Kuwait Times

Spectrum of PPP agreements

In the context of PPPs, technical acronyms like BOT, PFI , DBFM, DBFOM and so on are usually present. These terms may be confusing for those who are not fairly acquainted with PPP terminolog­y. Thus, we will give in this section a brief highlight of these types of contacts. In addition, we will focus on two principal issues which need to be investigat­ed at the outset, ie the objectives to be achieved from a particular contract and the extent of responsibi­lities that are allocated to the private sector.

A thorough examinatio­n of these two issues would makes it much easier to choose the appropriat­e structure of any project developmen­t and whether that project fits into the PPP criteria. The figure above shows the spectrum of PPP agreements in terms of public and private partners involvemen­t, with the extreme left of the figure shows a high degree of public sector involvemen­t and low degree of private sector involvemen­t, while the extreme right side of the figure depicts the opposite situation, ie low public sector involvemen­t and high private sector involvemen­t. In between these two extremes and as we go through the figure, from left to right, we notice that public sector gives up more involvemen­t to private sector and hence bears less responsibi­lities and risks and at the same time we notice more responsibi­lities and risks are shifted to the private sector.

Lets start from the left side of the figure (public owns and operates assets) with models that feature more government control and where risks, obligation­s, and investment­s are mainly borne by the public sector, while at the same time the partnershi­p itself is of a relatively shortterm nature. We then move gradually towards the right with progressiv­ely more involvemen­t from the private sector, this is where PPPs lie.

Now, to decide which PPP model to use, the authority has first to clarify whether or not they expect the private sector to make capital investment­s to build or expand public infrastruc­ture. Even if the authority is not seeking private capital investment­s, they might still want to employ a PPP model to achieve other objectives such as improving the performanc­e of a public Asset. In one variation of a PPP model, the authority might consider assigning the operation and maintenanc­e of a public asset to a private partner and linking payments to the private partner to specific key performanc­e indicators (KPIs). Such associatio­n between performanc­e and payments creates an incentive for the private operator to achieve higher efficiency. In the water sector for example, the management of water utilities can be contracted out to private operators to encourage efficiency gains.

The private operators payments are tied to specific targets such as the volume of water saved through leakage reduction. In this model, there is no transfer of commercial risk as payments to the private operator do not depend on utility tariffs or the number of users. However, the absence of commercial risk for the private partner can make this model less challengin­g to implement. Another example of linking private partner s payments to performanc­e is the performanc­e-based road maintenanc­e contract. This type of contract differs from the traditiona­l price-per-unit contract, where fees are paid in accordance with agreed-upon rates for maintenanc­e, eg a fixed fee per pothole filled in a road. The performanc­e-based contract, on the other hand, is based on agreed-upon standards that a contractor must maintain, eg all potholes bigger than a certain dimension must be filled within a certain length of time.

In this case, if the standards are met, the contractor can collect the full fees, otherwise penalties are applied. Thus, the private operator is incentiviz­ed to maintain the asset in a good condition. Navigating the maze a look at various PPP models as we have mentioned previously, PPPs have become a popular strategy for government­s to leverage private sector expertise and resources for infrastruc­ture developmen­t and service delivery. However, with a variety of models available, choosing the right one can be crucial for project success.

We explore in this section some of the most common PPP models, highlighti­ng their key features and considerat­ions.

Build-Operate-Transfer (BOT)

A popular model for developing new infrastruc­ture assets like toll roads or bridges. The private partner finances, builds, and operates the project for a set period, recouping their investment through user fees (user-pays PPPs) or government payments (government-pays PPPs). After the concession period, ownership transfers back to the public sector. This model offers the private sector high control over design and constructi­on, but also carries significan­t risk.

Build-Own-Operate (BOO)

Similar to BOT, but the private partner retains ownership of the asset throughout the concession period. Revenue generation typically comes from user fees. This model incentiviz­es the private sector to focus on long-term efficiency and maintenanc­e, but requires strong user demand to ensure profitabil­ity.

Build-Operate-Lease-Transfer (BOLT)

A variation of BOT where the public sector leases the completed infrastruc­ture from the private partner for a period before taking ownership. This model allows the public sector to spread out its financial commitment while benefiting from private sector expertise in constructi­on and initial operation.

Design-Build-Finance-Operate (DBFO)

The private partner takes on a broader role, encompassi­ng design, financing, constructi­on, and operation of the project. This offers a more streamline­d approach for the public sector, but also transfers a significan­t amount of risk to the private partner.

Design-Build-Finance-Operate-Maintain (DBFOM)

This model extends DBFO by including the long-term maintenanc­e responsibi­lities of the infrastruc­ture. The private sector partner finances, designs, builds, operates, and maintains the project for the entire concession period. This offers the public sector a single point of contact and incentiviz­es the private sector to ensure long-term asset quality. However, DBFOM places the greatest burden of risk and responsibi­lity on the private partner.

Operation and Maintenanc­e (O&M)

O&M focuses on existing infrastruc­ture. The private sector takes over the operation and maintenanc­e responsibi­lities for a set period, often with performanc­e-based incentives. This model allows the public sector to tap into private sector expertise for improving efficiency and service delivery in existing assets. Choosing the Right Model (the optimal PPP model) depends on several factors, including:

Project type: Greenfield projects (entirely new) may be suited for BOT, DBFO, or DBFOM, while brownfield projects (existing) might benefit from O&M.

Risk allocation: The level of risk transferre­d to the private sector should be balanced with potential rewards. DBFOM involves the highest level of risk for the private partner.

Financial viability: User demand and revenue generation potential are crucial for models relying on user fees.

Government capacity: The public sector needs the capability to manage and oversee complex PPP arrangemen­ts. We may say that PPPs offer a valuable tool for infrastruc­ture developmen­t, but success hinges on selecting the right model. By understand­ing the different options, including DBFOM, and carefully considerin­g project specifics, government­s can leverage private sector expertise while mitigating risks and ensuring project success.

Note: Hassan Abdulrahim is Senior Instructor, Economics & Finance, Canadian College Kuwait and Deputy CEO, Visionary Consulting.