How to ensure successful PPPs in the port sector

Public-private partnerships (PPP) are long-term contracts between a private parties and government entities for providing a public asset or service in which the private party bears significant risk and management responsibility. They represent an alternative method for financing the development or upgrading of infrastructure.

PPP schemes

Based on the degree of participation of the private sector as well as the level of risks assumed, we can differentiate several types of PPPs ranging go from the Operation and Maintenance (O&M) with limited risk and involvement, to the Build Own Operate Transfer (BOOT) with higher involvement and risk.

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Commonly the scheme to be implemented will depend on how much the grantor is going to invest, the “quality” of the business the private sector is going to have access to, and how the grantor intends to allocate the different risks associated to the project.

In any case, in the port sector, the Build-Own-Operate-Transfer (BOOT) scheme is the most commonly used, allowing the private entity to finance, design, build and operate a facility for a specified period, after which ownership is transferred back to the public sector.

Some of the reason for using PPPs in the ports sector to fund, procure and/or operate infrastructure are driven by the advantages it brings to all parties including:

  • Financial benefits: Under a PPP scheme, financing funds come from the private partner, instead of coming from the government budget. Therefore, in circumstances of limited public borrowing by fiscal regulations, PPP can represent a key driver to initiate the development of infrastructure that otherwise could not be implemented. Nevertheless, it cannot be forgotten the fact that significant public resources may be required.
  • Efficiency and effectiveness: The private sector expertise and experience are utilized in the PPPs including specialized and high-skilled professionals and, higher resources capacity, life cycle management, innovation or risk management attributable to private sector can provide efficiency to both the construction and the management of the infrastructure. However, the public sector is able to define the main boundaries of the services controlling some of the key elements such as the tariffs or the quality levels
  • Risks allocation: An appropriate allocation of the risks of the project between the private and public sector enables to reduce the risk management expenditures

Nevertheless, an appropriate assessment of each project is required to assess if the PPP is the way forward as well as to define the most suitable structuring of the deal.

Development and implementation stages

Once the scheme of the PPP is selected, there are five main stages that need to be followed for its successful implementation:

1. Project identification and preparatory activities: In this first step, a preliminary internal stakeholder consultation is carried to properly define the scope of work of the project. In addition, the identification of the major planning and implementation issues, an institutional due diligence and the establishment of the project management structure need to be carried out.

2. Project development and due diligence: The second phase is one of the most critical stages as it consists on the structuring of the deal itself. This includes the definition of the infrastructure and equipment investment requirements, the assessment of the project feasibility defining the conditions for each party, the assessment of the financing options, the definition of the legal framework as well as the assessment of the potential risks, its allocation and the definition of the required mitigation measures. Commonly, this stage is developed following an iterative process that ends once a proper result for all the parties is achieved.

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3. Implementation arrangement and pre-procurement: Based on the results of the previous phase, the bidding documents and the contact drafted. After this, in most of the cases, the bidders have the option to provided their comments, so that we ensure the contract is aligned with the reality of the market. This can be done during the tender itself or in advance.

4. Procurement and project construction: Once everything is ready is the time to launch the procurement process itself. One of the starting points is commonly the generation of interest in the private sector just before the pre-qualification of the bidders. The prequalification stage itself (if it applies) is a quite relevant activity to reduce some of the risks of the project. After this, the tender itself is triggered and it may last for several months. During this period the original conditions (contract and RFP) may change.

5. Contract management: In order to guarantee the correct development of the project, the establishment of a monitoring structure to manage all the technical, financial and legal elements of the contract is required. Generally, this implies building up the required capabilities in the public sector including the establishment of specific departments able to cope with potential disputes.

Contract structure

One of the most critical elements in the PPPs is the contract, that defines the main elements of the deal including the roles and responsibilities, the investment responsibilities or the economic terms. Therefore, it has to be drawn up carefully following a clear and concise structure.

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The contracts generally are structured in a main body as well as annexes that generally detail some of the most critical elements of the PPPs such as the infrastructure and equipment development plans or the key performance indicators (KPI). The contract itself needs to allow flexibility to the operator to allow him to adapt to the new market conditions. Some of this changes include tariffs, infrastructure development, KPIs and any other commitments.

Key drivers of a success implementation

Implementing a PPP with success is generally challenging due to the overall complexity of the deal and the number of elements to be considered. In order to ensure the proper establishment of a PPP, there are several elements such as the fairness of the deal for all parties, the clearness of the contract terms, the transparency between parties, the proper timings of the process, the adequate communication tools or the adequate monitoring schemes during the contract management are some of the elements that need to be considered.

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About the authors
Pablo Ruiz del Real holds a MSc in Civil Engineering and is a Partner at ALG and Head of Middle East operations.
Rubén Naveiro holds a MSc. in Industrial Engineering and is a Director at ALG.
For more insights, please check www.alg-global.com or contact:
pruiz@alg-global.com
rnaveiro@alg-global.com