Giz2011 0183en PPP PDF

Private Sector Cooperation
PPPs in the context of development

cooperation — an overview and approach
Manual
2 PPPs in the context of development cooperation
Imprint
Produced by
Deutsche Gesellschaft für
Internationale Zusammenarbeit (GIZ) GmbH
Postfach 51 80
65726 Eschborn
Responsible
Kurt Janssen
Sector Project ‘Private Sector Cooperation
and Corporate Social Responsibility (CSR)’
T +49 61 96 79-23 70
E kurt.janssen@giz.de
Author
PricewaterhouseCoopers AG
Wirtschaftsprüfungsgesellschaft
Contact
Hansjörg Arnold, Dr. Azadeh Kopp-Moini
T +49 69 95 85-56 11
E hansjoerg.arnold@de.pwc.com
Layout
Eva Hofmann, Sandra Winter
W4 Büro für Gestaltung, Frankfurt am Main
This Manual written by PwC AG WPG provides

only general information and does not substitute
specific advisory services.
May 2011
PPPs in the context of development cooperation 3
I Table of Contents
I Table of Contents 3
II List of Abbreviations 4
III List of Figures 5
IV List of Boxes 5
V Executive Summary 6
CHAPTER A: PPPs — An Overview

1. Introduction: Private Sector Participation in Development Cooperation 8
2. Why PPPs? 10
2.1 Reasons for increased Attention towards PPPs 10
2.2 Definition of a PPP 11
2.3 Main Characteristics and Payment Structures of a PPP 11
2.4 PPP Models 14
2.5 Track Record of PPP Models in Low- and Middle-Income Countries 18
2.6 A Hybrid Model: Performance-based Service Contracts 19
3. Types of Financing 21
3.1 Project Finance vs. Corporate Finance 21
3.2 Funding PPPs 24
CHAPTER B: Practical Guide and Sectoral Analysis

4. The Relevant Issues to be considered 28
4.1 Legal and Institutional Framework 28
4.2 A Balanced Approach towards PPPs 33
4.3 Stakeholders 34
4.4 The Bidding Process 36
5. PPPs in different Sectors 39
6. PPP Checklist 45
CHAPTER C: Conclusion — The Role of GIZ in PPPs 46

VI Bibliography 51
VII Annex 52
II List of Abbreviations
ADB Asian Development Bank IADB Inter-American Development Bank
AfDB African Development Bank IBRD International Bank for Reconstruction and
BAFO Best and Final Offer Development
BCIE Central American Bank for Economic IDA International Development AssociationIIFBL
Integration India Infrastructure Finance Company Limited
BMVBS German Federal Ministry of Transport, IFC International Finance Corporation
Building and Urban Development KfW Kreditanstalt für Wiederaufbau
BMZ German Federal Ministry for Economic MIGA Multilateral Investment Guarantee Agency
Cooperation and Development OBA Output-based Aid
BOAD West African Development Bank ODA Official Development Assistance
BOO Build-Own-Operate OECD Organisation for Economic Co-operation and
BOOT Build-Own-Operate-Transfer Development
BOT Build-Operate-Transfer PFI Private Finance Initiative
BRLT Build-Rehabilitate-Lease-Transfer PPI Private Participation in Infrastructure
BROT Build-Rehabilitate-Operate-Transfer PPP Public-Private Partnership
CDP Capacity Development for Partnerships PSC Public Sector Comparator
with the Private Sector PwC PricewaterhouseCoopers
DBFO Design-Build-Finance-Operate RLT Rehabilitate-Lease-Transfer
EBRD European Bank for Reconstruction and ROT Rehabilitate-Operate-Transfer
Development SPV Special Purpose Vehicle
EIB European Investment Bank UN United Nations
EOI Expression of Interest UNDP United Nations Development Programme
EU European Union US United States
FDI Foreign Direct Investment VfM Value for Money
GDP Gross Domestic Product VGF Viability Gap Fund
GNESD Global Network on Energy for Sustainable WHO World Health Organization
Development
GPOBA Global Partnership on Output-Based Aid
GIZ Deutsche Gesellschaft für Internationale
Zusammenarbeit GmbH
GTZ Deutsche Gesellschaft für Technische
Zusammenarbeit GmbH
III List of Figures

Figure 1: Investment Volumes for Private Sector-related/PPP Projects .......................................................................................................... 10
Figure 2: Life Cycle of Typical PPP Projects ......................................................................................................................................................................... 13
Figure 3: Range of PPP Models ........................................................................................................................................................................................................ 14
Figure 4: Realisation of PPP Contracts in Low- and Middle-Income Countries 1990-2008 ............................................................ 18
Figure 5: Regional Distribution of various Contract Types 1990-2008 ............................................................................................................. 19
Figure 6: General Project Finance Structure .......................................................................................................................................................................... 22
Figure 7: Supporting Agencies in Low- and Middle-Income Countries ............................................................................................................. 24
Figure 8: Supporting Financial Instruments in Low- and Middle-Income Countries .............................................................................. 24
Figure 9: Regional Financial Support 1990-2008 (US$ m) ......................................................................................................................................... 25
Figure 10: Regional Financial Support provided by different Agencies (1990-2008) ............................................................................... 26
Figure 11: Ranking of Investors’ Priorities ................................................................................................................................................................................. 29
Figure 12: Legal and Economic Factors affecting Revenues and Costs ............................................................................................................. 30
Figure 13: Best Project Experiences ................................................................................................................................................................................................ 31
Figure 14: Worst Project Experiences ............................................................................................................................................................................................ 32
Figure 15: Selected Stakeholders of a PPP ............................................................................................................................................................................... 34
Figure 16: Outline of the Procurement Process ..................................................................................................................................................................... 37
Figure 17: PPP Opportunities in different Sectors ................................................................................................................................................................ 39
Figure 18: Sectoral Share of Investments 1990-2008 ....................................................................................................................................................... 40
Figure 19: Cross-Sectoral PPP Investments .............................................................................................................................................................................. 40
Figure 20: PPP Investments in Sectors and Regions 1990-2008 ............................................................................................................................. 41
Figure 21: Private Sector Share of Enrolment in the Education Sector ............................................................................................................. 42
Figure 22: Private Health Expenditure as a Share of Total Health Expenditure (Income Groups, 2007) ................................. 43
Figure 23: Private Health Expenditure as a Share of Total Health Expenditure in Selected Countries .................................... 44
IV List of Boxes
Box 1: Political Risk Insurance regarding ‘Autopistas del Nordeste’ .......................................................................................................... 12
Box 2: Pros and Cons of a Management Contract ...................................................................................................................................................... 15
Box 3: Pros and Cons of a Lease Contract ....................................................................................................................................................................... 15
Box 4: Example of a BOT Project in the Energy Sector with GIZ Involvement .................................................................................... 16
Box 5: Pros and Cons of BOT/BROT/ROT Contracts .................................................................................................................................................... 16
Box 6: Pros and Cons of BOO Contracts ............................................................................................................................................................................. 17
Box 7: Overview of several PPP Options ............................................................................................................................................................................. 17
Box 8: Example of GIZ support to a Performance based Service Contract in the Transport Sector .................................. 20
Box 9: An Example of Project Finance ................................................................................................................................................................................. 21
Box 10: Corporate Finance vs. Project Finance ................................................................................................................................................................ 23
Box 11: Example of a PPP including Output based Aid ............................................................................................................................................ 27
Box 12: Requirements concerning the Strategic Stakeholder Dialogue ......................................................................................................... 35
Box 13: Examples of the Advantages of involving Stakeholders ....................................................................................................................... 35
Box 14: PPP Opportunities in the Education and Health Sectors ...................................................................................................................... 42
Box 15: An Example of a PPP in the Education Sector ............................................................................................................................................. 42
Box 16: Examples of PPP Schemes in the Education Sector ................................................................................................................................ 43
Box 17: Potential Areas of Involvement for GIZ .............................................................................................................................................................. 47
Box 18: An Example of GIZ Involvement in a Concession-related Project ................................................................................................. 48
Box 19: An Example of GIZ Involvement in a Regional Economic Integration Process with a PPP Approach .............. 49
Box 20: An Example of GIZ Involvement in a PPP Process in Yemen ............................................................................................................ 49
V Executive Summary
Strongly growing economies are increasingly faced by tual relationship between the contracting authority and
significant bottlenecks in the provision of public infrastruc- the private partner for a PPP to work. The service to
ture and services. There is a growing awareness among be provided is often, in practice, specified functionally
these countries that not only budgetary constraints, but as an ‘output’. The means by which the private partner is
also the lack of adequate regulatory and institutional supposed to deliver the service is not determined by the
frameworks, pose a hurdle to structuring innovative solu- contracting authority. Thus, a PPP has an underlying
tions to service delivery. Public-Private Partnerships (PPPs) risk allocation mechanism that provides for optimal risk
have attracted much attention in recent years whereby allocation between the public and the private sector and
public authorities come together with the private sector in which, in turn, secures an efficiency gain. PPPs encompass
an attempt to structure an infrastructure project. The idea an exit strategy, for they are planned along the life cycle
is that the private sector can make contributions towards of a project. PPPs encompass the bundling of service
closing existing and future infrastructure gaps as well as components, for instance, designing, building, operating,
realising efficiency gains throughout the life cycle of a PPP financing can all be bundled for the private sector to
project mutually with the public sector. Introducing com- assume responsibility for delivering the output specified
petition, especially via the bidding process, achieving a bet- by the public sector.
ter quality compared to public service provision as well as
rendering know-how transfer from private to public sector From a (systemic) capacity building and institutional per-
based on private sector managerial practices and experiences spective, PPPs touch upon many areas that are of concern
are considered as value added contributions of PPPs. to the Deutsche Gesellschaft für Internationale Zusammen-
Additionally, removing the financial responsibility from arbeit (GIZ) GmbH. Historically, GIZ has been engaged
the balance sheet of the public authority and working out in many different kinds of projects involving both public
adequate risk sharing mechanism are other advantages of and private sector. In the recent past, GIZ has come to
PPPs. There is no universal definition of a ‘PPP’. Creating realise that within the scope of its technical cooperation
a common terminology is not easy, but is nonetheless programmes there is an increasing demand for PPPs. Both
important for facilitating the dialogue between policy- counterparts and clients are now questioning how these
makers and practitioners. The term used in this manual should be structured and implemented.
will be based on the definition employed by the German
Federal Ministry of Transport, Building and Urban Devel- GIZ’s Private Sector Cooperation Unit has developed an
opment (BMVBS)1: a ‘PPP is a long-term contractually advisory service, entitled as ‘Capacity Development for
based mutual cooperation between (the) public and private Partnerships with the Private Sector (CDP)’. It aims at
sector(s) aimed at the provision of public services. The pooling GIZ’s advisory services such that public sector
resources of both the private partner and the public authority institutions may attain their goals more effectively and
are combined and the different risks are allocated in the efficiently through a joint cooperation with private sector
most efficient way to generate a successful project.’ agents. The focus of CDP has been set on three modes
of cooperation between public and private sector:
A PPP is considered as an alternative mechanism for the
provision of a public service; one whereby the public 1. Programmes for Development Partnerships
counterpart still holds accountability for the project on a 2. Public-Private Partnerships (PPPs)
long-term basis. Thus, there must be a long-term contrac- 3. Stakeholder Dialogues
1
Source: BMVBS (2003)
A major idea of initiating CDP has consisted of identifying Fostering a cooperative culture between public and
the range of ongoing services currently provided by GIZ private sectors and civil society;
with respect to private sector participation in the field Providing advice to strengthen and develop PPP-related
of technical cooperation, and to provide a proper classifi- legal and institutional frameworks, for example, in the
cation thereof. context of wider sectoral reform programmes;
Supporting PPP units and regulatory bodies on issues
Following up on GIZ’s experience in the area of private related to institutional capacity development;
sector participation in the past, this manual proposes that Supporting the implementation and realisation of
GIZ may focus its core advisory services in the field of individual PPP projects throughout the project life cycle.
PPPs on four major areas which may best be described as
follows:
2
Information on CDP — an overview Private Sector Cooperation
The brochure Capacity Development for Partnerships

with the Private Sector (CDP) — Consulting Services
is the main CDP advisory services publication. It
examines the various forms of cooperation between Capacity Development for Partnerships
with the Private Sector (CDP)
the state and the private sector. Consulting Services
Complementing the above brochure, there are

separate publications on three central forms
of cooperation: Programmes for Development
Partnerships (EPW), Public-Private Partnerships
and Stakeholder Dialogues (SD). These documents
Private Sector Cooperation Private Sector Cooperation Private Sector Cooperation
provide detailed information on CDP advisory

services and training courses, and guide staff
through the first planning stages.
For staff involved in the project management Programmes for Development Partnerships
Manual
Public-Private Partnerships (PPPs)
Manual
Stakeholder Dialogues
Manual
of development partnerships, Steering and

Monitoring Partnerships with the Private Sector
(SMP) provides a guide to design, implementation
and in-process monitoring. (see Chapter 4.2.3).
2
Contact: Kurt Janssen (kurt.janssen@giz.de)
CHAPTER A: PPPs — An Overview
1. Introduction:
Private Sector Participation in Development Cooperation
Private sector participation in the scope of international systems for efficient service provision, and a lack of manage-
cooperation has gained in significance, especially during ment know-how. Budgetary constraints and erratic payment
the last two decades. This comes against the backdrop of behavior on the part of users also play a key role here.
a dynamic process of market integration and fast-growing
international and national private sector investment in In this context, one specific type of private sector participa-
the developing world. Hence, given its growing economic tion is to integrate the private sector in order to minimise
assets, private sector has a vested interest in a stable these structural constraints in infrastructure provision faced
enabling environment for expanding and developing the by public and private sector in developing countries – i.e.
markets here. Within its limits, private sector can take by implementing so-called ‘PPPs’. PPP structures are
responsibility for and contribute to local development. potentially efficient in the provision of certain services and
can possibly contribute towards the transfer of know-how
With regard to projects pursued and implemented by and capital in specific sectors.
German development cooperation, private sector inclusion
is increasingly recognised as a service provision mechanism Under the umbrella of German development cooperation,
throughout the development process in many countries; PPP models have been primarily realised in the context of
one which has a certain leverage potential. German devel- financial cooperation. In the field of technical cooperation,
opment cooperation has acquired a longstanding experi- PPPs play primarily a role throughout the systemic and
ence of various approaches in this context, from company political advisory processes. The PPP models outlined in
sponsoring and self-commitment (e.g. on best practices this manual will be defined narrowly and are associated
and regulations) to using synergies in projects by structur- with infrastructure provision. Given the increasing devel-
ing complex large partnerships and alliances, as well as oping country interest in applying such models, they are
by mobilising private funds and financing. The strategy becoming even more relevant for German technical coop-
behind these types of cooperation between public and pri- eration.3
vate sector is to harness private sector managerial expertise,
mobilise inputs from private sector to secure complemen- This increasing relevance can best be described by looking
tary and (cost-) effective provision of services, raise private at the opportunities and risks of PPPs. As with the tip
sector awareness and stimulate a ‘participation culture’ for of an iceberg, a PPP project itself is only the ‘visible’ part.
further developing civil society, and, ultimately, to promote However, underlying it, there are a couple of essential lay-
private sector investment as an impetus for sustainable ers. These layers concern the political, regulatory and insti-
development. tutional environment, i.e. in terms of contracts, procure-
ment and policy and, more specifically, competition policy,
One baseline condition for sustainable development is as well as the financing environment. In addition, for
broad public access (for urban, rural, and peri-urban popu- sustainability reasons, PPPs need to be integrated into a
lations) to infrastructure services of a sufficient quality and particular sectoral policy to render positive results. And for
an affordable price. However, a large part of the world’s this purpose, the whole chain of activities that lead to the
population does not have access to infrastructure – not delivery of services has to be considered. Above all, a deter-
only that related to clean water, sewage disposal, energy mined political will has to be in place for realising the
and transport, but also the infrastructure linked to educa- potential advantages of PPPs.
tion, health and quality governmental services. Meanwhile,
those that are connected to such systems in the developing Hence, from a (systemic) capacity building and institution-
world often suffer from poor quality services and an erratic al perspective, PPPs touch upon a couple of areas that are
service delivery. There are several reasons for these chal- of concern for GIZ. The overriding purpose of this manual
lenges. Most commonly, these can be explained by erratic is therefore to provide an overview and to help guide GIZ
policies arising from vested interests, insufficient financial and its partners on how to approach PPP models in a prac-
independence of public service providers, missing incentive tical way. Furthermore, the manual intends to explore and,
3
Source: BMZ (2009). A couple of examples may illustrate this perception, for example, the SADC and ECOWAS work towards PPP-related competency,
the network for PPP in Asia that is actively pursued by ASEM member states etc..
where appropriate, to categorise the role of GIZ in this

area of development. This manual touches upon the fact
that PPP models are not always the right solution to inte-
grate private partners in public sector business. A balanced
approach and evaluation of the specific project is essential.
This manual is structured in three chapters. The first chap-

ter gives an overview of PPP models and their application.
The second chapter provides a practical guideline for the
implementation of PPPs encompassing issues such as
the necessity to look into the institutional and regulatory
frameworks. This chapter presents a PPP checklist for prac-
titioners, and gives also an insight into the sectoral trends.
The final chapter deals with the cooperative role to be
played by GIZ and the consulting services that it provides
in this field. Throughout the manual, there are a number
of examples and case studies for illustrative reasons.
2. Why PPPs?
The focus of this section is to introduce the reader into the of infrastructure investment may have negative repercus-
most commonly used options for structuring PPPs, and to sions in terms of low tax revenues and also low GDP
present the main characteristics and payment structures of growth rates. Needed resources to meet the infrastructure
the different PPP models. gap and, therefore, fulfil the accountability of public
authorities to provide infrastructure services may be gener-
ated by involving private participants. Furthermore, private
2.1 Reasons for increased Attention sector-related efficiency gains and risk allocation aspects of
towards PPPs PPP projects may attract financial institutions to provide
Infrastructure bottlenecks exist in almost all countries capital, and to get involved in PPP projects.8
around the world. They have a negative impact on eco-
nomic growth and the welfare of people. They also affect
the efforts of public authorities to reduce existing social Investment Volume of Projects with Private Sector
and economic disparities. Public authorities have limited Involvement in Low- and Middle-Income Countries ($US m)
financial resources to devote to investments in infrastruc-
180000
ture and to improve public services. They face restrictions
160000
on their ability to raise debt.4 Therefore, since the 1990s,
140000
private sector has increasingly played an important role in
120000
the provision of basic infrastructure services formerly pro-
vided by public authorities.5 Currently, based on private 100000
sector efficiency arguments and due to the presence of large 80000

infrastructure gaps, countries are appealing more and more 60000
for private sector investment and searching for alternative 40000
forms of service provision. The Organisation for Economic 20000
Cooperation and Development (OECD) estimates that ‘to 0
2030, annual infrastructure investment requirements for
90
92
94
96
98
00
02
04
06
08
19
19
19
19
19
20
20
20
20
electricity, road and rail transport, telecommunications 20
and water are likely to average around 3.5% of world gross
domestic product (GDP)’.6 PPP Investment Volume of Projects in Low- and Middle-
Globalisation, population growth and climate change Income Countries ($US m)
all pose new challenges to infrastructure service delivery
180000
worldwide. In developed countries, many public services
160000
need to be refurbished and replaced to cope with existing
140000
and upcoming challenges. As for transport infrastructure,
120000
in the United States (US), President Barack Obama has
proposed a long-term stimulus programme planning to 100000
invest US$ 500 billion in the years from 2010 until 2016.7 80000
Similarly, in developing countries, population growth 60000
poses significant stress on the backbone of service delivery. 40000
The recent financial crisis and the subsequent recession 20000
faced by many countries have also impacted public service 0
provision, due to the financial constraints faced by public
90
92
94
96
98
00
02
04
06
08
19
19
19
19
19
20
20
20
20
20
authorities. The likelihood of state bailouts has increased

and financing has gotten more expensive. An interruption Figure 1, Source: World Bank, PPI-Database.
4
5
Source: PwC (2004a).
6
Source: PwC (2003).
7
Source: OECD (2007).
8
Amongst other private investments (e.g. privatisation), PPPs are included in the definition of private sector involvement.
PPPs, whereby public authorities come together with private partner and the public authority are combined and
a private sector party in an attempt to structure a specific the different risks are allocated in the most efficient way to
deal/project, have attracted much attention and invest- generate a successful project.’
ment in recent years (see Figure 1). The private sector party
takes the responsibility, for instance, for building new In this manual, the term ‘PPP’ will be based on this
infrastructure, assuming the relevant risks. It also manages definition.
the operation and maintenance of the asset over the long
term, and is expected to arrange the necessary financing,
while the public sector pays for its availability and operation. 2.3 Main Characteristics and Payment
Public authorities draw on different kinds of arguments Structures of a PPP
to enter into such joint interventions with the private
sector and to pursue PPPs. Given what has already been i) Main Characteristics
said, PPPs may be considered as being of relevance for:9 There are numerous options for structuring PPP contracts.
achieving greater efficiency than traditional public The option ultimately decided upon largely depends on
procurement methods for the provision of public services; the legal feasibility, the project-specific objectives of public
closing the infrastructure financing gap via private sector authorities, and the interests of private sector partners.
capital; Contracts must fulfil several criteria in order to be defined
introducing competition, especially via the bidding as a ‘PPP’. They must:
process; 1. involve a long-term relationship;
achieving a better quality output compared to that 2. ensure the provision of a public service;
resulting from public service provision; 3. transfer risk to the private sector partner;
rendering the transfer of know-how from private to 4. involve the bundling of processes; and
public sector based on private sector managerial practices 5. specify the output.12
and experiences;
removing the financial responsibility from the balance 1. Long-term relationship: PPP contracts are usually
sheet of the public authority; and for targeted towards projects with a minimum duration of
achieving adequate risk sharing. at least five years.13 Nevertheless, in some cases, it might
be practical to reduce this period by a maximum of two
years.14
2.2 Definition of a PPP
There is no universal definition of a ‘PPP’. Quite often, 2. Provision of a public service: the project must be set up
it refers to an arrangement that goes beyond simple in an area of activity where it is favourable or necessary
financing; one that encompasses private sector resources, that the public authority retains the ultimate accounta-
expertise and management practices. Creating a common bility. This differs significantly from a privatisation.
terminology is not easy, but is nonetheless important for
facilitating the dialogue between policy-makers and practi- 3. Risk transfer to the private partner: a significant transfer
tioners.10 In many instances, PPPs are defined in a general of risk to the private sector partner is an important
manner, allowing for practical implementation policies. element of a PPP. Broadly, one can distinguish between
six main types of risk:
In Germany, the BMVBS defines ‘PPPs’ as follows:11 • Operational risk
A ‘PPP is a long-term contractually based mutual coopera- The risk of failures in the availability and quality of
tion between (the) public and private sector(s) aimed at output as well as increases in operational costs
the provision of public services. The resources of both the >
9
10
Source: Alfen (2009).
11
Source: World Bank (2010b).
12
Source: BMVBS (2003).
13
Source: World Bank (2007a); BMVBS (2003); IFC (2009).
14
Source: BMVBS (2003).
Source: European Commission (2004).
• Construction risk
The risk of an extension to the construction period and Autopistas del Nordeste
of increasing material and/or labour costs
MIGA, a member of the World Bank Group is involved in
• Demand risk
a 30 year concession agreement regarding the construc-
The risk of low revenues due to overestimated demand tion, maintenance and operation of a toll road in the
• Financial risk Dominican Republic. Due to the absence of long term
The risk of changes in exchange or interest rates, as well financing, MIGA has covered political risks of the project.
as all the other factors that may influence the financing As a consequence, the project has been 40% oversub-
scribed and the rating increases significantly.
of a project
• Political risk
The risk of revolts or wars, as well as unexpected Box 1: Political Risk Insurance regarding ‘Autopistas del Nordeste’.
political interventions regarding the regulatory framework Source: MIGA, (2007).
• Force majeure
The risk of natural disasters, such as earthquakes and
extreme weather conditions. The type and level of risks transferred to private sector
partners largely depends on the specific contract – quite
Depending on the PPP model selected, the first three generally, the partner who can best manage the risk
types of risk may be transferred to the private partner. should cover it.
The last two categories of risks normally remain with
public authorities. Their probability of occurrence as 4. Bundling of processes: this means that there are different
well as their possible impact/relevance largely depends choices for transferring tasks to private partners. It is
on the specific project and the country or region con- quite common to split a PPP process into four stages:
cerned. Normally, coverage of political risk and force design, build, finance and operate. Under most PPPs,
majeure is only relevant for a number of developing at least the construction and operation are assumed by
countries. Political risks and also fluctuations in foreign private sector participants.16
exchange rates may be insured or guaranteed by inter-
national development institutions such as the World In this context, a further analysis of the life cycle of
Bank Group.15 Coverage of force majeure may be more a PPP (see Figure 2) may be quite useful. In contrast
difficult or quite expensive. Normally, this risk remains to pure public procurement, many projects within the
with the government or is unallocated. Nevertheless, scope of a PPP have a time limit. The length of the
handling these two categories of risks requires careful partnership between the public and private sector part-
negotiations between all partners and guarantors. As a ners is stipulated in the contract. Especially in those
consequence, contracts may be defined such that both PPPs where large initial investments are necessary, private
parties have a right of termination. sector participants will propose tariff levels in such a
way that the cash flows generated will at least cover the
investment costs. The selection of the right private sector
partner within the bidding process, therefore, largely
depends on the proposed future burden for the public
authority and/or consumers.
15
16
Source: World Bank (2007b). Also refer to, for instance, German Investment Guarantees (Bund).
Source: World Bank (2007a).
Life Cycle of Typical PPP Projects

ii) Underlying Payment Structure in
a Typical PPP
The underlying payment structure of a PPP model is
important since it influences the outcome of a PPP. For
Design
example, if the payment structure foresees a direct payment
from users to a private provider and the PPP represents a
Investment, monopoly in service provision, then it is essential that the
Build
Finance government establishes a supervisory and regulatory body
to ensure that the efficiency gains are also distributed
Operation, Maintenance
to the user and thus have the intended positive impact on
public welfare. The choice of payment structure largely
depends on the PPP model selected, the sector involved,
Exploitation the underlying project, and, of course, the prevailing legal
framework. Typically, one can distinguish between three
main types of payment mechanisms, which may be com-
Figure 2, Source: PwC. bined and also complemented by subsidies.
1. In some cases, private partners only get paid by public

The life cycle approach of a PPP sets strong incentives authorities. There are sectors and/or large projects which
for private partners to continue being innovative and are very capital intensive, and for which covering the
to develop more efficient ways for delivering the output cost through user payments is nearly impossible. A result
specified by public authorities. This is because private of selecting an availability-based payment mechanism is
sector partners often assume the revenue risks. Revenues that the demand risk remains with the public authority.
may be contractually regulated and, therefore, insuffi- Therefore, it may be useful to include sanctions in the
cient to cover all the costs involved. However, it is not initial contract in case the private sector partner fails to
always possible to fully transfer all life cycle risks to the deliver or performs badly.
private sector. As PricewaterhouseCoopers (PwC) points
out with respect to an upgrade of part of a railway line, 2. If user fees or tariffs are considered to be the right
if ‘the assets in question are integrated into a wider payment structure, private partners get paid directly by
network which is typically maintained by a public or consumers. Especially with respect to natural mono-
private utility, then the private sector bidder cannot take polies, public authorities must monitor and regulate the
life cycle risks and the incumbent utility will carry out level of the fees charged. This is particularly important
maintenance more cost efficiently.’17 for the basic services that must be accessible to all people
in the population group previously targeted.
5. Output specification: when implementing a PPP, public
authorities determine at the outset the project output, 3. An intermediate way of allowing the private sector
and only define the functional specifications of the partner to share in the financial benefits of the project is
service to be provided by the private partner. Therefore, to base the public payment on shadow fees/tolls. Public
private sector partners have the flexibility to adopt the authorities then pay private partners depending on the
most efficient technology and way of providing and number of users benefiting from the output. This mech-
realising the predetermined output. anism is often used for road projects, or in those areas
where direct user payments are quite complicated or
simply unreasonable.
17
Source: PwC (2005).
2.4 PPP Models (see main types of risks specified in 2.3 above). In this con-
Within the field of international cooperation for sustain- text, GIZ considers the following spectrum of PPP models
able development, the German Federal Ministry for Eco- (see Figure 3).
nomic Cooperation and Development (BMZ) and GIZ It is important to highlight that performance-based
have until now identified six basic forms of cooperation service contracts do not fully fit into the classical definition
between the public and private sector. These range from of a ‘PPP’ (the reasons for this will be shown in section
company sponsoring and co-financing to financial and advi- 2.6). Nevertheless, due to the ongoing discussion on the
sory services for private investments in developing coun- classification of PPP contracts (for instance, in the BMZ),
tries. PPPs feature among these six basic forms. and its relevance to important areas in which GIZ has
This manual aims to provide an overview of the most its core activities (e.g. in the education, health and water
commonly used contracts classified as PPPs. Although they sectors), performance-based service contracts will be con-
may vary according to the intended outcome of a project, sidered and briefly described in this manual. However, they
the models here can basically be distinguished according to will be dealt with separately. The following section discusses
the extent to which risk is transferred to the private sector the models in more detail.
Range of PPP Models
Privatisation No PPP
Level of Private
BOO PPP,
Involvement
Combinations
BOT, BROT, ROT… of the Types
are possible
Leasing /Affermage
Management Contract
Private Risk
Performancebased Service Contract Grey Area
Service Contract No PPP
Commercialisation
Publicly owned Enterprise
Figure 3, Source: PwC.

i) Management Contract sector partner. The duration of a lease contract may range
Under a management contract, private sector partners are from 5 to 20 years. Thus, a lease contract is normally longer
contracted to manage the operation and maintenance of than a management contract.
public-owned assets. The investment made by private part- Often, a lease contract is connected to other complex
ners is either small or non-existent. While the operational models such as the Build-Rehabilitate-Operate-Transfer
risk is transferred to private sector partners, the construc- (BROT) or Rehabilitate-Lease-Transfer (RLT) models.
tion risk largely remains with public authorities. The duration of the contract is then extended and linked
In exchange for assuming managerial tasks, private part- to large capital investments by the private partner.
ners get paid a fee by public authorities. Only in cases
where the fee structure is performance-based, part of the
demand risk may also be transferred to the private sector Lease Contract
partner. However, the responsibility for increasing invest- Pros Cons
ment outlays remains with the public sector. It must be
• Rapid implementation • Only moderate improvements
highlighted that management contracts may only be classi- of existing assets possible,
fied as involving a PPP under certain circumstances, since • Widely politically accepted little investment incentives
there is a limited transfer of risk, the length of term is not for the private partner
• Often combined with more
very long (typically only 3-8 years, i.e. of a ‘medium’ term), complex contracts • Complexity moderate
and service provision is not output driven, but rather clear- (BRLT,RLT)
ly defined. Quite often, management contracts are used as • Risk transfer moderate
• Operational and Demand
a first step towards preparing for further and more complex risks are to some extent • Investment responsibilities
private partner involvement. shifted to the private remain widely with the
partner public authority, few
incentives to improve
• Incentives to realise quality
Management Contract efficiency gains
Pros Cons
• Only moderate improvements Box 3, Source: PwC.
• Rapid implementation
of existing assets possible,
• Not complex little investment incentives
for the private partner
• Widely politically accepted iii) BOT, BROT, and ROT Models
• Operational risk is shifted • Risk transfer limited Under the Build-Operate-Transfer (BOT) model, which
to the private partner is based on a concession agreement, the construction,
• Demand risk and respons-
• First step of entry prior to bility of further investments maintenance and operation of assets are bundled together.
developing more complex widely remain with the BOT models can be classified as ‘greenfield projects’
contracts public authority, few incen-
tives to improve quality because the asset is newly established within the scope of
the PPP. During the concession period, which typically
Box 2, Source: PwC. runs for more than 20 years, ownership may be fully,18
partly or not transferred to private partners. The underly-
ing payment structure provides the opportunity to private
ii) Lease Contract partners to generate cash flows recovering at least the
A lease contract is quite similar to a management contract investment costs. In this context, public authorities often
since it covers the operation and management of public- guarantee payment of up to a specific amount for the
owned assets. The main difference relates to the payment acceptance of goods/services by consumers and therefore
structure as the lessee may be authorised to set tariffs and cover part of the demand risk. GIZ’s experience with a
get paid directly by the consumer. Next to operational BOT project in Madagascar is described in Box 4.
risks, the demand risks may broadly be shifted to the private
18
BOOT=Build-own-operate-transfer.
Energy Sector: cooperation with the e8 partners to which GIZ contributed

Madagascar: Lokoho Hydro for Rural Development market analyses, socio-economic baseline- and demand
studies and an environmental impact assessment. GIZ also
The aim of the Lokoho project was to develop a replicable worked as a facilitator to mobilise additional grants from
business model for private sector investment in Madagascar the EU Energy Facility and soft loan financing from KfW and
and at the same time demonstrate the commercial viability helped to eventually set up the financing structure. Another
of a BOT project in the energy sector that both improves important aspect concerned the creation of a beneficial
energy supply from sustainable sources and fosters rural policy, institutional and legal environment at both national
development. To this end, a comprehensive cooperation and regional level in order to make the Lokoho project
of international utilities (the e8 group, namely EDF, RWE replicable in other regions of Madagascar. The project set-up
and Hydro Quebec), a local private partner (Electricité de helped to integrate private infrastructure investment into a
Madagascar) and international development organizations broader promotion of rural development.
(GIZ, KfW, EU) established the basis for the construction
and operation of a hydro power plant in the northeast of After tendering the first construction lot an unexpected cost
Madagascar. increase prompted the private partners to thoroughly review
the project. At the same time, the coup d’état of 2008/09
On the public side, ADER, the agency for the development shook up the political situation fundamentally and created
of rural electrification associated to the ministry of energy, a lot of uncertainty for private investment. Therefore, despite
was supposed to assume a pivotal role in the replication considerable efforts and its evident role model character,
of the exemplary PPP project. GIZ aimed at strengthening the project could not be realized. Nevertheless, the syner-
ADER’s capacities to efficiently and effectively identify, gies between private investors and development agencies
plan and implement projects for the development of rural can serve as a blueprint for similar future projects in
electrification by use of renewable energy sources. The PPP Madagascar or other developing countries. Development
project also focused on supporting the private investors. Cooperation played an important role in the facilitation of
Throughout the initial phase, GIZ promoted particularly the whole project and was highly appreciated by both the
those areas that are highly relevant for rural development private and the public partners.
such as the business for rural power supply, the promotion
of productive use of electricity or the participation of the To learn more about this project, see Annex.
localworkforce. A feasibility study was prepared in close
Box 4: Example of a BOT Project in the Energy Sector with GIZ Involvement. Source: GTZ, 6.09.2010.
In many cases, a special purpose vehicle (SPV) is set up BOT/BROT/ROT

by private and public sector partners to implement and
Pros Cons
operate the project. Usually, the share or influence of the
private partner in the SPV is quite high. Therefore, most • Provides scope for private • Complex
investments
of the initial investment is undertaken by private sector • Provides scope for political
partners. Additionally, debt financing is essential to widen- • Incentives to build on and backlashes
provide high quality
ing the financial resources of the SPV. Typically, the share standards • Private borrowing probably
of debt financing in PPPs is between 70-90%.19 To reduce more expensive than public
• Optimised risk allocation borrowing
the overall financing costs, public authorities often partially possible
guarantee the debts of the SPV.
• Public borrowing probably
Under the Build-Rehabilitate-Operate-Transfer (BROT) more expensive than
model, the private sector partner rehabilitates existing assets private borrowing
and improves them through extensions. The Rehabilitate- • High efficiency gains
Operate-Transfer (ROT) model is a weaker form of the possible
BROT model because it is limited to rehabilitation and
operation. During the entire PPP cycle, ownership typically Box 5, Source: PwC.
19
Source: World Bank (2009a)
remains with the public authority. Due to the relatively low approaches, BOO models are targeted towards providing
investment costs involved under the ROT model, it is essential basic infrastructure services. Their implementation
common practice for projects to be financed by user fees. will not automatically result in more competitive markets.
In an attempt to avoid the negative consequences of private
iv) BOO Model monopolies, public authorities consider it important to
The Build-Own-Operate (BOO) model consists of trans- remain involved and to assume the ongoing regulatory
ferring the construction, ownership and operation of a oversight (for instance, by balancing tariff levels). Also,
public asset to a private partner. It is in some respect simi- due to the high capital investments of private partners and
lar to a privatisation because ownership remains permanent- the limited possibilities for increasing tariffs (because of
ly with the private sector. The difference is the ongoing government regulation), public authorities may often be
accountability and often the ongoing financial obligations forced to secure the ongoing cash flow of such projects.
of public authorities. In contrast to most privatisation
v) Summary
The following table provides a summarised overview of
BOO those major characteristics pertaining to the different PPP
Pros Cons options as described in the previous section.
There are a number of other PPP models that diverge
• Provides large scope for • Provides scope for political
private investments backlashes in varying degrees with respect to the level of risk transfer
and the level of public influence. For instance, one option
• Incentives to build on and • Private borrowing probably
provide high quality more expensive than public involving a high level of public influence is the so-called
standards borrowing ‘turnkey’ model and an option with a moderate level of
• High efficiency gains • Risk allocation may not be public influence would be the ‘franchise model’. Meanwhile,
possible optimal the Design-Build-Finance-Operate (DBFO) and Private
• High level of risk transfer • Scope for creating Finance Initiative (PFI) models involve a comparatively
monopolies low level of public influence.20
Box 6, Source: PwC.
PPP Model Level of Ownership Investments Allocation Duration

Accountability by of Risks in Years
Public Sector
Management High Public Public Public/Private 3-8
Contract
Lease Contract High Public Public Public/Private 5-20
BOT/BROT/ROT High Public/Private Public/Private Public/Private 15-30
BOO High Private Private Private ∞

(limited Public)
Box 7: Overview of several PPP Options
20
See also: World Bank (2010b): In a recent policy paper, the World Bank considers the various structures and proposes a practical methodology for classifying
PPPs in infrastructure based on their fundamental characteristics and parameters.
2.5 Track Record of PPP Models in Quite interestingly, a breakdown of contract types by
Low- and Middle-Income Countries region reveals that concession-based PPPs (BOT, BROT,
The track record of PPP models in low- and middle- and ROT) are predominant in nearly all regions, account-
income countries shows that in the transport and water ing for the highest share of PPP contracts. While BOO
and sewerage sectors, the number of contracts involving type contracts are also quite significant, the proportion of
concessions – e.g. of the BOT, BROT, and ROT model lease and management contracts varies considerably. In
type – outnumber all other types of PPPs (see Figure 4). East Asia and the Pacific, as well as in South Asia, these are
In the energy sector, BOO models, whereby ownership is simply not relevant. In the Middle East and North Africa,
ultimately transferred to the private sector, are similarly PPPs involving lease contracts are non-existent, but those
important as BOT models. involving management contracts are as frequent as the
In contrast to concession-based and BOO projects, number of BOO-related contracts realised. In Sub-Saharan
the number of lease and management contracts is quite Africa, both management and lease contracts outnumber
small, with most of these being realised in the transport those PPP contracts based on the BOO model. In Europe
and water and sewerage sectors. and Central Asia, management and lease contracts account
for almost 30% of all the contracts realised.
Realisation of PPP Contracts in Low- and Middle-Income Countries 1990-2008
1000 Energy
900 Telecommunication
Transport
800 Water and Sewerage
700
600
500
400
300
200
100
0
BOO BOT/BROT/ROT Lease Contract/BLT/RLT Management Contract
Figure 4, Source: World Bank, PPI-Database.

Regional Distribution of Various Contract Types 1990-2008
0,9 BOO
0,8 BOT/BROT/ROT
Lease Contract/BRLT/RLT
0,7 Management Contract
0,6
0,5
0,4
0,3
0,2
0,1
0
East Asia Europe and Latin America Middle East South Asia Sub-Saharan
and Pacific Central Pacific and the and Africa
Caribbean North Africa
2.6 A Hybrid Model: Performance-based private sector knowledge and efficiency into public sector
Service Contracts business. However, since service contracts clearly define
It is important to bear in mind that performance-based output levels and how these should be achieved by the
service contracts do not fully fit into the classical definition private partner, there is not much room for private sector
of a ‘PPP’. However, due to its relevance to important areas innovation.
in which GIZ has its core activities (such as in the educa- Partially linking private partner revenues to the output
tion, health and water sectors), performance-based service to be delivered may have an impact, because there would
contracts are considered and briefly described here, though then be an incentive to deliver the output more efficiently.
separately from the other models. Performance-based service contracts are, for instance, used
The classification of service contracts is not clear cut, even in the health sector. In developing countries, these con-
if the payment structure is performance-based, as: tracts are often combined with the broader objectives of
1. performance-based service contracts feature only public authorities, such as ensuring that the service reaches
a limited transfer of risk; the poor. One instrument for combining pro-poor subsi-
2. most of these contracts are of a short term dies with a service contract involves the usage/allocation
(i.e. 1-3 years); of vouchers. Here, private health service providers only get
3. no investment by the private sector partner is required; a part of their revenues if they present vouchers previously
4. service provision is limited to specific areas within collected from their customers. Obviously, any competition
projects; and for the targeted population groups has its limits,21 as the
5. the way in which the output should be realised is very private provider also gets paid by non-targeted population
clearly defined. groups. The incentive to attract voucher clients, in particu-
lar, is thus checked.
Service contracts are targeted towards involving private Performance-based service contracts are sometimes
partners in specific areas related to the operation of a defined as the ‘lowest stage’ of a PPP model.22 In the
public asset. This kind of contract aims at introducing opinion of others, classifying models with higher levels of
21
22
Source: GTZ (2010).
Source: BMZ/GTZ/KfW (2008), ADB (2008).
private sector involvement as ‘PPPs’, such as those involv-

ing management and/or lease contracts, is already deemed
critical.23
Overall, performance-based service contracts fall into
the grey area of PPP classification. Even if performance
orientation leaves space for some minor risk sharing
(regarding operational or demand risk) and the service con-
tract has a long period of duration, private capital is not
at risk and the way in which project output is delivered
is pre-determined by the public sector. The relevant experi-
ence of GIZ with performance-based contracts is described
in Box 8.
Transport: Latin America and the Caribbean: application of technology and the pursuit of innovative
Financial and Institutional Reform of Road materials, processes and management are all up to the
Conservation contractor. This allocates higher risk to the contractor
compared to traditional contract arrangements, but at the
Improving road conditions and cutting the cost of road same time opens up opportunities to increase his margins
maintenance are the main reasons why many countries where improved efficiencies and effectiveness of design,
look for new ways of contracting out road maintenance. process, technology or management are able to reduce
‘Financial and Institutional Reform of Road Conservation in the cost of achieving the specified performance standards.
Latin America and the Caribbean’, a joint programme by
GTZ, the International Road Federation (IRF) and the United Between 1995 and 2003 the programme assisted Brazil,
Nations Economic Commission for Latin America and Colombia, Guatemala, Honduras, Peru, and Uruguay to
the Caribbean (UN-ECLAC), has developed an innovative implement this new contract scheme. Today, it is applied to
PPP model of contracting out road maintenance through more than 50,000 kilometres of the roads in Latin America
performance-based contracts between 1990 and 1993. and the Caribbean. Besides improving road conditions,
Specifically, GTZ and UN-ECLAC further developed and the new contracting modalities have helped to reduce
adapted concession contracts (that had formerly been the overall costs by well over 20% compared with traditional
predominant PPP option in the road sector) to management contracts. Meanwhile, performance-based road mainte-
contracts. nance contracts have spread all over the world, supported
by the main donor and financial institutions in development
The traditional way of contracting out road maintenance cooperation. Most likely they will replace conventional
was based on quantity-related payments in relation to road maintenance contracts within the next thirty years
work inputs. This gave contractors the incentive to carry worldwide.
out as much works as possible while neglecting quality
aspects. On the other hand performance-based contracts To learn more about this project, see Annex.
promote cost efficiency and quality work. The contractor Cf. UN-ECLAC (ed.): Road Network Management.
is being paid a fixed fee for keeping road, bridge, and Roads — A New Approach for Road Network Management
traffic assets in long-term good condition. The choice and and Conservation, 2004.
Box 8: Example of GIZ support to a Performance based Service Contract in the Transport Sector. Source: GTZ, 6.09.2010.
23
3. Types of Financing
This section will analyse issues to be considered with The initial setting up of a SPV is the basic requirement
regard to possible financing mechanisms and the support of the classical project finance model. Typically, this is the
of financial institutions provided to PPP projects. case with PPPs where a large amount of primary invest-
ment is necessary, as is often the case with the BOT, BOO
and other models. The assets referring to the project are
3.1 Project Finance vs. Corporate Finance transferred to the SPV. The prime purpose of setting up
a SPV is to remove the liabilities of the project from the
i) Project Finance balance sheet of the private investor. Especially in sectors
‘The most common form of funding to date for large such as water or transport, there is a need for extraordinar-
and capital intensive PPP projects, has been via bank debt ily high amounts of investment. Due to high transaction
loaned to the project company (special purpose vehicle costs (for instance, arising from the comprehensive due
(SPV)), and combined with a small element of risk capital diligence required) as well as the absence of any assets
from the private and sometimes also the public investors. beyond the project that could be transferred to financial
The key to raising significant proportions (up to 90% being institutions in case of bankruptcy, it is often necessary
common) of the finance as debt has been the existence that public authorities guarantee the debt incurred by the
of a comprehensive and clear allocation of risk between SPV. This is needed in order to avoid high financing costs
public and private partners and, in particular, away from as well as to secure the ‘bankability’ of the project. In
the debt and asset-holding vehicle. These limit the risk to developing countries, grantors such as international devel-
the project cash flows and make borrowing on the back opment institutions often fill the financial gaps and make
of them feasible, with associated financing cost savings.’24 projects bankable.
Athens International Airport-Combining EU Funds tium created a private company, Athens International
with Private Finance Airport SA, to own and operate the airport for a period of
30 years. A grant from the Hellenic Republic amounted to
This €2.6 billion project involved the development of the €150 million and share capital amounted to €134 million,
new Athens International Airport at Spata and provides additional project financing came from commercial loans.
an example where private sector funds have been used A consortium led by Hochtief and also comprising ABB
with EU grants to deliver infrastructure investment in and TKT Krantz GmbH, undertook the construction project.
Cohesion countries. The Greek Authorities and the European Subcontractors, of which 80% were Greek companies,
Commission had agreed within the framework of the carried out 70% of the construction work. Work included
Community Support Framework 1994 — 1999 (CSF II) to the construction of a runway and taxiway systems for
maximise private sector partnerships in the development handling up to 65 aircraft movements per hour. The airport
of transportrelated infrastructure. The new Athens Interna- has an existing capacity for 16 million passengers and
tional Airport project consisted of a 30-year BOOT conces- 220,000 tonnes of cargo a year, increasing to 50 million
sion which received EU grants amounting to approximately passengers a year after development. Construction was
€250 million or 11% of the project cost. An EIB loan of completed in September 2000 after 51 months and after
€997 million supported approximately 45% of the initial 5 months of testing, the airport opened to the public on
project cost. The Hellenic Republic and a private consor- 28 March 2001.
Box 9: An Example of Project Finance. Source: PwC. (2005)
24
Source: PwC (2004b).
General Project Finance Structure

Public Authority
Contractual
Arrangement
Equity Project
Sponsors Financial Institutions
Debt Company (SPV) Debt
Bidders
Building Operation
Figure 6, Source: PwC.
The most common feature of a project financing ii) Corporate Finance

arrangement is so-called ‘limited recourse’ or ‘non-recourse In contrast, the project investors themselves may imple-
financing’, which implies that the lenders look only to the ment the project and act as borrowers. In this case, finan-
assets and revenues of the project for the repayment of debt cial institutions make their decision regarding the amount
and interest, and not to the shareholders. Equity funds and cost of a loan dependent on the creditworthiness of
usually invested in the SPV comprise the share capital and the investing company. All assets and incoming cash flows
other shareholder funds. However, quite often, the equity within the investing company may serve as collateral for
portion has the lowest priority and hence lenders will have the credit. Where the investor is a stock company, infor-
the right to project assets and revenues before the equity mation about the performance of the company and its
holders can obtain any return. Thus, the equity portion economic viability may be obtained quite easily (from
bears the highest risk. PPPs normally involve the construc- rating and annual reports). This may shorten the due dili-
tion of high value long-term assets generating stable gence process and reduce transaction costs. Nevertheless,
revenues. Thus, project finance attracts long-term debt of in practice, this form of finance may be of limited use
a fixed rate of interest.25 for those projects requiring large amounts of investment
SPVs may also attract mezzanine capital that may best capital.
be described as somewhere between equity and debt.
For instance, subordinated loans involve those lenders who
agree not to be paid until more senior lenders have been
repaid. There is, however, compensation via the higher
interest rates on these loans for the added risk taken by the
contributors of mezzanine capital.
25
Corporate Finance Project Finance

Pros Cons Pros Cons
• Lower transaction costs • Place sponsors’ assets/ • Off balance sheet. • Greater transparency costs
because credit risk assess- balance sheet at risk. compared to corporate
ment is based on sponsor • Separates project credits finance.
credit rather than complex • Lower debt to equity ratios. profile from developers’
project credit risk. credit profiles-the project • In developing markets only
• Typically available only company is insulated from available for larger projects.
• Simpler, easier to obtain for smaller investments developer default. Similarly,
and faster to structure than (sponsor not willing to developers are insulated • Requires additional due
project finance. accept larger risk). from smaller cash flows. diligence and associated
time when structuring.
• Requires smaller amounts • Project is not isolated from • Can achieve high leverage
of due diligence and asso- sponsor credit profiles and ratios. This can provide • Bid prices can change when
ciated time because of vice versa. greater rates of equity final price is dependent on
additional security provided returns from smaller cash prevailing credit market
by sponsor’s credit rating, • May limit public control flows. conditions (i.e. interest
may offer lower margins over refinancing activities rates) as final financing
on debt. and prevent public sharing • Can create greater tax terms may not be set until
in refinancing gains. shields because of greater after preferred bidder
• Offers greater flexibility leverage — which can selection.
to accomodate changes • Public authorities may reduce the overall cost of
(such as renegotiations). realise fewer benefits capital. • Given the complexities of
related to project transpa- project finance structures
rency compared to project • Reduces managerial discre- and documentation the time
finance structures. tion over free cash flows between bid award and
because of lender imposed financial close/project com-
constraints. mencement may be lengthy
(typically in the order of
• Mitigates the ‘underinvest- 12 months, but may be
ment bias’. much longer if the project
structure is not bankable).
• Provides additional mecha- This can conflict with
nisms for risk spreading grantor/political project
through syndication and timetable expectations.
securisation.
• Additional lender due dili-

gence can improve project
quality.
• Lender reporting and

control requirements can
help to achieve much
greater transparency for
the grantor with regards to
project company operations
and financial performance.
This can be very important
implications when asses-
sing performance related
payments and when setting
or adjusting fare levels.
Box 10: Corporate Finance vs. Project Finance. Source: Perrott, (2009).
3.2 Funding PPPs against any kind of risk concerning financial matters.
The idea is to support the implementation of the project
i) Financial Support Institutions by ensuring long-term financial resources which go beyond
PPP projects may benefit from international financial sup- those normally provided by commercial banks.26 As for
port, as is especially the case in developing countries, where PPPs in low- and middle-income countries, the IFC also
public authorities are often unable to fill the financial gaps. offers significant support in terms of equity, quasi-equity,
Several institutions support the implementation of PPPs. loans, risk management and syndication.
A strong player is the World Bank Group. Information The support from other financial institutions, especially
gathered from the Private Participation in Infrastructure the Asian Development Bank (ADB), the Inter-American
(PPI) Project Database indicates that institutions related to Development Bank (IADB),27 the European Bank for
the Wold Bank Group, namely the International Finance Reconstruction and Development (EBRD) and the Euro-
Corporation (IFC), the International Bank for Reconstruc- pean Investment Bank (EIB)28 is mainly focused on the
tion and Development (IBRD), the Multilateral Investment provision of loans. With a share of 58%, loans are the most
Guarantee Agency (MIGA), and the International Develop- important instrument for providing financial support
ment Association (IDA) account for nearly half of the (see Figure 8).
overall financial support to PPPs in developing countries.
Supporting Agencies Supporting Financial Instruments

in Low- and Middle-Income Countries in Low- and Middle-Income Countries
BCIE BOAD
1% <1% Equity
MIGA Other ADB AFDB Syndication 1% Guarantee
10% 2% 7% 2% CAF 22% 17%
IFC 4% Insurance
EBRD Risk
24% Management 1%
4%
1%
EIB
14% Quasi-Equity
IDB <1%
1%
IDA
4%
IBRD IADB Loan
7% IAIC 20% 58%
<1%
Figure 7, Source: World Bank, PPI-Database. Figure 8, Source: World Bank, PPI-Database.
The MIGA is the main provider of political risk guarantees. Looking at the geographical distribution of where financial
The other World Bank Group institutions, the IBRD/IDA support has been provided, it is noticeable that in Sub-
and IFC, offer partial risk and partial credit guarantees. Saharan Africa, financial support is equivalent to 22% of
Risk guarantees protect private investors against events the overall investment volume for PPPs. Loans and guaran-
where governments are unable to meet their project-related tees have been the most important financial instruments.
obligations. This would cover events such as wars, exchange The highest amount of overall support has been provided
rate fluctuations, as well as contractual and regulatory risks. to the Latin America and Caribbean region (especially,
Credit guarantees protect both public and private partners regarding loans, syndication and guarantees).
26
27
Source: Delmon (2007).
28
The IADB also provides significant support in terms of equity, guarantees (e.g. for political risk) and syndication.
Source: EIB (2004).
Regional Financial Support 1990-2008 ($US m)
20000
18000
16000
14000
12000
10000
8000
6000
4000
2000
0
Figure 10 on page 26 provides an overview of the regional The inclusion of OBA in a PPP model sets additional
financial support provided by multinational donor agencies. incentives for private partners to provide high quality
services and to attract an increasing number of people
The US is currently developing a National Infrastructure to use the output of the PPP. OBA affects the payment
Innovation and Finance Bank. Its role regarding PPPs structure of the private partner because it is a further
would be quite similar to that of the EIB. In 2011, Presi- source of revenue in addition to other sources, such as
dent Obama plans to invest US$4 billion into the fund.29 user fees. Public authorities or international financial
In addition, in 2009, the World Bank created the Infra- institutions monitor the output of the project and pay
structure Crisis Facility Debt Pool to help address the private partners depending on what is consumed by
consequences of the recent financial crisis. The involve- targeted population groups. A commonly used method
ment of institutions such as the IFC, Germany’s KfW, the to increase the number of people consuming the PPP
French development institution PROPARCO, and the output is to distribute vouchers (see section 2.6).32
EIB contributes significantly to the success of this fund.30
ii) Output-based Aid

Output-based Aid (OBA) widens the scope for perform-
ance orientation within PPP models (see Box 11) and also
for the transfer of risk to the private partner. It can be
classified as a financing mechanism that may be combined
with all kinds of PPP models. This (additional) support
may be provided by public authorities or various interna-
tional financial institutions.31
29
30
31
Source: Cordiant Capital (Online), Cordiant Capital to manage New Infrastructure Crisis Facility Debt Pool, 1.12.2009.
32
An example of an international institution that offers OBA subsidies is the GPOBA fund.
Source: Sandiford/Gorter/Salvetto (2002), World Bank (2005), Johannes (2007).
Regional Financial Support provided by different Agencies (1990-2008)
East Asia and the Pacific Europe and Central Asia
Other IFC MIGA Other ADB

6% ADB IDA 6% 4% 1% 1%
MIGA EBRD
28% 2%
17% 30%
IBRD
2%
IFC EIB EIB

32% 11% 53%
IBRD
IDA 2%
IDB 3%
1%
Latin America and the Caribbean Middle East and North Africa
Other BCIE Other AFDB

MIGA <1% 3% CAF 8% 8%
9% 10% MIGA
13% EIB
IFC EIB
24%
21% 3%
IDB
1%
IBRD
IBRD
IADB IFC 7%
6% IDA
IAIC 45% 35% IDB 1%
1%
4%
South Asia Sub-Saharan Africa
MIGA Other ADB

2% ADB 3% 7% AFDB
MIGA
30% 10% BOAD
17%
IFC 1%
45% EIB
IFC 14%
16%
IBRD
IBRD IDA 9%
21% 24%
IDB IDA
1% 2%

Lesotho: New Public-Private Partnership Set to Boost The project benefits from collaboration within the World
Access to Health Care for the Poor Bank Group and a strong partnership with the government of
Lesotho. The World Bank provided technical assistance to
‘June 15, 2010 — The Kingdom of Lesotho’s health sector the design and management of the PPP as part of the Health
faces daunting challenges including battling the world’s third Sector Reform Program. The International Finance Corporation
highest HIV/AIDS prevalence rate (23 percent for adults aged (IFC), the Bank’s private sector arm, acted as lead advisor
15-49), low life expectancy (45 years), and an over-burdened to the government of Lesotho throughout the planning,
health care system with demand consistently outstripping structuring, tendering and implementation phases of the PPP
the state’s ability to provide vital health care services, agreement, including extensive due diligence to establish
particularly for poor people. the project’s feasibility and to engage and secure the support
of stakeholders locally, regionally and internationally.
On June 1, a new era in health care dawned when Health
and Social Welfare Minister, Mphu Ramatlapeng, handed over Jean Philippe Prosper, IFC Director for Eastern and Southern
three publicly-run clinics in Likotsi, Qoaling and Mabote to Africa said, ‘This pioneering project is the first public-private
the Ts’epong Consortium, managed by one of Africa’s largest partnership in Africa’s health sector that outsources the
private health care providers, Netcare. design, build and full operation of a hospital and all clinical
services. It provides an innovative and sustainable model
The project will replace the 100-year old Queen Elizabeth II for governments and the private sector to collaborate in
Hospital, which continues to operate at minimal level, with delivering better health services in Lesotho and across sub-
a new facility that can provide quality care for patients and Saharan Africa.’
improved working conditions for staff.
The Global Partnership for Output Based Aid (GPOBA),
The three semi-urban clinics have been refurbished as part a partnership program administered by the World Bank, is
of a larger US$100 million project, which is being funded by providing a US$6.25 million grant to help subsidize the cost
a coalition of public and commercial financiers from multiple of access to services for the residents of Maseru District,
partners, including the Development Bank of Southern Africa, the capital city and home to nearly one-third of the country’s
private equity firms and the Government of Lesotho. population.
The public-private partnership (PPP) for strengthened health ‘The GPOBA grant means expectant mothers, infants, children,
service delivery is a first for Sub-Saharan Africa, and taken and patients at risk of or living with HIV/AIDS and tuberculo-
in the context of Lesotho’s public health challenges, it is a sis will have access to improved health services,’ said Feng
key milestone that represents progress in the government’s Zhao, Senior Health Specialist and task manager for the
effort to overhaul the health system and expand coverage project for the World Bank and GPOBA. ‘As well as providing
to larger numbers of people. access to basic services for the poor, the output-based
approach puts an emphasis on accountability and efficiency
‘We believe this new public-private partnership has the po- in service delivery, which complements the overall design
tential to dramatically increase provision of health services,’ of the larger hospital PPP project.’
said Ruth Kagia, World Bank Country Director for Lesotho.
‘By adopting a results-based approach and improving effec- The innovative financing and implementation structure of
tiveness and efficiency of resources, this project will support the project positions Lesotho as a leader in health sector
Lesotho’s effort to improve health care services for its public-private arrangements, potentially providing a model
citizens.’ that could be replicated regionally and even globally.’
Box 11: Example of a PPP including Output based Aid.

Source: GPOBA (Online), Lesotho: New Public-Private Partnership Set to Boost Access to Health Care for the Poor, June 15th 2010.
4. The Relevant Issues to be considered
This section takes a closer look into some relevant issues remains unclear. For instance, the United Kingdom does
to be considered before choosing and implementing a PPP not have any such laws, but is one of the pioneers advanc-
project, such as the existing legal and institutional frame- ing the cause of PPPs.
work, potential conflicts of interest, stakeholder analysis, A number of pertinent issues must be considered prior
and the selection and award of PPP contracts via a carefully to initiating the PPP process as well as throughout the
prepared tendering process. process itself.35 Individual laws and guidelines should be
clear and transparent, aiming to level out the various com-
plexities faced throughout the PPP process. Due to the
4.1 Legal and Institutional Framework high transaction costs involved, it is especially important
Although the decision to adopt a PPP is foremost a politi- that the bidding process is defined in considerable detail
cal one, governments must give consideration to the and provides scope for competition. Some of the issues
underlying institutional and regulatory context. A relevant dealt with in the bidding documents must be based on
question here is whether government institutions have the laws and guidelines to create acceptance among the various
necessary skills and resources, whether laws and regulations stakeholders. Private partners will only participate in a
encourage PPPs, and whether capacity development invest- project, if the process of generating ongoing revenues is
ments are required regarding existing institutions and the sustainable. In this context, the ability of private partners
regulatory framework in order to attain the proper environ- to charge and collect user fees or the question of how
ment for implementing PPPs.33 to impart trust in public authorities – i.e. regarding the
Thus, actually structuring a project as a PPP demands fulfilment of payment obligations and the taxation of
a closer look at the existing legal framework. Throughout revenues – are all issues which need to be clarified.
the planning process for a PPP project in a specific country, Legal certainty may attract investors to increase their
the question of legal feasibility constitutes an important investments. This is especially important for investments in
element of the ultimate decision on whether to pursue a developing countries. Under a World Bank survey on the
PPP. Typically, most existing laws have not been designed power sector, private sector participants emphasised a clear
explicitly for PPPs. They do not always allow for the and secure legal framework as the main priority for their
involvement of private partners or, more specifically, for investment decision.36
PPPs in all sectors and markets.
In the recent past, many public authorities have cus-
tomised and revised their legal structures in order to obtain
the proper legal scope and transparency required for PPPs.
The process of matching legal frameworks and its outcome
is very different and depends, for instance, on existing legal
structures, political interests and institutional capacities. In
some countries like Germany, France, India or Korea, spe-
cific PPP laws have been established aimed at accelerating
and promoting private sector participation.34
The advantages of defining concrete PPP laws are not
always clear. Nevertheless, PPP laws may be considered
positive insofar as they provide an indication of the willing-
ness of politicians to foster and promote private sector par-
ticipation. Quite objectively, the question of whether specific
PPP laws must be introduced for PPPs to be successful
33
34
35
Source: Research Republic LLP (2008).
36
Source: Lamech/Saeed (2003): ‘Factor ratings. A scale of 1 to 4 was created for factor ratings by assigning numerals to each possible rating. “Not a factor”
was given the value 1, “a minor factor” the value 2, “a major factor” the value 3, and “a critical factor/ deal breaker” the value 4. An arithmetic average of all
respondents’ ratings was then calculated for each factor. This average is the rating for that factor.’ See Figures 11, 13 and 14.
Ranking of Investors’ Priorities

Minor Major Critical ‘Deal Breaker’
Legal framework defining the rights and obligations of private
investors
Consumer payment discipline and enforcement
Availability of credit enhancement or guarantee from Government

and/or multilateral agency
Independence of regulatory institution and processes from arbitrary

government interference
Administrative efficiency-lead time to get necessary approvals

and licenses
Judicial independence-degree of perceived independence from

government influence
Tenure and stability of elected officials in political process
Regulations that clearly define and allow exit for investors in

infrastructure
Investment grade credit rating for long-term forex debt
Negative perceptions and resistance to private investment amongst

members of civil society (trade unions, press, NGOs)
Sector in transition to a competitive market structure
Country ranking in Transparency International's Corruption

Perception Index
Cost and available tenors to borrow in domestic banking market
Reliance on a competitive bidding process to select project

investor/purchaser
Ability to vertically integrate with other segments of the energy

chain (upstream generation or downstream distribution; gas
supplies; power exports; etc.)
0 0,5 1 1,5 2 2,5 3 3,5 4

Figure 11, Source: Lamech/Saeed, (2003).
Evidence on the extent to which legal frameworks must situations, and hinder the private partner in generating
correspond to PPP schemes is not available, but the overall efficiency gains.
legal framework should be transparent and cover basic busi- Beyond the macro level, individual contractual modes
ness principles, as demanded by the private sector. A frame- need to be taken into account and adopted at the project-
work that is too narrow could possibly reduce opportunities specific level:37 PPP agreements are generally set up based
for structuring PPPs, neglect the requirements of specific on existing legal structures. During the lifetime of
37
e.g. Delmon (2007); World Bank (2009a).
Legal and Economic Factors affecting Revenues and Costs
Protecting Revenues Protecting Costs
Legal and Domestic and

Regulatory Global Economy
Framework
Devaluation
Regulatory
Subsidy Exchange Rates
Change in Laws
Breach of Interest Rates

Tariffs Input Prices
Contract
Commodity
Prices
Revenue Total Costs

Legal and
Macroeconomic Regulatory
Environment Framework
Devaluation Regulatory
Wages & Other

Exchange Rates Demand Change in Laws Expenses
Breach of
Interest Rates
Contract
Figure 12, Source: Delmon, (2007).
a project, laws may change in such a way that the initial symbolic, because investors do not trust that government
conditions for the partnership are affected. To protect policy will actually be implemented. Detailed contractual
private partners against this risk and, thus, reduce financ- agreements between the investor and the donor regarding
ing costs, contracts must secure the long-term sustainability monitoring, control and early termination may provide
of the project. Also, other issues related to renegotiation for more security.
terms,38 breach of contract or the rights and responsibilities High quality regulation may contribute to improved
of the partner should be covered under the contractual trust and also enhance the general environment for PPPs.
agreement. Apart from changes that directly affect the The overall policy framework must provide certainty
legal and regulatory framework, certain economic factors regarding the goals and objectives, the overall political
(e.g. movements in exchange or interest rates) may affect commitment to the PPP project, corruption and ethical
the revenues and costs of PPPs. To protect private investors issues, and the principles behind regulatory guidelines.
and the PPP itself from these changes, the contractual In general, consulting and law firms are quite often
agreement must include measures for covering these risks. integrated into the PPP process, providing information
Figure 12 presents the legal and economic factors affecting and helping to identify and structure the country- and
project revenues and costs. project-specific legal and contractual requirements related
Also, legal frameworks must have a robust structure. to PPPs.
In some countries, the legal framework may be more
38
Source: GTZ (2004): GTZ points out ‘that the probability of renegotiations was less than 30% when a regulatory body was in existence while it reached more than
60% where no regulatory body was in place.’
Best Project Experiences
Retail tariff levels and collection discipline adequate to meet cash

flow needs of sector
Ability to exercise effective management and operational control of

the investment
Government met all commitments of state-enterprise performance
and exchange conversion
Laws and contracts were enforced (e.g. disconnections payment by

counter parties, etc.)
Availability of limited recourse financing
Regulatory process allowed for satisfactory & non-arbitrary

adjudication of tariff adjustments and dispute resolutions
Demand growth was in line with projections —
no oversupply or capacity utilization problems
Regulatory commitment sustained through long-term contract
Government responsive to needs and timeframes of investors
Economic and political sustainability of the investment enhanced by

a competitive selection process
Presence of government guarantee (or equivalent backstop) of
state-enterprise performance and revenue sufficiency
Public-private partnership (i.e. joint venture with state and/or
state-enterprise) facilitated success
0 0,5 1 1,5 2 2,5 3 3,5 4
During a World Bank survey on the power sector, is often a lack of research and studies on the actual out-
investors provided an insight into their experience of projects come of PPP projects and programmes. This hampers both
in developing countries, the fundamental driving factors, the development of evidence-based policy and the ability
and the best and worst practices encountered (see Figures to undertake a proper public debate on PPPs.39
13 and 14). They identified payment discipline and enforce- A PPP will not be successful without strong institutional
ment as the most important factors determining the success support. Where legislation and guidelines do not provide
of a project. A failure in the interaction between the public clarity, public units may be useful in helping to decide
authority and private partners was found to be a factor that whether a PPP should be pursued and how to initiate the
inhibits the success of a project. Furthermore, the existence process involved. While many different institutional
of an adequate framework, both in terms of the project frameworks may exist, there are benchmarks and positive
itself and more generally, may cover critical points and thus experiences that are of relevance and which may be used.
result in a successful project.
The interest of public authorities in PPPs is no indica-
tion of their ability to implement PPPs. Quite often
this interest concerns more the tapping of private capital
resources and less the advantages of the procurement
method itself. The experience of PwC indicates that there
39
Worst Project Experiences
Government unresponsive to needs and timeframes of investors
Retail tariff levels and collection discipline insufficient to meet

cash flow needs of sector
Regulatory commitment expected under long-term contract could

not be sustained
Regulatory process was arbitrary leading to unsatisfactory tariff
adjustments and outcomes on disputes
Laws and contracts were not enforced (e.g., disconnections,
payment by counter-parties, etc.)
Government did not meet its commitments of state-enterprise

performance and exchange conversion
Absence of government guarantee (or equivalent backstop) of
state-enterprise performance and revenue sufficiency
Demand growth was lower than projections leading to oversupply
and/or capacity utilization problems
Economic and political sustainability of the investment undermined
by a competitive selection process
Economic and political sustainability of the investment enhanced

by a competitive selection process
Unavailability of limited recourse financing
Presence of state and/or state-enterprise as joint venture partner

undermined the effectiveness of operations
0 0,5 1 1,5 2 2,5 3 3,5 4
In some countries, a supervisory body has been set up particular sector involved, and, of course, the respective
within a ministry (Ireland), as a public company (Partner- project. For instance, in some cases, it may be appropriate
ships British Columbia) or as a joint venture between pub- to create sectoral pools which provide expertise and serve
lic and private partners (ÖPP Deutschland AG). The entity as a forum for exchanging ideas with a central unit and
may provide support to the public authority to develop for developing benchmarks. The feedback from sectoral
the necessary institutional capacities and an adequate legal projects may be collected at a regional or national level,
framework. It provides knowledge and guidance where no with the results used to adjust existing standardisation
such framework exists. One lesson learnt in this regard is processes and institutional frameworks (e.g. sectoral), as
that it is important to standardise PPP policies and, where well as to evaluate the economic performance and quality
possible, to simplify the process, reduce transaction costs of the services provided. Potential outcomes may include
and therefore increase efficiency. the identification of those sectors for which PPPs are
The decision to choose and implement a PPP is quite favourable and the corresponding PPP models. The organ-
complex and largely depends on the region concerned, the isation of these sub-units may be integrated, for instance,
in a separate national PPP organisation or in different panies and institutions, and the general public. It is espe-
ministries. Finally, it is important to foster cooperation cially important when it comes to implementing PPPs
among the various institutions. because of the many parties involved, and all the technical
Apart from the above, PPP units can participate quite and financial issues that need to be considered before and
actively and make decisions, as well as monitor and during the implementation process. Thus, it is very impor-
control PPP processes. For instance, in South Africa, the tant to identify and involve all of the required groups, as
centralised PPP unit is involved in the approval of PPPs well as their individual interests (stakeholder dialogue), and
after the feasibility study, before the bidding documents to create acceptance for a clear allocation of responsibilities
are issued, and before the contract is signed.40 throughout the PPP process.
If public authorities have only limited PPP experience
and inadequate frameworks, a PPP may best be realised if
other institutions (e.g. international PPP units or financial, 4.2 A Balanced Approach towards PPPs
legal and technical advisors with extensive PPP experience) Potential conflicts of interest result quite often from the
share their knowledge (including on studies, practical differing objectives of public authorities and private com-
trainings, secondments), and support public authorities panies. Whereas the motivation of private companies to
in their efforts to build up the necessary institutional pursue PPPs is strongly financial, public authorities have
capacities, especially with respect to domestic PPP units. broader interests and objectives, for instance, to ensure that
Due to the complex structure of PPPs and the potential basic infrastructure services can be accessed by all (at a low
backlashes arising from public sector restructuring, this cost, with no user fees), guarantee certain standards for
may be a long and difficult process. employees etc. Structuring contracts so that they explicitly
In India, the Asian Development Bank supports the consider private sector interests potentially implies that
Department of Economic Affairs, where a specific cell has the transfer of services to the private sector may cause the
been integrated especially for the promotion of PPPs. exclusion of several population groups, especially the poor.
India, one of the pioneers of PPPs in the developing world, A successful PPP should best combine both public
has already set up institutional structures at the national and private sector objectives, while maintaining a proper
and the state level. Moreover, the objective of two existing balance between these. Private partners get the opportunity
PPP institutions at the national level, the Viability Gap to enter formerly purely public markets. In return, the
Fund (VGF) and the India Infrastructure Finance Com- public authority keeps the ultimate accountability for these
pany Limited (IIFBL)), is to cover financial gaps in infra- markets, and sets up standard requirements in contracts
structure projects by providing grants or credits of up to (e.g. as regards monitoring and controlling issues) so that
20% of total project costs.41 exclusion risks are minimised. In this context, tariff setting
Capacity Development is a key issue that must be con- in particular must be regulated by public authorities
sidered at all stages of the PPP process. GIZ defines this and output failures should have consequences for private
‘as the process of strengthening the abilities or capacities of partners.43
individuals, organisations and societies to make effective In many projects, narrowly defined contracts may hin-
and efficient use of resources, in order to achieve their own der private companies to go for PPP projects especially
goals on a sustainable basis’.42 Due to the political context when constraints are integrated to strictly render a project
under which capacity development is implemented, it is unprofitable. Nevertheless, public authorities and donors
necessary to be aware of the varying interests of politicians. can promote public-private partnerships (e.g. as part of a
Capacity development may be carried out (within what pro-poor reform agenda)44 if they decide to close financial
is often a complex environment) by supporting reforms, gaps in such a way that pro-poor politics can be success-
creating institutions and also, more generally, by maintain- fully realised within a partnership.
ing the dialogue between public authorities, private com-
40
41
42
43
Source: GTZ (2003).
44
Source: UNDP (2006).
Source: ADB (2008); GNESD (2002); Azuba, Mugabi, Mumssen (2010).
It is not only the financial gap that excludes poor people Since the spectrum of stakeholders is quite diverse, the
from basic infrastructure services, but also, in some cases, roles and the needs of the various stakeholders in the PPP
exclusion from services may be due to the existing illegal process are also divergent.45 As seen in the sections before,
status of villages, houses or the occupants thereof. If public public authorities need to secure a robust legal and institu-
authorities ensure access by securing that water pipelines, tional framework. Advisors may help the public sector to
for example, are built and extended to illegal zones, they define the structures needed. Consumers provide feedback
do not only support the poor. They also accept the status on their ability and willingness to pay for the services
of the villages and persons concerned. Therefore, the public offered – an important measure for setting up and regulat-
sector may deem the process of structuring PPPs as an ing the fees likely to be charged. All those who are finan-
option for involving a wide range of groups, and for draw- cially involved in a project, including the public authorities,
ing illegal persons/villages under the umbrella of the law. private investors and donors, need to monitor and control
the usage of their money. Their ultimate objective is to
create value for money.
4.3 Stakeholders Transparency is a key issue that must be considered
Stakeholders are different parties affected by a PPP project, by all stakeholders operating the project. Private investors
voluntarily or involuntarily. At the very beginning of a PPP submit proposals and their preferred PPP financing and
process, it is necessary to identify potential stakeholders, operating structure. Throughout the implementation
their needs and their role throughout the process. process, the private partner is in charge of financing, oper-
In general, the following groups are affected by a PPP: ating, and managing the PPP project. Employees need to
be informed about their roles within the project. Of special
interest is the informal labour force (referred to later in
Selected Stakeholders of a PPP this section) which, in turn, may be best identified with
and better involved in the project.
Stakeholder management is a major activity for both
Unions
the project team and the project board. Failure to ‘buy-in’
stakeholders until later in the process – and then trying
to convince them of the merits of the decisions previously
taken – may extend and complicate the PPP process and
Employees Consumers may definitely negatively influence their attitude to the
project (see Box 13). Also, project costs may rise, revenues
may decrease and the public authority’s objectives left
unfulfilled. Concerning pro-poor politics and the overall
Private Public Informal access-related objectives, ongoing calculations and user
Investor Sector Sector
surveys may be implemented to identify tariff levels that
are both appropriate and adequate.
The interests of different stakeholders in the PPP
Financial Donors Financial Technical process naturally vary. PwC has specified the following
Institution Advisors Advisors
basic principles for a typical stakeholder dialogue that
may be considered for solving potential conflicts at an
Figure 15, Source: PwC. early stage:
45
Source: ADB (2008).
Requirements concerning the Strategic Examples for Advantages of involving

Stakeholder Dialogue Stakeholders
• Provide a ranking of various groups depending on their
level of influence and their willingness to cooperate Advantages of involving stakeholders
• Provide support by integrating directly the top level of in Kathmandu, Nepal
the private company In Kathmandu an affermage contract was being devel-
• Clarify the various expectations of all stakeholders and
oped to improve water services. Work on design was
indicate topics to work on jointly
• Define clearly the room and limits for keeping the already under way when it became clear that little was
dialogue (be fair) known in fact about the number of poor people in the
• Be serious and indicate flexibility and a compromising service area, the type of service they were receiving, and
attitude on behalf of all parties the improvements they wanted. A program of surveys
and consultation was carried out. The results showed that
Box 12, Source: PwC, (2010b). a number of preconceptions were incorrect. For example,
some officials had argued that a heavily discounted life-
line block was a good way to ensure poor people would
benefit from the reforms. In fact, since only 51 percent
Especially in developing countries, the informal sector of the poor had connections, this was not the case. The
is another stakeholder group that is of relevance. ‘The term consultation process therefore recommended avoiding
informal sector is used to refer to the economic activities consumption subsidies and instead focusing on expanding
access for the unserved population.
which have the following characteristics: non-permanence
and casualness, outside the scope of existing company law
or government regulations, carried on in small scale by Advantages of involving stakeholders
in Cartagena, Colombia
less capitalized establishments mostly relying on household
In Colombia national regulation requires that water
labour. Informal sector activities are not regulated or
utilities bill monthly. In the town of Cartagena, the opera-
controlled by government agencies – they exist and operate tor found that this billing regime made it difficult for
because of market forces or other socio-economic factor. low-income workers-especially those paid by the day-
… In low-income countries the size of the informal sector to manage bill payments. Through consultation it became
clear that if bills were sent twice a month, these house-
is significant because of poverty, unemployment or under-
holds would find it easier to pay, benefiting both them
employment. … The relevant question is when and and the operator. The regulator refused to adjust the
how can PPPs promote informal activities? Developing national standards, but by working with community organi-
countries may be particularly well suited to using PPPs zations that organized to collect payment twice monthly,
to link government, the informal sector and international the operator was able to achieve the same result. It was
only through consultation and engagement with local
organizations. The question remains how to adapt PPPs organizations that the problem was identified and the
to developing country needs. Approaches for PPP must solution developed.
incorporate adaptation and change necessary to bring the
informal private sector within the mainstream financial Box 13, Source: World Bank, (2006).
and legal net.’ 46
46
Source: Shafiul/Mansoor, (2004).
4.4 The Bidding Process and ultimately providing information on whether it should
best be set up as a PPP or rather based on traditional public
i) Objective sector procurement.
The selection and award of PPP contracts is in practice Public authorities need to have a good understanding of
quite complex. In particular, the process of organising and the market reaction to the defined project. Hence, in many
managing the bidding process must be prepared well in countries, the public sector initiates the so-called ‘market
advance, as soon as the decision to adopt a PPP for the sounding process’ to get prior and more concrete informa-
implementation of an infrastructure project has been made. tion from potential bidders on the proposed project and
Here, it is important to be clear that there is no simple to foster acceptance of the procurement approach. Market
rule of thumb or checklist to use as a tool for choosing the sounding helps the public sector to obtain feedback on the
proper project structure. Projects vary and must be consid- level of interest and the project’s feasibility from a techni-
ered individually for the bidding process to be designed cal, organisational and economic point of view. Quite
successfully within the context of the regional and local often, the market sounding process is publicly announced
issues that are relevant and the goals to be set by policy- and marketed nationally and internationally through road
makers. shows in order to generate greater market interest. Also,
Nevertheless, this section will provide an overview of the it is important that the process is open, fair, and treats all
pertinent issues to be considered throughout the PPP bid- participants equally.48
ding process, starting with an elaboration of the important In addition, prior to starting the procurement process,
actions and steps that need to be taken prior to actually a VfM analysis is conducted to assess the commercial via-
following this route. The commonly practiced procurement bility of the project. The Public Sector Comparator (PSC)
methods are presented, since the underlying procurement is a major indicator for assessing the viability of the project,
process is a driving factor that ultimately results in the and estimates the cost to the public sector of building
selection of the best private sector partner possible, i.e. in and operating the asset. It provides a baseline measure which
coherence with national and international norms. The pro- can be used as a benchmark to assess the case for a PPP.
curement process must be structured such that it is con- The PSC is derived from complex financial modelling
ducive for the private sector to participate and for financial processes, whereby the various project payment methods,
institutions to get involved in project financing. The vari- technical requirements, costs and revenue streams, as well
ous stages of a typical bidding process are also outlined, as the associated risks, are allocated, quantified and simu-
from the project launch to the prequalification stage, and lated to see whether the project may be sustainable on
until the actual financial close of the PPP contract. a PPP basis.49
ii) Market Sounding Process and the Value iii) Procurement Process
for Money Analysis Although quite cumbersome and complex, the procure-
Although the decision to adopt a PPP is foremost a politi- ment process is necessary for selecting the best bid and for
cal one,47 prior to deciding whether to pursue a specific maximising the benefits from the competition between
project on a PPP basis or via the classical public procure- the bidders. The procurement process must be structured
ment route, a sound market screening process may be con- in such a way that it stands up to the scrutiny of both
ducted and a ‘value for money’ (VfM) analysis is commonly the public and private sectors, the financial institutions
undertaken. The idea is to determine whether there is solid involved, as well as any other stakeholders.50
interest on behalf of the private sector in implementing There are various options available to contracting
the infrastructure project on a PPP basis. In addition, the authorities for structuring the bidding and award process.
VfM analysis provides an insight into the future cash flows The three main approaches include competitive bidding,
of the project, determining the project’s financial viability competitive negotiations, and direct negotiations.51
47
48
49
Source: Perrott (2009).
50
51
In practice, most bidding processes are structured to provide Outline of the Procurement Process
room for both negotiation and competition. Thus, this
section focuses on presenting the competitive bidding and Number of Project Launch
negotiation approach for PPP schemes. bidders
The bidding process consists of a series of stages aimed
at saving on the overall time and costs entailed for all the
Prequalification
parties involved, and at obtaining the best available project
technique as well as bids that deliver the best value for
money. The contracting authority must elicit bids that are
Competitive negotiation
comparable with each other. Thus, output specification is and dialogue
a key requirement that the public sector must fulfil prior
to initiating the bidding process. Private sector participants
may only submit their technical, operational and financial Request for proposals
proposals for the implementation of an infrastructure
project if the public sector has, in advance, invested in
defining the end services or output that it needs. Selection of final or
Furthermore, the procurement process must be trans- preferred bidder
parent such that all the parties involved are aware of the
Depth of
evaluation methods, principles, criteria and the scoring information
system applied. The method and the criteria are often Financial close
flow
communicated openly to the participants throughout the
various stages of the procurement process. It may be neces- Figure 16, Source: World Bank, (2009a).
sary to train staff or to have advisers assist in the prepara-
tion of the proper methods, and all the financial and
technical documents. In addition, the process must allow Project Launch: At the outset of the project, the contract-
for a number of different bidders to form a consortium; ing authority initiates the bidding process with a public
one comprised of experienced companies such as real notification in electronic and traditional media outlets,
estate developers, financial institutions, operators, building providing basic information on the tendering opportunity.
companies, etc. The tender notice is usually published domestically and
Figure 16 provides an outline of the different procure- internationally to capture market interest both at home
ment stages, starting with the notification of the project, and abroad. Marketing the project in a broad manner also
and then moving on to the prequalification and competitive helps in creating transparency and competition. In the
negotiation stage. Participants are then asked to submit tender documents, the participants are asked to provide
their proposals. Once proposals have been submitted and information on their financial, technical and other capacity
evaluated, preferred bidders are selected. The procurement for delivering the project.
process ends in a financial close once the negotiation stage
has been concluded. Alternatively, PPP tendering may be Prequalification: The prequalification stage aims to screen
structured as a single-stage process. After prequalifying bid- out all those bidders who do not pass the defined thresh-
ders, the contracting authority would make a final request olds. Assuming abundant interest on behalf of the market,
for proposals. But given the complex nature of large infra- the prequalification process helps to limit the number of
structure PPP projects, and the multitude of issues to be bidders and assists in obtaining industry input to develop
considered, it is recommended that contracting authorities the project details further. Bidders need to submit their
opt for a multi-stage approach towards procurement.52 Expression of Interest (EOI) and to provide information
52
on their technical and professional capacity, their financial Bidders also receive the draft PPP agreement which
and human resources, their managerial capability, and on is normally put together by the lawyers of the contracting
their relevant experience in the sector. The challenge for authority. At this stage, they may provide mark-ups of
the contracting authority is to predefine the right mix of the draft contracts. A dialogue between bidders and the con-
parameters by which to judge the participants. Politicians tracting authority may be useful to both parties at this point.
may consider involving local and/or small- and medium- The main possibilities for interacting with the bidders are
sized enterprises as well. bidder conferences and arm’s length consultations, whereby
bidders submit written comments on the draft bidding
Competitive Negotiation and Dialogue: Once a short list documents and the proposed PPP agreement independently.
of bidders has been selected, the contracting authority The contracting authority reviews these comments and gains
may open the competitive negotiation and dialogue stage. a better understanding of the issues potential bidders con-
The idea of the request for proposal stage is to receive sider important and of their concerns. It can then use this
sufficient quality bids from the short-listed candidates. information throughout the whole negotiation stage.
The bids must meet the objectives and the output require-
ments specified by the contracting authority. In order to Selection of final or preferred bidder: Once the proposals
enhance the clarity and quality of bid documents, an have been submitted, the contracting authority – with
‘Information Memorandum’ is put together – quite often the help of its advisers – starts the evaluation process to
by the advisers of the public authority – that provides select the most appropriate preferred bidders. Based on
information on the project, the payment mechanisms, out- predefined parameters, scores related to price and non-
put requirements, risk allocation, plus model designs and price criteria and the weightings applied, the various tender
plans with the detailed background information required proposals are assessed. The winning preferred bidders will
for bidders and lenders to carry out project due diligence. present the economically most advantageous offers, provide
There is also a timetable, which should be realistic and an adequate level of certainty regarding the price/service,
transparent so that all participants have the same opportu- and demonstrate an appropriate risk allocation.53
nity to compete. Bidders need time to assemble their own Roughly two to three bidders are then selected to move
advisers, team, and for key decisions to be obtained from on to the negotiation stage. Negotiations may be conducted
top management, etc. Transaction costs are also quite in a short period of time when the best-rated bidder is invited
high, thus, the overall costs of participating are often kept first for a round of discussions on the PPP agreement. Com-
in mind. petitive negotiation, however, requires that the contracting
authority negotiates with all the preferred bidders simul-
Request for Proposals: At this stage, bidders are also asked taneously in order to enhance the competitive nature of the
to submit their proposal, ranging from the technical to underlying process. The contracting authority negotiates
the financial proposal. More specifically, the proposal must the outstanding issues with the preferred bidders, or just
cover all issues related to the infrastructure project, for one bidder, depending on the negotiation strategy selected.
example, as regards planning, construction methods, timing,
and expected costs and revenues. In addition, it must Financial Close: Once negotiations are over, preferred
address the operational method and the managerial struc- bidders are asked to submit their ‘best and final offer’
ture to be applied throughout the life cycle of the project. (BAFO). The idea behind this is to reduce the bid price
A financial model must be set up by the bidders to reflect and to increase value for money for the public authority.54
the financial return on investment. It typically includes Preferred bidders will at this stage revise their proposals
details on the financial plan (for funding and operations), in writing and the number of contenders is then reduced
a financial model with its key assumptions and parameters, to one. If the BAFO is acceptable to the contracting
as well as an indication of the required levels of govern- authority, financial close may be reached.
ment financing (subsidies and so forth).
53
54
5. PPPs in different Sectors
In this section, trends in private sector involvement in PPP Opportunities in different Sectors
economic and social infrastructure are briefly outlined, and
examples of sectors in which PPPs have been completed 100%
worldwide are shown.
PPP projects are possible in nearly all sectors where the Telecommunication,
Energy
public authority bears accountability for the provision of
public infrastructure services.55 Examples of sectors (related Transport
to both economic and social infrastructure) in which PPPs
have been completed worldwide are: telecommunications,
Private Equity
energy, transport, water, health, and education.56 The Water
analysis in this section considers foremost the economic
infrastructure across sectors, but also provides an insight
into social infrastructure, where data is available. Health, Education
There is no universal norm as to the most appropriate
approach towards service provision (see Figure 17). An
analysis must be made on an individual sector-by-sector Defence
and project-by-project basis.57
Telecommunications, energy supply and transport
Public Influence 100%
belong to those sectors where a high level of private partner
involvement can be necessary and useful. In recent decades, Figure 17, Source: PwC.
many public authorities have opened up their telecommu-
nication markets to the private sector. As a result, in this
particular market, many private companies are making sectors and services that are favourable for increased private
investments and supporting public authorities in efforts to sector participation, i.e. the telecommunications, energy,
provide infrastructure of a high standard. In contrast, transport, and – bearing in mind certain restrictions – the
Defence is a good example of a sector that is more or less water, and also education and health sectors.
prone to purely public provision. Here, private sector From 1990 until 2008, both the telecommunications and
involvement may only be possible in just a few areas, like IT. the energy sector registered the largest share of total private
Some goods/services cross the classical divide between investment (see Figure 18). This is mainly because of the
purely public and private sector provision. This is true for stable cash flows expected to emanate from users. In the
water58 and social infrastructure, especially education and energy sector, there is still a high demand for private sector
health,59 where providing access to all population groups investment, especially in Africa. According to World Bank
is an important objective that invariably results in a higher estimates, only 37.8% of the African population currently
level of public sector involvement. The main obstacles has access to electricity.60 In the water sector, private invest-
to attracting private partner involvement in these sectors ment has been comparably low due, for instance, to high
include lower than expected economic rates of return and investment costs and the difficulties of generating stable
regulatory constraints that prevent user charges from being cash flows of a high level.61 Also, general fears of a political
set at a profitable level. backlash against private ownership, and the relatively greater
What follows provides an overview of sectoral trends role played by local authorities, have dampened enthusiasm
in low and middle income countries, focusing on selected- for private investments and, more specifically, PPPs.62
55
56
This manual provides only an illustrative overview of important areas of PPP practice.
It must be highlighted that sector-specific issues are not in the core focus of this manual. Therefore, some other favourable PPP sectors, such as waste
57
management or areas of the judicial system, are not included.
58
World Bank (2010b).
59
Source: GTZ (2006), for instance.
60
WHO (2009), for example.
61
Source: Business Monitor International (Online), Africa’s Infrastructure Needs double the Current Investment, 23.04.2009.
62
Source: PwC (2003).
Source: OECD (2005).
Sectoral Share of Investments with Private Involvement Sectoral Share of PPP Investments
1990-2008 1990-2008
Water and Sewerage Water and Sewerage

Transport Transport
Energy Energy
Telecommunication Telecommunication
The evolution of sector-specific PPPs varies over time Considering PPPs in low- and middle-income regions,
(Figure 19). In the energy and transport sectors (the latter the trend in sectoral volume varies (see Figure 20). The bar
in particular), there is a high increase in PPP investments, chart shows that PPPs have advanced much more in the
especially in the period from 2004 until 2008. In the regions of East Asia and Latin America than in Africa and
transport sector, this increase was mostly realised from 2004 South Asia. The transport and energy sectors are predomi-
until 2006. PPPs in the telecommunications and water nant in all regions as far as the advancement of PPPs
sectors are generally quite insignificant during the period is concerned.
concerned.
Cross-Sectoral PPP Investments ($US m)
40000 Energy
Telecommunication
35000
Transport
Water and Sewerage
30000
25000
20000
15000
10000
5000
0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

PPP Investments in Sectors and Regions 1990-2008 ($US m)
140000 Energy
Telecommunication
120000
Transport
Water and Sewerage
100000
80000
60000
40000
20000
0
There are various reasons why the actual implementation In developing countries, demand for additional infra-
of PPPs in many regions and sectors has been quite low so structure in the education sector is quite high. According
far. Most important is the lack of experience and the need to the UN, more than 115 million children of primary
to create a certain level of awareness and consciousness school age are out of school. The situation is extraordinary
about PPPs among the various stakeholder groups (see sec- critical in Sub-Saharan Africa, Southern Asia and Ocea-
tion 4.3). It is often necessary for relevant experience to nia.64 In Sub-Saharan Africa, only 52% of pupils complete
be provided, as well as financial and technical support. primary schooling, and only 63% of this group move on
Added to this, many projects where private sector involve- to lower secondary schools. In some countries, the situation
ment would be enriching risk failure because of the absence is even worse. For instance, in Burkina Faso, Mozambique
of an adequate regulatory and institutional framework and Niger, less than 35% complete primary education.65
(to some extent politically motivated – see section 4.1). As a consequence, private school enrolment is now quite
In the social sector, public influence on the overall sys- common in many countries.
tem typically remains quite high. Nevertheless, due to the
financial and technical constraints of public authorities,
as well as the issue of efficiency in service provision, in a
few cases, private sector involvement has been established
across all service areas – comprehensively covering the basic
setting (in terms of maintenance, building operations,
catering, cleaning, security, etc.), as well as core educational
and health services.63
63
64
Source: Riess (2005).
65
Source: UN (2005).
Private Sector Share of Enrolment in Private Sector Share of Enrolment in

PRIMARY SCHOOLS (in %) SECONDARY SCHOOLS (in %)
Brazil Brazil
Brunei Darussalam Brunei Darussalam
Burkina Faso Burkina Faso
Colombia Colombia
Costa Rica Costa Rica
Dominican Republic Dominican Republic
Eritrea Eritrea
Gambia Gambia
Ghana Ghana
Indonesia Indonesia
Jordan Jordan
Mexico Mexico
Namibia Namibia
Nicaragua Nicaragua
Palestinian Autonomous Palestinian Autonomous
Peru Peru
Senegal Senegal
Sudan Sudan
Syrian Arab Republic Syrian Arab Republic
Venezuela V enezuela
0 5 10 15 20 25 30 35 40 45 50 0 5 10 15 20 25 30 35 40 45 50
2000 2008
Figure 21, Source: UNESCO Institute for Statistics.
Public authorities have come to recognise PPPs as an option

for improving both the quality of and access to social ITE College West
infrastructure. Box 14 below categorises specific services The process of designing, building and operating ITE
College West in Singapore has been structured as a PPP.
in the education and health sectors according to whether
From summer 2010 on, it will accomodate 7,200 full
they are conducive to PPP-based provision. time and 8,100 part time students with a slate of state
of the art workshops, laboratories, lecture theatres,
PPP Opportunities in the Education and more. The PwC led advisory team had the skills
and Health Sectors. and experience ITE needed to successfully help them
complete Singapore’s first social infrastructure project.
Typical PPP Areas Atypical PPP Areas
Core Services: Box 15: An Example of a PPP in the Education Sector. Source: PwC.
Non-Core Services:
• Maintenance • Clinical Support Services
• Operating Buildings • Clinical Services It must be said that in contrast to the other sectors men-
• Cleaning • Teaching tioned above, in the education sector (and also in health),
• Catering
the term ‘PPP’ is often defined quite broadly. For example,
• Security
the IFC identifies seven models within this sector, ranging
Box 14, Source: Adapted from Riess, (2005). from the Adopt-a-School programme to the School
Infrastructure Partnership, as ‘PPPs’.66 In a recent study,
the World Bank67 highlights 92 important education
programmes around the world, where PPPs have been
introduced successfully.68 A large number of these have
been realised in developing countries.
66
67
Source: IFC (2009).
68
As to whether one may refer to these projects as PPPs or not, please also see the discussion concerning the definition of PPPs in section 2.4.
Pakistan Colombia
Leasing of public school building to private operators Concession Schools
The government leases under-used and dilapidated government The management of public schools is turned over to private
school buildings to private schools. The private sector is given schools with proven track records of delivering high-quality
the right to operate a school in the afternoon shift, when the education for a period of 15 years under performance-based
school building is closed. In exchange, the private operator contracts.
must upgrade the building, pay the utility costs of both schools,
contribute to the operating costs of both schools, and pay
10% of any profits to the public school council. More than 6,000
such schools are now operating in Punjab.
Box 16: Examples of PPP Schemes in the Education Sector. Source: World Bank, (2009b).
The demand for private sector involvement in the health In Azerbaijan, the Dominican Republic, and Sudan,
sector is similarly high. The Global Health Council points private health expenditure is higher than 60%. For the
out that ‘it is increasingly apparent that governments period 2000 – 2008, the trend varies. In countries such
cannot fully meet the health needs of people through as Burkina Faso, Gambia, Ghana, Indonesia, Jordan and
reliance on public (government) resources alone. In many Senegal, private health expenditure as a proportion of
countries less than half of the population has access total health spending has decreased significantly, but
to public services.’ 69 It is a big challenge to cover these in other countries, such as Namibia, it has experienced
services gaps with private sector investment. In developing a marked increase.
countries right now, private expenditure on health already
amounts to more than half of total health expenditure.
Private Health Expenditure as a Share of Total Health Expenditure (Income Groups, 2008)
High income
Upper middle income
Lower middle income
Low income
0 10 20 30 40 50 60 70
Figure 22, Source: WHO.
69
Source: Global Health Council (2009).
Private Health Expenditure as a Share of Total Health Expenditure in Selected Countries
Venezuela
Syrian Arab Republic
Sudan
Senegal
Peru
Nicaragua
Namibia
Mexico
Jordan
Indonesia
Ghana
Gambia
Eritrea
Dominican Republic
Costa Rica
Colombia
Burkina Faso
Brunei Darussalam
Brazil
Azerbaijan
0 10 20 30 40 50 60 70 80 90
2000 2008
Figure 23, Source: WHO.

6. PPP Checklist
As already mentioned, PPP projects can vary significantly. 10. Assessing the viability of the project (i.e. the
Hence it is not possible to set up an overall checklist economic and financial benefits to both the public
that allows for advisers to maximise project output and to and the private partner), and working out whether
opt for the most suitable project. Nevertheless, there are a PPP procurement would be advantageous
some key issues that drive every PPP process and certain
factors that must be considered prior to starting a PPP 11. Evaluating and developing a proper PPP model
project and throughout the whole related process. (check key PPP characteristics)
12. Assessing the need for structuring a special purpose
As stated below, these concern: vehicle (a project company)
1. Defining the objectives of the local/public authority 13. Developing the proper payment mechanism
with regard to the specific service to be delivered
14. Gaining clarification about the underlying assets of
2. Gaining an understanding of the willingness of the the service to be provided — the right of use or a
public authority to have a long-term contractual transfer of the underlying assets for the duration
relationship with the private partner of the contract
3. Assessing the legal certainty for private sector 15. Evaluating different funding arrangements and
involvement in the specific country and assisting in developing sustainable financing by evaluating the
the establishment of appropriate regulatory structures existence of related mechanisms that support project
and frameworks aimed at fulfilling the objectives financing
of service provision
16. Identifying stakeholders while, for example, taking
4. Assessing the adequacy of the existing institutional into consideration consumer interests
setting for promoting and initiating private sector
participation 17. Evaluating the relevant experience and education of
the project team — i.e. on the part of the public
5. Checking the experiences of public authorities with authority
similar projects
18. Defining clear responsibilities within the project team
6. Assessing the possibility for specifying the service
and determining the service output 19. Defining, monitoring, and controlling instruments
7. Verifying the market and the demand for the project 20. Assessing the necessity of setting up a steering team
that includes the relevant stakeholders
8. Gaining an understanding of the appetite for risk
allocation — is there a tendency towards a fair 21. Setting criteria for evaluating bids
allocation of the project risks between the public
and the private sector 22. Setting criteria for proposal evaluation
9. Evaluating the volume of the project against the 23. Defining the principles required to guarantee
expected transaction costs transparency and anti-discrimination
24. Defining exit strategies.

CHAPTER C: Conclusion — The Role of GIZ in PPPs
Recently, GIZ’s counterparts and clients have shown an Fostering a cooperative culture between the public
increasing interest in public-private partnerships (as and the private sectors and civil society, namely, by:
defined in this manual), asking what they are for and how - supporting and facilitating stakeholder dialogue
they can be structured and implemented. Accordingly, GIZ throughout the PPP process (for instance, through
is faced with a new challenge to first of all clearly specify facilitation and moderation);
the range of services provided to-date and secondly to go - linking institutions and PPP projects with partners,
beyond the current practice and identify a new scope for like potential investors, financing institutions, donors,
services that may be provided best by GIZ. This manual advisory firms, etc. (network development/‘match-
may be deemed as a the starting point for a deeper discus- making’ services), and by
sion on this issue. It further specifies the wide range of - supporting knowledge and information management
possibilities for GIZ’s involvement as regards promoting systems related to PPP projects (benchmarking,
private sector participation in technical cooperation. technical consultancy).
‘Capacity development, empowering partners, promoting
potentials’ is the guiding principle for holistic competency Providing advice to strengthen and develop PPP-related
development, which GIZ regards as the key to sustainable legal and institutional frameworks (policy consultancy),
development. GIZ’s core competency is capacity develop- for example, in the context of wider sectoral reform
ment. As has already been seen, ‘capacity’ refers to the programmes.
ability of people, organisations and societies to shape devel-
opment on a sustainable basis. This entails identifying Supporting PPP units and regulatory bodies on issues
problems and then developing and successfully implement- related to institutional capacity development (organisa-
ing strategies to reach solutions. GIZ supports developing tional development consultancy), and advising these
and emerging countries in building their capacities and units and/or bodies in terms of developing the capacity
managing the learning and change processes involved. This for:
is done at various levels: at the so-called ‘macro’ or policy - raising awareness about PPPs among all stakeholders;
level, the ‘meso’ or institutional level, the ‘micro’ or - identifying the strengths, weaknesses, opportunities
project level, and also at the ‘meta’ level, which may best and threats of PPPs;
be described as the overarching umbrella to facilitate the - mobilising partners as an ‘honest broker’ to promote
dialogue and promote the cooperation between the public PPPs in specific regions or areas;
and private sectors. - setting up communities of practitioners to continue
Based on what has been discussed in this manual and sharing experiences, tools and knowledge beyond
GIZ’s diverse experience of structuring, accompanying the regular stakeholder dialogue and round table
and/or assisting specific, large and complex PPP projects discussions;
in developing countries, there are various areas in which - promoting an exchange on concerns about risk
GIZ can get involved to help institutions and governments management in PPP projects (e.g. as regards global
with issues related to PPPs. GIZ may focus its core adviso- financing, fundraising, and the role of the govern-
ry services on the following four areas: ment), and raising awareness on this issue; and
- other tasks.
Supporting the realisation of individual PPP projects

throughout the project life cycle (technical consultancy).
The approach of GIZ and the services it offers is best

described by Box 17, illustrating the systemic development
approach and the PPP services underlying each level.
Meta Level Macro Level

Social-Cultural Policy Level
Framework • Assistance in strengthening and developing PPP related legal and institutional
frameworks
• Promoting the idea
of public private
cooperation
• Fostering of a
cooperative culture
Meso Level
between public and
private sector and Institutional Level
70
civil society • Supporting and facilitating stakeholder dialogue throughout the PPP process
• Supporting PPP units and regulatory bodies on issues related to institutional capacity
development
• Linking institutions and PPP projects with partners, like potential investors,
financing institutions, donors, advisory firms, etc.
Micro Level
Project Level
• Linking institutions and PPP projects with partners, like potential investors, financing
institutions, donors, advisory firms, etc.
• Technical Advice: Supporting the realisation of individual PPP projects throughout the
project lifecycle
Box 17: Potential Areas of Involvement for GIZ
Policy consultation at the macro level is not only the the main contract for the EuroMed Transport Project.71
foremost stage of GIZ involvement, but also the most effi- It analysed various aspects of the transport system in the
cient means to form and achieve the objective of generat- 12 Mediterranean countries covered by the project, and
ing a ‘win-win’ situation for public authorities and their considered a range of institutional issues (such as with
private sector partners. GIZ is used to interacting with gov- respect to operations, policy and regulation) relating to
ernment agencies, and can best support public authorities these different transport sectors.
by facilitating inter-governmental dialogue, and by pro- As seen in earlier chapters, there is also the possibility
viding assistance throughout the whole process to develop to transfer experiences gained from one country to another.
sector- and PPP-specific strategies. Thus, raising awareness Thus, the application of benchmarks or good practices
at the government agency level comes at the very outset, (bundling of existing knowledge) across different sectors
before service needs are defined. or within one sector may be a good starting point for initi-
GIZ is best suited to providing guidance, and the ating reform processes throughout the developing countries
necessary insight into the advantages and disadvantages where GIZ has traditionally been active.
of involving private partners in or across specific sectors. Therefore, GIZ can take advantage of its past experience
For example, a GIZ International Services-led consortium to get involved at both the macro and meso levels in the
conducted a comprehensive micro study on PPP options development of legal frameworks, and to help structure the
in the transport sector. The study was pursued under necessary regulatory frameworks – a prerequisite for private
70
71
Detailed Information about Stakeholder Dialogues can be found in the ‘Stakeholder Dialogues-Manual’ (see also the Information on CDP on page 7).
Source: European Commission (2008).
sector to engage in business in a developing country. after the financial close, and over the whole life cycle of
At this point, it is important to re-emphasise that public the project. GIZ has been involved in several such cases
authorities should not rush into PPPs until they are confi- around the world. For instance, in Senegal, GIZ has not
dent that the proper structures are in place. Thus, struc- only supported the preparation of the bidding documents
turing legal frameworks is rather a medium- to long-term for a project here, but also the selection of potential con-
process: one which requires a certain degree of patience. cession holders.
More specifically, GIZ may assist in raising awareness GIZ’s involvement in institutional strengthening
among various stakeholder groups about the need to realise processes is an enriching input that may best be applied at
stable legal structures. GIZ can also get highly involved in both the macro and meso levels when launching an educa-
the regulatory framework dialogue process. tional campaign on PPP-related matters. In this context,
However, the long-term process of introducing the GIZ may get engaged quite early on in the advisory process
frameworks required for PPPs should generally not hinder for establishing institutional structures appropriate for
their implementation. A comment made by the Finance PPPs. Box 19, for example, shows how GIZ has assisted
Secretary at the Ministry of Finance in Lesotho is of ECOWAS in initiating a regional PPP process.
relevance here. ‘We could not wait for the legal framework The above issues concern the core areas where GIZ has
for PPPs to be in place in Lesotho before we launched traditionally been involved. Due to its global network, GIZ
our first initiative to fund a hospital’ 72. can assist public authorities and also private partners by
In addition to the adequate legal framework needed acting as an ‘honest broker’ at the meso and micro project
for PPPs to be successful, properly functioning regulatory levels, i.e. to facilitate the involvement of the other advisors
bodies are a prerequisite for PPP projects to actually needed during the PPP process, and to provide limited
work. Public sector officials and institutions are needed to support to the bidding process (see Box 20).
monitor and control PPPs throughout the bidding process,
Senegal: Programme to promote renewable state established the political goal to provide up to 50%
energies, rural electrification and a sustainable of the rural population with access to electricity by 2012.
supply of domestic fuel (PERACOD) The suppliers receive a subsidy of up to 70% for this, and
must undertake to maintain the supply independently for
The GIZ-supported programme PERACOD in Senegal aims to the period of the concession.
improve the conditions and the implementation capacity for
sustainable access to modern energy services, especially GIZ/PERACOD generally supports ASER in strengthening
for the poorer sections of the population. The involvement its institutional capacities to efficiently realize its aims in
of private actors is pivotal to the outstanding dimension rural electrification. To this end, a catalogue of criteria for
and sustainability of the programme. To extend the reach of selecting villages for electrification was developed. With
rural electrification, Senegal entered a concession approach specific regard to PPP, GIZ advised ASER on the adaptation
that began with the creation of ASER (Senegalese Agency of the legal framework for tendering ERIL concessions and
for Rural Electrification) in 1998. ASER awards three differ- eventually financed four ERIL concessions. Throughout
ent types of concessions that differ considerably in regional, the bidding process GIZ supports ASER in selecting suitable
temporal, and financial range. concessionaires and provides them with technical and
managerial training. Regarding the implementation of the
GIZ assists ASER primarily in the process of implementing concessions, GIZ will support ASER in the development of a
so-called ERIL concessions, which were created in order system that monitors the fulfillment of the concessionaires’
to accommodate local initiative. ERIL concessions typically contractual obligations and their qualitative performance.
encompass ten to twenty villages with overall less than
500 customers and are granted for 15 years. The Senegalese To learn more about this project, see Annex.
Box 18: An Example of GIZ Involvement in a Concession-related Project. Source: GTZ , 6.09.2010
72
Source: World Bank (Online), Public-Private Partnerships to Boost African Infrastructure, Incomes for the Rural Poor, May 5th, 2010.
Regional Economic Integration — Public-Private The ECOWAS Commission currently conducts a study to
Partnerships in and with the ECOWAS collect information about the PPP regulatory infrastructure
and framework within the fifteen member states. During
The Authority of Economic Community Of West African States this process, major stakeholders of the member states will
(ECOWAS), Heads of States and Government underlined the be identified and best practices and common challenges
importance of an improved cooperation with the private documented. The study will be discussed with representa-
sector during its summits in 2007 and 2008. It directed the tives of the member states and the scope of a regional PPP
ECOWAS Commission to mobilize both the regional and policy will be examined.
international private sector and support their engagement in
the integration process by encouraging them to invest in the GTZ is involved in the process since 2008, providing technical
development programmes pursued by the Commission and advice on the methodology. The GTZ support programme to
member states. This cooperation between the public and the the ECOWAS Commission organises the support measures,
private sector exhibits characteristics of the classic PPP while having the cross-cutting nature of PPP in mind. Various
approach (outsourcing of public tasks to private operators; presentations have been held on regional meetings that
leasing, concessions, BOO/BOT etc.) as well as of the Part- have sharpened the awareness on the PPP approach. It is
nerships for development concept, delivering effective and currently discussed to enlarge the cooperation on PPP with
sustainable solutions to different development challenges the ECOWAS Commission in 2011.
through a collaborative approach.
Box 19: An Example of GIZ Involvement in a Regional Economic Integration Process with a PPP Approach
Water and Sanitation in Yemen: Envisaged lease

contract ‘Sana’a’ potential bidding companies in a data room. In the light
of unfavourable circumstances, GTZ advocated easing the
In the process of reforming Yemen’s water sector, Sana’a tendering requirements to offer a more attractive contract
was the first branch of the national water operator NWSA to the private sector. To the same end, GTZ invited private
to be established as an autonomous body, the Sana’a companies to a pre-tendering meeting to inform and assist
Water Supply and Sanitation Local Corporation (SWSLC). potential bidders. Finally, GTZ set up an organizational
One year after its establishment, the World Bank analysed structure for the envisaged PPP.
the technical and institutional capacity of the Sana’a
utility with the main focus on staffing, tariffs, business pro- The process from prequalification through to submission of
cedures and infrastructure. The analyses found that SWSLC the bids took around 18 month. Three international private
was not performing well and suggested that it would operators submitted prequalification documents. Unfortu-
improve its performance indicators if it entered a PPP. After nately, no bid was received from the prequalified potential
a PPP options study, the World Bank recommended a lease bidders. The contract development team later came to the
contract and foresaw a high estimated annual impact of conclusion that the lease contract was not an attractive and
YR 1.275 billion per annum through selected improvements secure option. A lease contract transfers high risks to the
in operational and financial efficiency. private provider while the circumstances were very difficult
due to scarce water resources, overstaffing (with a condition
A contract development team was set up comprising an of the lease arrangement being to maintain staff level),
international legal expert, the SWSLC Board of Directors, low household incomes, poor data availability from socioe-
the International Development Association and the Technical conomic and affordability studies and the absence of a
Secretariat/GTZ. An 8 to 10 years lease contract was de- regulatory body. As the World Bank made investments of
signed to half the amount of unaccounted for water, increase $ 120 million dependant from tendering the lease contract,
sewer connections five-fold and raise collection efficiency the option was pursued despite the sever concerns that
from 60% to 95%. GTZ supported the pre-qualification and local experts and GTZ had raised. Still, the World Bank in-
bidding process by collecting technical and managerial data vestments were used to finance some urgent improvements
on SWSLC, developing a technical master plan for the water and moreover, the experience gained throughout the process
and sanitation supply as well as a financial model for the can be adopted in other PPP approaches.
cost trend and identifying the need for training. The studies
and a prototype of the lease contract were disseminated to To learn more about this project, see Annex.
Box 20: An Example of GIZ Involvement in a PPP Process in Yemen. Source: GTZ , 6.09.2010.
Another interesting area where GIZ can support local and

national public authorities is in their efforts to tap the
best possible sources of finance. It is not GIZ’s mandate to
provide financing, however, it can help identify the optimal
national, bilateral and multinational financing sources for
a specific project. Thus, GIZ may act as a ‘financial facili-
tator’ that informs stakeholders and provides them with
advice on the various options and most optimal sources of
finance.
Above all, in any change process, it is necessary to be
aware of the various, often contrary, interests that exist.
Therefore, in any of the aforementioned areas where GIZ
can provide assistance to institutions and governments
regarding PPPs, transparency is of importance. All the
stakeholders, and their special interests, should be known.
In addition, the involvement of all parties is required to
ensure the acceptance of a clear allocation of responsibili-
ties throughout the PPP process.
VI Bibliography
ADB, Public-Private Partnership Handbook, 2008. Perrott, Optimizing Project Finance Solutions in the Water
Alfen, Public-Private Partnership in Infrastructure Sector, (2009).
Development, 2009. PwC, Comparative Review of IFI Risk Mitigation
Azuba/Mugabi/Mumssen, Output-based Aid for Water Instruments and direct Sub-Sovereign Lending, 2003.
Supply in Uganda, OBApproaches Nr. 35, 2010. PwC, Developing Public-Private Partnerships in
BMVBS, PPP im öffentlichen Hochbau, Band 1 Leitfaden, New Europe, 2004a.
2003. PwC, Partnering in Practice, 2004b.
BMZ/GIZ/KfW, PPP in der EZ, BMZ Seminar in Bonn, PwC, Delivering the PPP Promise, 2005.
27.2.2008. PwC, Transportation & Logistics 2030 — Volume 2:
BMZ, Development Partnerships with the Private Sector — Transport infrastructure — Engine or hand brake for
Public-Private Partnerships (PPP), 2009. global supply chains?, 2010a.
Delmon, Mobilizing Private Finance with IBRD/IDA PwC, Public-Private Partnerships: The US Perspective,
Guarantees to bridge the Infrastructure Funding Gap, 2007. 2010b.
EIB, The EIB’s role in Public-Private Partnerships (PPPs), Research Republic LLP, Developing India’s Infrastructure
2004. through Public-Private Partnerships, 2008.
European Commission, Long Term Contracts between Riess, Is the PPP model applicable across sectors?, 2005.
Government Units and Non Government Partners (Public- Sandiford/Gorter/Salvetto, Using Voucher Schemes for
Private Partnerships), 2004. Output-Based Aid, 2002.
European Commission, Micro Study on Public-Private Shafiul/Mansoor, Partnerships for solid waste manage-
Partnerships in the Transport Sector, December 2008. ment in developing countries: linking theories to realities,
Global Health Council, Understanding Private Sector Habitat International 28 p.467–479, 2004.
nvolvement in Health Systems, 2009. UN, The Millenium Development Goals Report, 2005.
GNESD, Making Power Sector Reform work for the Poor, UNDP, Starting a Pro-Poor Public-Private Partnership for
2002. a Basic Urban Service, 2006.
73
GTZ , Capacity Development for Sustainable Development, WHO, Spanish Health District tests a new Public–Private
Policy Paper No.1, 2003. Mix, 2009.
GTZ, Sharing the Experience on Regulation in the Water World Bank, Competitive Vouchers in Health, 2005.
Sector, 2004. World Bank, Approaches to Private Participation in Water
GTZ, Regulation and Supervision in Water Supply and Services, 2006.
Sanitation (WSS), Casesheet — Focus Peru, 2006. World Bank, Contract design in Public-Private
GTZ, The role of the Private Sector in Health Care Provision Partnerships, 2007a.
in Developing Countries, 2010. World Bank, Mobilizing Private Finance with IBRD/IDA
IFC, Public-Private Partnerships in Education, 2009. Guarantees to bridge the Infrastructure Funding Gap,
Johannes, Output-based Aid in Health, OBApproaches 2007b.
Nr. 13, 2007. World Bank, Attracting Investors to African Public-Private
Lamech/Saeed, What International Investors look for Partnerships, 2009a.
when Investing in Developing Countries, 2003. World Bank, The Role and Impact of Public-Private
MIGA, Improving Project Profiles to get Investments Partnerships in Education, 2009b.
going, 2007. World Bank, Developing Post-Primary Education in
OECD, Encouraging Public-Private Partnerships in the Sub-Saharan Africa, 2010a.
utilities sector: The Role of Development Assistance, 2005. World Bank Policy Research Working Paper 5173,
OECD, Infrastructure to 2030 — Volume 2 Mapping Policy Understanding Options for Public-Private Partnerships
for Electricity, Water and Transport, 2007. in Infrastructure, 2010b
73
GIZ was formed on 1 January 2011. It brings together the long-standing expertise of DED, GTZ and InWEnt.
VII Annex
• Brokerage between project developers and financing
Madagascar: institutions
Lokoho Hydro for Rural Development • Development of a business concept for the rural
electricity supplier
Sector: Energy • Assistance with the development of a tariff structure
Type of PPP contract: BOT that accounts for pro poor aspects
Project duration: July 2005 – January 2009 • Training concept for local electricians
(suspended)
Programme outcomes, lessons learned
Description of programme aims and PPP components The project set-up helped to integrate private infrastructure
Madagascar offers excellent possibilities for the utilisation investment into a broader promotion of rural development.
of hydro power, which at present constitutes the main The synergies between private investors and development
source of electricity generation in the country. Never- agencies can serve as a blueprint for similar future projects
theless, a large potential for hydro power still remains in Madagascar or other developing countries. The joint
untapped. In the northern and central part of Madagascar venture formed by international and local companies pro-
the hydro power potential could significantly contribute to vided a sound basis for technology transfer to Madagascar.
increase the electrification rate and substitute the expensive Although the financing structure of the Lokoho project
diesel-fuelled power plants that generate about one third turned out to be very complex, a streamlined set-up based
of the electricity. For rural areas, the Malagasy government on the Lokoho approach could also be a promising PPP
and international organizations favour small scale hydro approach for other (energy) infrastructure investment.
power plants with the participation of private investors and Development Cooperation played an important role in the
operators. facilitation of the whole project and was highly appreciated
The comprehensive cooperation of international utilities by both the private and the public partners.
(the e8 group, namely EDF, RWE and Hydro Quebec),
a local private partner (Electricité de Madagascar) and Contact person
international development organizations (GIZ, KfW, EU) Sascha Thielmann (sascha.thielmann@giz.de)
established the basis for the construction and operation
of a power plant in the northeast of Madagascar. However,
after tendering the first construction lot an unexpected
cost increase prompted the private partners to thoroughly
review the project. At the same time, the coup d’état of
2008/09 shook up the political situation fundamentally Senegal:
and created a lot of uncertainty for private investment. Programme to promote renewable energies,
Therefore, despite considerable efforts and its evident role rural electrification and a sustainable supply of
model character, the project could not be realized. domestic fuel (PERACOD)
GIZ advisory services on PPP components Sector: Energy

• Institutional capacity development to ADER, the agency Type of PPP contract: Concessions
for the development of rural electrification associated to Project duration: 2003 – 2015
the ministry of energy
• Contributions to the initial feasibility study in form of Description of programme aims and PPP components
a socio-economic baseline study and further market At the end of 2009, no more than 22% of rural Senegalese
analyses households had an electricity supply. This not only under-
• Assessment of the potential for productive use of mines economic development, it also impedes access to
electricity and development of promotional instruments education, health, communication and culture. Almost the
entire rural population and 30% of urban residents use with access to electricity by 2012. The suppliers receive
firewood or charcoal for cooking. Uncontrolled forest a subsidy of up to 70% for this, and must undertake to
clearance leads to erosion and a loss of soil fertility. Future maintain the supply independently for the period of the
supplies of energy for cooking are under threat. concession.
PERACOD aims to improve the conditions and the
implementation capacity for sustainable access to modern GIZ advisory services on PPP components
energy services, especially for the poorer sections of the • Development of ASER’s overall capacities to efficiently
population. The involvement of private actors is pivotal to realize its aims in rural electrification
the outstanding dimension and sustainability of the pro- • Adaptation of the legal framework for tendering ERIL
gramme. To extend the reach of rural electrification, Sene- concessions
gal entered a concession approach that began with the • Creation of a catalogue of criteria for the selection of
creation of the Senegalese Agency for Rural Electrification villages for electrification
ASER in 1998, driven by the World Bank and other inter- • Selection of concessionaires, awarding and implementa-
national donors. Three types of concessions were put into tion of ERIL concessions
ASER’s toolbox: • Installation of a monitoring and evaluation system for
PPER concessions (Priority Electrification Programme): monitoring the fulfilment of contractual obligations and
At the outset, the country has been divided into 13 the performance of the concessionaires
concessions, covering all unelectrified rural areas. Each • Technical and managerial further training for concession-
concession is financed by a donor (World Bank, KfW, aires and communities
AfDB, AFD etc.). PPER concessions can encompass
several administrative regions with several 100,000 Programme outcomes, lessons learned
customers and are granted for 25 years. As of mid-2010, four PPER concessions have been award-
ERIL concessions (Rural Electrification through local ed. Due to necessary revisions of the legal framework, the
initiative): ERIL concessions are complimentary to tendering of ERIL concessions has been delayed. Until
PPER concessions. From the outset it was clear that they are legally effective, however, several concessionaires
PPER concessions would be cumbersome and lengthy operate under temporary licenses. The pilot phase of
to implement, and would not reach all customers in electrification based on local initiatives brought a power
a given area. Therefore, and in order to accommodate supply to some 17,000 people in 72 villages. Three private
local initiative, the tool of ERIL concessions was created. providers have installed power plants and established a
ERIL concessions typically encompass ten to twenty power supply. Roughly another 150 small villages with no
villages with overall less than 500 customers and are access to electricity have been chosen for electrification in
granted for 15 years. the second phase of the programme (starting mid 2009).
PREM concessions (Multi-Sector Energy Project): The power is used in the villages by private households as
PREM concessions were initially created to promote well as schools and health centres. Moreover, the electricity
productive use of electricity, and to allow for electrifi- is also used to help small rural business to realise income
cation of social infrastructure. This kind of concessions creation measures, which promotes economic growth in
has drawn the least attention from the private sector. the villages.
Because of their adequate advisory and financial dimen- Contact person

sions, GIZ/PERACOD supports ASER primarily in the Gunnar Wegner (gunnar.wegner@giz.de)
process of implementing ERIL concessions. In contrast,
PPER concessions are likely to range in a two-digit million
amount and are thus mainly backed by institutions of
financial cooperation. The Senegalese state established the
political goal to provide up to 50% of the rural population
sized and large enterprises, they can be adapted to PPP

Latin America and the Caribbean: with small businesses as well.
Financial and Institutional Reform of
Road Conservation Contact person
Armin Wagner (armin.wagner@giz.de)
Sector: Transport
Type of PPP contract: Management contract
Project duration: June 1990 – November 2003
Short description of programme aims

GIZ implemented the supra-regional programme ‘Finan- Benin:
cial and Institutional Reform of Road Conservation in Water supply in semi-urban centres
Latin America and the Caribbean’ in cooperation with
UN-ECLAC (UN Economic Commission for Latin Amer- Sector: Water and sanitation
ica and the Caribbean) and the IRF (International Road Type of PPP contract: Affermage contract
Federation) from 1990 until 2003. Besides a sufficient and Project duration: 2004 – 2015
sustainable funding of the road network the programme
also aimed at an improvement of an efficient management Description of programme aims and PPP components
and maintenance. To this end, GIZ and UN-ECLAC Despite major efforts to improve the situation, there is still
modified contracts commonly in use in the transport a long way to go before the supply of clean drinking water
sector. While companies are paid according to quantifiable in Benin is secured. Originally, the network-bound supply
criteria (such as working hours or amount of material) in systems for drinking waters in semi-urban centres (2,000 –
these traditional contracting schemes, the new modality 15,000 inhabitants) in Benin were operated and owned by
allows for a compensation based on the quality of the water user associations. An evaluation from 2006 showed
company’s work throughout the duration of the contract that 100% of the supply systems connected to the electricity
(usually about ten years). The condition of the road net- network and 91% of those supplied by generators were
work is checked each month against prearranged criteria functioning flawlessly. Yet only 27% thereof were financially
such as the width of the usable road surface, cleanliness or sustainable, amongst others due to insufficient provisions
condition of the drainage structures. The company receives for replacement investments.
the full payment only if the road network meets a mini- In the course of a reform of the national sub-sector
mum standard as agreed upon in the contract; otherwise strategy, the municipalities as formal owners of the water
the sum is reduced accordingly. supply systems assigned local private actors with their oper-
ations. On the basis of affermage contracts, the private
GIZ advisory services on PPP components operators are responsible for the technical, commercial and
• Establishment of road management companies financial operations and maintenance. Based on the with-
responsible for managing whole road networks on drawal of water, they pay a fee to the municipality which is
a long term contractual basis. used to finance replacement and potential extension invest-
• Development and introduction of performance-based ments. The municipality are also in charge of monitoring
road asset management and maintenance contracts the contractual requirements.
Programme outcomes, lessons learned GIZ advisory services on PPP components

Performance-based contracts are successful to the extent • Advisory service to the national ministry of mines,
that more than 50,000 kilometres of the Latin-American energy and water (national and regional level) on the
road network are maintained on the base of this new reform and implementation of the national water sub-
modality. While usually deployed in PPP with medium sector strategy
• Further training for the private operators, the munici- population and only 10% have access to wastewater dis-
palities and the regional units of the water ministry posal. Furthermore, leakages add up to some 50% while
Advisory service to the municipalities on: the institution is overstaffed with 15 employees per water
• General operating modalities (private sector participation, connection. Cabinet resolution 237 of November 1997 for
community based approaches, etc.) the reform of the water supply and sanitation sector was
• Investment planning, transaction and operation a key policy decision and a milestone in the reform process.
• Preparation of tendering documents It envisaged a 10-year time frame, throughout which the
• Selection of operators larger NWSA branches should be transformed into local
• Formulation of the contracting modalities corporations under local management and run in accor-
• Monitoring the operation of the drinking water supply dance with commercialized business principles.
systems The SWSLC (Sana’a Water Supply and Sanitation Local
Corporation) was the first autonomous corporation estab-
Programme outcomes, lessons learned lished in 2000. The decree establishing the SWSLC includ-
At the end of 2009, private actors operated 62 supply ed a clause which gave it the legal right to enter into any
system networks for drinking water, another 88 were in form of partnership with the private sector in line with the
the process of being awarded. By commissioning private investment law and privatization law applicable in Yemen.
operators, the drinking water supply systems in semi-urban A PPP option study was requested by the government as
centres are run more transparently and with a higher part of the Sana’a water supply and sanitation project. In
degree of technical and administrative expertise. However, close coordination with the World Bank, the government
the approach requires intensive support (i.a. for the trans- of Yemen opted for a lease contract. Main reasons for this
action advice). The demand for further training and advi- decision were considerable operational advancements in
sory service for the private operators, the supervision of comparison with a management contract. A concession
the municipalities, and the regional water administrations was ruled out, as Yemen, being one of the least developed
is equally high. Lastly, the economic efficiency of smaller countries, receives grants and can borrow more cheaply
systems is difficult to assure. from donors’ concessional funds, whereas a private conces-
sionaire would have to borrow at the conditions of the
Contact person world capital market’s high interest rate, which would tend
Conrad Thombansen (conrad.thombansen@giz.de) to increase tariffs.
Already during the request for pre-qualification, the
private sector showed little interest for the contract. After
a one-month extension of the deadline and another infor-
mation meeting, only five firms handed in their bidding
documents, three of which were eventually pre-qualified.
Yemen: When the request for proposals had ended none of the
Envisaged lease contract ‘Sana’a’ firms had handed in their documentation. Thus, the
Yemenite water supply remains with the public sector but
Sector Water and sanitation the transaction cost and time for this process were high.
Type of PPP contract Lease contract
Project duration 1999 – 2003 GIZ advisory services on PPP components
• Preparation of the terms of reference for the interna-
Description of programme aims and PPP components tional legal consultancy firm
Yemen is one of the world’s most arid countries. The • Assistance to the SWSLC in collecting technical and
government acknowledged the water crisis in the 90ies managerial data
and is working on reforms of the water sector. NWSA, the >
national operator in Sana’a serves only 30 – 40% of the
• Preparation of the criteria of the prequalification

documents and the evaluation process submitted by
the 5 interested private companies
• Preparation of the data room and provision of documen-
tation and studies related to the SWSLC
• Preparatory meeting with companies participating in the
tendering process
• Preparation and revision of the Request for Proposals
Preparation of an organizational structure between the
prospective private operator, Sana’a corporation executive
management and the Board of Directors
Programme outcomes, lessons learned

The PPP option study of 1999 should have shown already
that a lease contract is not a realistic option for Yemen.
With a lease contract, the private operator carries a great
part of the entrepreneurial risk. In the context of great
poverty, dramatic water scarcity and the conflicts and
unrests in Yemen this option is hardly attractive. Premised
soft loans of the world bank were a main incentive to
nevertheless tender the contract, as it was a pre-condition
to obtain another US$ 120 mill. In this respect, the events
in Sana’a may serve as an example of a PPP process of
which those involved were not entirely convinced and
which did not take into account all framework conditions.
Contact person
Anwer Sahooly (anwer.sahooly@giz.de)
Deutsche Gesellschaft für
Internationale Zusammenarbeit (GIZ) GmbH
Dag-Hammarskjöld-Weg 1–5
65760 Eschborn
Germany
T +49 61 96 79-0
F +49 61 96 79-11 15
E info@giz.de
I www.giz.de

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Private Sector Cooperation

PPPs in the context of development

This Manual written by PwC AG WPG provides

CHAPTER A: PPPs — An Overview

CHAPTER B: Practical Guide and Sectoral Analysis

CHAPTER C: Conclusion — The Role of GIZ in PPPs 46

III List of Figures

The brochure Capacity Development for Partnerships

Complementing the above brochure, there are

provide detailed information on CDP advisory

of development partnerships, Steering and

CHAPTER A: PPPs — An Overview

where appropriate, to categorise the role of GIZ in this

This manual is structured in three chapters. The first chap-

CHAPTER B: Practical Guide and Sectoral Analysis

sector efficiency arguments and due to the presence of large 80000

authorities. The likelihood of state bailouts has increased

Life Cycle of Typical PPP Projects

1. In some cases, private partners only get paid by public

Range of PPP Models

Service Contract No PPP

Publicly owned Enterprise

Figure 3, Source: PwC.

Energy Sector: cooperation with the e8 partners to which GIZ contributed

In many cases, a special purpose vehicle (SPV) is set up BOT/BROT/ROT

Box 6, Source: PwC.

PPP Model Level of Ownership Investments Allocation Duration

BOT/BROT/ROT High Public/Private Public/Private Public/Private 15-30

BOO High Private Private Private ∞

Realisation of PPP Contracts in Low- and Middle-Income Countries 1990-2008

Figure 4, Source: World Bank, PPI-Database.

Regional Distribution of Various Contract Types 1990-2008

Figure 5, Source: World Bank, PPI-Database.

private sector involvement as ‘PPPs’, such as those involv-

Box 9: An Example of Project Finance. Source: PwC. (2005)

General Project Finance Structure

Figure 6, Source: PwC.

The most common feature of a project financing ii) Corporate Finance

Corporate Finance Project Finance

• Additional lender due dili-

• Lender reporting and

Supporting Agencies Supporting Financial Instruments

Regional Financial Support 1990-2008 ($US m)

Figure 9, Source: World Bank, PPI-Database.

ii) Output-based Aid

Regional Financial Support provided by different Agencies (1990-2008)

East Asia and the Pacific Europe and Central Asia

Other IFC MIGA Other ADB

IFC EIB EIB

Other BCIE Other AFDB

South Asia Sub-Saharan Africa

MIGA Other ADB

Figure 10, Source: World Bank, PPI-Database.

Box 11: Example of a PPP including Output based Aid.

CHAPTER B: Practical Guide and Sectoral Analysis

4. The Relevant Issues to be considered

Ranking of Investors’ Priorities

Consumer payment discipline and enforcement

Availability of credit enhancement or guarantee from Government

Independence of regulatory institution and processes from arbitrary

Administrative efficiency-lead time to get necessary approvals

Judicial independence-degree of perceived independence from

Tenure and stability of elected officials in political process