Frameworks of Public Private Partnership (P3) Contracts
In order to establish a working relationship a contract must exist. A contract defines the terms, conditions, consideration and covenants in a commercial transaction. In respects to project management the contract you select is important. Discovering the proper framework with a public private partnership (P3) is essential. The question remains, "What types of contracts should a contractor use?"
Chart 1.1 demonstrates a basic framework of each format
A Build-Operate-Transfer (BOT) project contains certain framework to its agreement structure. Under the agreement structure, concessions are granted to a contractor to design, finance, operate, and maintain a facility. The duration of time varies. Typical acceptable time horizons range between 10 and 30 years. These periods are usually applied to large infrastructure projects. The projects consist of: highways, bridges, local roads, & utilities. The contractor recoups cost of the project by collecting surcharges, metering fees or tolls during life of the concession period. Typically, at the end of operating period, all operating rights and maintenance responsibilities revert to government.
There are several contractual methods related to BOT. Other variations include (but not limited to): Build-Transfer-Operate (BTO), Build-Own-Operate-Transfer (BOOT), and Build- Own-Operate (BOO).
With a BTO contract, a private developer self finances to build a facility. Upon completion developer transfers legal ownership to a sponsoring government agency. The agency then leases the facility back to developer. The term is usually a long-term lease (+10 years). During the lease, the developer operates the facility and has opportunity to earn reasonable returns from user charges. An example would be water metering fees, surcharges on electricity or some other form of revenue tax. An External Agency license is desirable with this format but not required.
With BOOT, ownership of the facility rests with the constructor until the end of the concession period. Upon termination of the concession period ownership and operating rights are transferred free of charge to the host government. The private party enjoys full use, ownership and revenue during the concession period. The host government typically derives revenue from surcharges, or taxes. Often it is a requirement for BOOTs to have "External Agency Licenses" from the host government.
BOO projects resemble outright privatization of a facility. BOO projects are sometimes constructed with no provision to transfer ownership to the host government. At the end of a BOO concession agreement, the original agreement can be renegotiated for further concession periods. It is not possible to construct a BOO contract without specifying an External Agency License. The license must be granted from the host government to the private party.
There are myriads of possible contractual relationships for P3s. Design-Build-Finance-Operate (DBFO) contracts are frequently used in countries such as Great Britain. Great Britain's preferred usage for highway projects is DBFO. The DBFO partner finances the project and is granted a long-term right of access. A standard time frame is usually 30 years. The DBFO partner receives compensation through specified service payments during the life of the project. For highways without tolls traffic-related payments are based on “shadow tolls.” “Shadow tolls” are payments made by host governments to contractors on basis of traffic flows at predetermined points along the roadway.
A main difference between DBFO and a BOT arrangement is no actual tolls are collected from road users with road projects. The influence of this can be positive or negative. If the host government is responsible for financing the project than the affect is possibly positive. If the finance portion is burdened (either through private sourcing or private responsibility) then the affect can be negative. Where a host government assumes no responsibility for financing, with the host government carrying an investment grade rating below BBB or Baa3, institutional financing will likely experience difficulty. Often strength of cash flows serve basis for financing. When host governments are known for poor credit ratings user fees are typically preferred. Often the guarantee against default is worth more than guarantee of payment in a DBFO.
It is important to remember financing is key to P3 projects. Designing a P3 without financing in mind results in failed projects.
In a BOT arrangement, the private sector recovers its costs through toll or fee collection. There is no cost to government for the construction of the project. With DBFO, the cost of the project, in the form of annual payments, is still ultimately paid by the host government. This means that there is still a cost to the taxpayer with a DBFO arrangement. The cost of a DBFO project is typically less than traditional methods. Cost savings come through efficiencies from private operation to reduce overall cost of project.
The other benefit is a DBFO contract typically offers some protection to the private sector operator. In the event the public sector partner changes the conditions under which the road operates remains. This provides protection if other competing roads are upgraded during the contract period to reduce traffic flows.
As we review the different structures for P3 contracts it is important to note the difference. Knight Advisory & Planning is an expert and thought leader in all faucets of P3 approach. Constructing a project requires project management before the project. The project of P3 has its own life cycle. Let Knight Advisory & Planning navigate you through your P3 process so you can focus on your project process.
Knight Advisory & Planning (KAP) is the only company to primarily focus on Public Private Partnerships (P3) since 2006. KAP operations are spread across countries of the world to serve this need. KAP Network consists of core partners surrounded by interlocking networks of consultants and affiliates in key trading countries and disciplines. We maintain Master Project Manager (MPM) who are American Academy of Project Management (AAPM) certified and are experienced in the following industries: construction, development, finance, technology, FinTech, biotechnology, production, R&D, and manufacturing. With over twenty (20) years of experience let us guide you through the P3 process.