37575 311 privatesector P U B L I C P O L I C Y F O R T H E NUMBER NOTE 2006 Public-Private Partnership Units SEPTEMBER Mark Dutz, Clive Harris, What Are They, and What Do They Do? Inderbir Dhingra, and Chris Shugart As governments turn to the private sector to provide services once PRESIDENCY delivered by the public sector, they must learn new skills. An Mark Dutz is a senior VICE private sector development increasingly common way to provide the new capacities needed is to specialist, and Inderbir establish public-private partnership units--as new agencies or as Dhingra a private sector development specialist, special cells within a cross-sectoral ministry such as finance or with the World Bank's planning. Making the right choices on what roles such units play, DEVELOPMENT South Asia Finance and where they are located, and how conflicts of interest are managed is Private Sector Development Unit. critical in their success. This Note reviews the experience. SECTOR Clive Harris is a lead infrastructure specialist Governments are turning to the private sector to see these arrangements over the life of the con- with the World Bank's PRIVATE provide a broad range of services previously deliv- tract. And they need advocacy and outreach South Asia Energy and ered by the public sector. These public-private skills to build consensus on the role of PPPs and AND Infrastructure Unit. partnerships (PPPs) are often long-term arrange- to develop a broad program across different sec- Chris Shugart is a ments in which the government purchases ser- tors and levels of government. consultant. vices under a contract, either directly or by An increasingly common way to provide FINANCIAL subsidizing supply to consumers. In other PPPs these capacities is to establish PPP units, as new the government bears substantial risks--for agencies or as special cells within a cross- example, by guaranteeing revenue or returns-- sectoral ministry such as finance or planning. on projects that sell directly to consumers. Making the right choices on what functions This shift from traditional public sector these units should perform and how they GROUP methods places new demands on government should interact with line agencies responsible agencies. They need the capacity to design proj- for service delivery will be critical to ensuring BANK ects with a package of risks and incentives that that they both add value and fit into existing makes them attractive to the private sector. governmental processes. They need to be able to assess the cost to tax- payers, often harder than for traditional proj- What do PPP units do? WORLD ects because of the long-term and often A review of international practice shows that uncertain nature of government commitments. these PPP units may be asked to perform a wide THE They need contract management skills to over- variety of roles (table 1). Most provide informa- P U B L I C - P R I V A T E P A R T N E R S H I P U N I T S W H A T A R E T H E Y , A N D W H A T D O T H E Y D O ? tion and guidance on PPPs to government A critical question here is what role PPP units departments. This can include general should play in relation to line departments. For resources on PPPs, such as international experi- departments that develop a large number of ence and customized guidance on the prepara- PPPs, building up their own PPP capacities tion of PPPs. This guidance can include makes sense. In the United Kingdom the Prison standard contracts, concession agreements, or Service and the Highways Agency, which have contract clauses and detailed procedures for many projects, both have a dedicated Private identifying, evaluating, and procuring PPPs. Finance Initiative (PFI) team. In Pakistan the In a few cases PPP units do no more than per- Private Power Infrastructure Board was created 2 form this information and guidance role. The to facilitate private investment in power genera- Canadian federal government created an tion. For departments with far fewer deals, agency, the P3 Office, to promote the benefits building up PPP capacities may not be eco- of PPPs and to act as a resource center, devel- nomic. Local authorities in the United King- oping guides and "self-help" tools. But in some dom that implement PFI school and hospital cases, such as in Ireland, agencies that aid proj- projects rely on support from central bodies. ect preparation do not issue guidance material. Timing also matters. A PPP unit can assist a Many PPP units provide advisory support line department at the start of its program, when and funding to line departments and sub- the department lacks experience. But line national agencies developing PPPs. This usually departments that helped pioneer PPPs may involves PPP unit staff acting as resource peo- have more experience than a newly created PPP ple, but it can include additional funding to pay unit. In these cases the PPP unit needs to take the costs of transactions advisers. In some cases care not to slow the more experienced agencies, PPP units play a leading role in closing the though it should ensure that they properly transaction and receive compensation for deal address critical issues (such as affordability and closure. value for money). Table Functions of cross-sectoral PPP units 1 Information and Information and Advisory support Advisory support guidance guidance and funding and funding Approval Approval PPP facto a center project-advice for project b de contract or power guidance as in jure PPPs Resource(dissemination) PPP material Intensivespecific Funding preparation Role developer Role monitoring De approvalover Andhra Pradesh, India: AP Infrastructure Authority c British Columbia, Canada: Partnerships BC d Gujarat, India: Gujarat Infrastructure Development Board d Ireland: National Development Finance Agency -- e -- e f Italy: Project Finance Unit Netherlands: PPP Knowledge Center Philippines: BOT Center g South Africa: PPP Unit, National Treasury United Kingdom: Partnerships UK d h Victoria, Australia: Partnerships Victoria i a. Funding for consultants working with the line department or local government. b. Involves greater responsibility than for an adviser and fees based on some measure of performance (such as closing of a deal). c. All PPPs must be referred to the state's Infrastructure and Investment Department, which may then refer them to the AP Infrastructure Authority for clearance. d. Contract management role can be requested by clients (line departments and local governments). e. The central PPP unit provides general guidance and policy material. f. Gives project-specific advice and carries out the procurement of PPPs in health, justice, and education. Line agencies are responsible for procurement in other sectors. g. Plays a role in approval through membership in the Investment Coordination Committee. h. Prepares a report for each local government Private Finance Initiative project that goes to an interdepartmental committee for approval. i. Monitors contract management by line agencies and gets involved where major issues arise. Finally, PPP units often play a role in the BOT Center or Pakistan's Private Power approval of PPPs developed by line agencies. Infrastructure Board. A third approach comes This often involves providing input into deci- from Canada, where Partnerships British sions made by others rather than having direct Columbia is a government-owned company. It is clearance authority. In South Africa the overseen by a public-private board and offers Treasury relies on the PPP Unit to assess salaries outside the normal civil service ranges to whether line agencies and provinces can meet attract people with key financial and transac- the costs of proposed PPPs within their future tions skills. budgets. The PPP Unit is involved at three A fourth way is to set up a joint venture com- 3 points: after the feasibility study, before the bid- pany owned in part by private shareholders. ding documents are issued, and before the con- Such units often receive performance-based tract is signed. In other cases the link is less payment, linked to deal closure, for example. direct. In the Philippines, for example, the BOT Partnerships UK, established in 2000, is 51 per- Center is just one member of an interagency cent owned by the private sector and focuses on committee that approves build-operate-transfer structuring and negotiating the commercial (BOT) projects. aspects of PPP projects. Several state govern- Still, this oversight role is potentially the most ments in India, including Karnataka and important one for a PPP unit. In some countries, Rajasthan, have established joint ventures with such as South Africa, the unit's primary role and private financial institutions to promote and motivation is to scrutinize the quality, afford- develop PPP transactions. ability, and expected fiscal cost of proposed One overriding consideration, particularly at PPPs. In South Africa the clear regulatory the start of a PPP program, may be the potential process for PPPs has helped the PPP Unit per- benefits of placing the PPP unit where it will form this role. Another way to make guidance have high visibility, strong influence, and clear binding is through the requirement to use political backing. For example, the United model contracts developed by the PPP unit--or Kingdom's PFI program received a substantial to ensure heavy scrutiny by the PPP unit if they boost with the establishment of the Treasury are not used. Task Force. Where should PPP units be placed? How should conflicts of interest be handled? Where PPP units primarily screen PPPs, assess Risks of a conflict of interest arise with cross- value for money and affordability to the govern- sectoral PPP units that both provide input into ment, or disseminate good practices, they often the approval process for PPPs and play a role in take the form of a cell or group within an exist- identifying and preparing projects. Conflicts ing government agency. That agency is often the also can arise if a PPP unit promotes or assists in finance ministry or treasury, reflecting concerns developing projects and then is asked to carry about a need to strengthen the understanding out ex post evaluations. The best solution may and monitoring of the fiscal costs of PPPs. In be to split the functions. But early in a PPP pro- some cases the agency is the planning ministry. gram, when capacities are in short supply and Where PPP units are to provide transactions policies are being developed, there may be some support, their ability to buy in these skills from benefits from having the same group provide the private sector and provide the right incen- input into both the development and the tives to staff to close deals requires close atten- approval of transactions. tion. One option is to establish a unit within a In South Africa the PPP Unit faces a poten- ministry and rely on long-term consultants, as tial conflict of interest because it provides both with South Africa's PPP Unit. Another option, transactions advice for projects and advice that creating greater independence from the gov- feeds into the Treasury's approval process. To ernment, is to set up the unit as an autonomous address this potential conflict, for projects for entity, attached to but not fully part of the gov- which the unit provides transactions advice, ernment bureaucracy, as with the Philippines' approvals are sought from other groups in P U B L I C - P R I V A T E P A R T N E R S H I P U N I T S W H A T A R E T H E Y , A N D W H A T D O T H E Y D O ? Treasury. In British Columbia the Treasury vide oversight of, and improve the quality of, retains approval powers rather than delegating provincial government PPPs. them to Partnerships British Columbia. Partner- Countries with greater decentralization see ships UK sometimes supports local governments less of a role for a national unit in subnational in PPP transactions and has a role in the PPPs. In Canada several provinces (such as viewpoint approval of local government PPPs through the British Columbia and Quebec) have their own submission of a report to an interdepartmental cross-sectoral PPP unit. The federal government committee, but the two activities are carried out agency, the P3 Office, merely acts as a resource is an open forum to by different staff. Another layer of scrutiny can center and promotes the use of PPPs. In encourage dissemination of be added by bodies such as audit authorities. In Australia the national government has virtually public policy innovations for the United Kingdom the National Audit Office no role in state-level PPPs and instead has private sector­led and has undertaken a number of reviews of the gov- focused largely on PPPs for services for which it market-based solutions for ernment's PPP program. is responsible. State governments develop PPPs development. The views Possibilities for conflicts of interest are prob- for the services for which they are responsible, published are those of the ably greater where PPP units are public-private with little involvement by the national govern- authors and should not be joint ventures and where success fees are paid ment. The states have even established their attributed to the World for closing transactions. These cases call for own information sharing structures, with a PPP Bank or any other affiliated careful structuring of the arrangements for cor- forum for government policymakers and a PPP organizations. Nor do any of porate governance. Private sector participation working group, for the heads of PPP agencies, the conclusions represent is added to orient the unit toward private sector to coordinate the pipeline of PPP projects and official policy of the World modes of thinking and working, but the unit still contractual approaches. Bank or of its Executive must maintain the policy perspective and objec- Directors or the countries tives of the public sector. Partnerships UK has they represent. an advisory council, made up entirely of mem- bers from the public sector, that approves the Note To order additional copies selection criteria Partnerships UK uses in decid- This Note is based on material from World Bank, contact Suzanne Smith, ing which projects to become involved in. "India: Building Capacities for Public-Private Partnerships" managing editor, Clearly, a public-private unit generally Room F 4K-206, (South Asia Region, Washington, D.C., 2006). should not issue PPP policies nor play the main The World Bank, 1818 H Street, NW, role in assessing the costs of or approving PPPs. Washington, DC 20433. A public-private unit that provides transactions support therefore needs to be complemented Telephone: by capacities to perform these functions else- 001 202 458 7281 where (typically in the finance ministry). Fax: 001 202 522 3480 What role do national PPP units have in Email: subnational PPPs? ssmith7@worldbank.org In many countries subnational governments make heavy use of PPPs. Should national PPP Produced by Grammarians, units play a role in these transactions? In prac- Inc. tice their role is strongly determined by the legal and fiscal relationships between the national Printed on recycled paper and subnational levels of government. In the United Kingdom national agencies provide advisory support to local authorities, and a cen- tral government interdepartmental committee chaired by Treasury approves most local gov- ernment PFI projects. In South Africa a primary motivation for creating the PPP Unit was to pro- T h i s N o t e i s a v a i l a b l e o n l i n e : h t t p : / / r r u . w o r l d b a n k . o r g / P u b l i c P o l i c y J o u r n a l