TYPES OF PUBLIC-PRIVATE PARTNERSHIPS
Various types of PPPs are in use around the world. In general, in PPPs the constructor is not paid by the government agency to construct the project but instead obtains its own financing for construction. In some countries, Build-Operate-Transfer (BOT) projects are often used. Under these agreements, a concession is granted to a contractor to design, finance, operate, and maintain a facility for a period, usually between 10 and 30 years. This is usually applied to large infrastructure projects such as highways. The contractor recoups the cost of the project by collecting tolls during the life of the concession period. Typically, at the end of the operating period, all operating rights and maintenance responsibilities revert to the government.
There are several contractual methods related to BOT. These include Build-Transfer-Operate (BTO), Build-Own-Operate-Transfer (BOOT), and Build- Own-Operate (BOO). With a BTO contract, a private developer finances and builds a facility and, upon completion, transfers legal ownership to the sponsoring government agency. The agency then leases the facility back to the developer under a long-term lease. During the lease, the developer operates the facility and has the opportunity to earn a reasonable return from user charges.
With BOOT, ownership of the facility rests with the constructor until the end of the concession period, at which point ownership and operating rights are transferred free of charge to the host government. BOO projects resemble outright privatization of a facility. BOO projects are sometimes let with no provision of transfer of ownership to the host government. At the end of a BOO concession agreement, the original agreement can be renegotiated for a further concession period.
There are a myriad of possible contractual relationships that can be employed using PPPs. Design-Build-Finance-Operate (DBFO) contracts are frequently used in Great Britain for highway projects. The DBFO partner finances the project and is granted a long-term right of access, usually 30 years. The DBFO partner is compensated through specified service payments during the life of the project. For highways, this is expected to include traffic-related payments based on “shadow tolls.” “Shadow tolls” are payments made by the host government to the contractor on the basis of traffic flows at predetermined points along the roadway.
A main difference between DBFO and a BOT arrangement is that no actual tolls are collected from road users. In a BOT arrangement, the private sector recovers its costs through toll or fee collection, and there is no cost to the government for the construction of the project. With DBFO, the cost of the project, in the form of annual payments, is still ultimately paid by the host government. This means that there is still a cost to the taxpayer with a DBFO arrangement. However, the cost of a DBFO project is less than the traditional method because efficiencies from private operation and construction reduce the overall cost of the project. A DBFO contract typically offers some protection to the private sector operator in the event that the public sector partner changes the conditions under which the road operates. This provides protection if other competing roads are upgraded during the contract period, thus reducing traffic flows.
The figure below shows the spectrum of privatization that is possible using PPPs.
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