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Preconditions for Successful PPP Implementation

4.1 Procurement and the Development of Advanced Tendering Systems

The tendering phase is essential to ensure that the quality of the outputs is the same as that of public provision. PPPs have the potential of blending public interest and private efficiency, but this potential can only be unleashed if the tendering and public procurement process are very well managed. It requires a very high degree of expertise by the public sector.

To find the best contractors, it is necessary to have clear procurement regulators which inform properly the private sector and guarantee a level playing field in the process of awards. The tendering process has to be designed so as to maximize the benefit of a PPP relationship. This may mean that tendering processes may require separate stages and even complex pre-award discussions with companies to verify their capacity to deliver.

For complex developments, the EU has started using negotiated competitive tendering, which includes negotiations on the details of the tender after a pre-selection with two to three frontrunners. This is sometimes necessary when the public sector is not able to specify in detail each aspect of the wished asset or service and the private sector is requested to propose alternatives. The negotiated procedure has been used internationally to seek the best value for money, allocate risk better, and encourage innovative solutions.

Tender procedures are complex and may be difficult to sustain for some companies. Depending on the project and complexity, the public sector may cover costs associated with the tender procedure, especially after pre-selection. A guarantee of intellectual property protection should be guaranteed for the innovations which the tendering party is offering.

The allocation of risk is a cornerstone for efficient PPPs. Excessive risk for the private sector will damage the tendering procedure, and too little risk to the private sector may affect efficiency negatively.

4.2 Legal and institutional requirements

The development of successful PPP investments is influenced by a number of issues, in particular the legal framework and the availability of sufficient private enterprises with the know-how to perform the required works. Also, it is necessary that an "open economy" approach with national treatment is guaranteed in order to attract foreign companies. The lack of sufficient competition in tendering will result in a narrower choice of contractors, higher prices and the risk of not finding a sufficiently suitable private company, increasing the risk that the project objectives are not realized.

The legal framework has to be conducive to private involvement, in particular if private funding is sought from international commercial lenders. The legal environment is of paramount importance. Even in the EU, some member states, especially the newest, have encountered problems in the regulatory sphere. Regulatory uncertainty and unpredictability will keep financial institutions at bay. The legislative and regulatory provisions need to be well developed and articulated before attempting to implement PPPs.

There is a need to identify elements which would affect private sector participation, such as the viability of the project or market distortions. Public procurement regulations regulating relationships between the public sector and the private sector need to be clarified especially those concerning the benefits and obligations for each party and the distribution of risks over the life cycle of the project. The public sector needs to have specific teams specialized in setting up PPPs, able to respond to the needs of specific projects.

Some of the issues that need to be taken into account are the following:

  • Legal capacity of the parties and the legal requirements of the state to provide services
  • General legislation determining the role of the private sector in providing public services
  • Legislation clearly setting the conditions for participation of foreign companies or financial institutions
  • The existence of a legal basis for cost recovery mechanisms
  • The ability to provide guarantees to the private contracting parties over the period of their involvement
  • Clear land and property rights including intellectual property laws
  • Clear land acquisition rules
  • Planning permission requirements
  • Licenses
  • Transparency of national laws
  • Administrative capacity to negotiate and follow the contracts
  • Provisions for dispute settlement
  • The role and requirements for any state finance participation
  • Clear competition and antitrust legislation
  • Clear labor and social security laws
  • Clear tax and accounting liabilities
  • Open and clear procurement procedures with very clear project specification requirements
  • Rights to step in in the event of project failure and availability of alternative contractors
  • Reputation (environmental, social) of the projects
  • Credit standing of the public sector counterparty
  • Certainty of the project cash flows to meet debt service requirements

The above list of desirable preconditions has been adapted from OECD and European Commission guideline documents with some additions from interviews with specialists.

In addition it is important to clarify requirements on environmental or social impact assessment, and in particular which requirements international lenders, especially institutional lenders such as the ADB, the World Bank and other publicly financed development banks would require if their funds are to be involved.

Depending on the kind of uncertainties and foreseeable problems with some projects, specific provisions can be used to eliminate some of the risks for private contractors, maintaining however the incentives to provide the goods on time and at specified cost using BOT PPPs or mixtures between BOT and DBFO. The European Commission (2003) has compiled a table of advantages and disadvantages (Table 3 [ PDF 20.2KB | 1 page ]).

Download this Paper [ PDF 520KB| 48 pages ].

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