies can engage the private sector in many ways, such as contracting for manpower, service outsourcing or Business Process Outsourcing. PPP is another form of Best Sourcing that can be used to work with private sector to deliver services, particularly services that require the development of new physical assets.

PPP refers to long-term partnering relationships between the public and private sector to deliver services. It is an approach that the government has adopted to increase private sector involvement in the delivery of public services.

Conventionally, public agencies have only engaged the private sector to construct facilities or supply equipment. Public agencies then own and operate the facilities or equipment to deliver services. For example, a public agency might engage private companies to build a water treatment plant. Upon completion, the public agency will own and operate the water treatment plant to provide water to the public. No financing is involved in this arrangement.

With PPP, the public sector focusses on acquiring services at the most cost-effective basis, rather than directly owning and operating assets. For example, if PPP is used to develop a water treatment plant, the private sector is engaged not only to construct the plant, but also to design, operate, maintain and secure financing to build the plant to supply water to the public agency. Hence, instead of owning and operating the water treatment plant, the public agency purchases the water directly from the private sector. This means that the private sector has more room to introduce innovation into the delivery of public sector services.

Under PPP, the private sector can look forward to providing a wider range of services and over a longer contract period (usually between 15 to 30 years). Through closer collaboration with the private sector, public services can be delivered in a more value for money way by making optimal use of the public and private sectors? expertise, resources and innovation to meet public needs effectively and efficiently.

Typical PPP Delivery Models

There are many PPP models, including joint-ventures, strategic partnerships to make better uses of government assets, Design-Build-Operate (DBO), Design-Build-Finance-Operate (DBFO), etc.

PPP MODELS

Build Operate Transfer (BOT): Build-operate-transfer (BOT) or build-own-operate-transfer (BOOT) is a form of project financing, wherein a private entity receives a concession from the private or public sector to finance, design, construct, and operate a facility stated in the concession contract. This enables the project proponent to recover its investment, operating and maintenance expenses in the project.

In the BOT framework, a third party, for example the public administration, delegates to a private sector entity to design and build infrastructure and to operate and maintain these facilities for a certain period. During this period, the private party has the responsibility to raise the finance for the project and is entitled to retain all revenues generated by the project and is the owner of the regarded facility. The facility will then be transferred to the public administration at the end of the concession agreement without any remuneration of the private entity involved.

Build Own Operate Transfer (BOOT): A BOOT structure differs from BOT in that the private entity owns the works. During the concession period the private company owns and operates the facility with the prime goal to recover the costs of investment and maintenance while trying to achieve higher margin on project.

Build Lease Transfer (BLT): Under BLT, a private entity builds a complete project and leases it to the government. In this way the control over the project is transferred from the project owner to a lessee. In other words the ownership remains with the shareholders but operation purposes are leased. After the expiry of the leasing, the ownership of the asset and the operational responsibility are transferred to the government at a previously agreed price.

Design ? Build – Finance – Operate (DBFOT): Design-build-finance-operate is a project delivery method very similar to BOOT except that there is no actual ownership transfer. Moreover, the contractor assumes the risk of financing till the end of the contract period. The owner then assumes the responsibility for maintenance and operation. After the expiry of the concession period, the operational responsibility are transferred to the government.

Design-Build-Operate (DBO): Under this model, the private sector designs and builds a facility. Once the facility is completed, the title for the new facility is transferred to the public sector, while the private sector operates the facility for a specified period. This procurement model is also referred to as Build ? Transfer ? Operate (BTO).

Build Own Operate (BOO): In a BOO project, ownership of the project remains usually with the project company. Therefore the private company gets the benefits of any residual value of the project. This framework is used when the physical life of the project coincides with the concession period. It involves large amounts of finance and long payback period.