Contracts And Procurement

Introduction

Public-Private-Partnerships (PPP) could be implemented in a variety of different ways; it is the term used for collaborations between the public and private sector. The role of private sector in PPP could be but is not limited to:

To provide capital

To provide management of the overall project and their often international expertise.

The Organisation for Economic Cooperation and Development(OECD) defines a PPP as an agreement between government and one or more private sector partners (which may include the operators and the financiers) according to which the private partners deliver the service in such a manner that the service delivery objectives of the government are aligned with the profit objectives of the private partners and where the effectiveness of the alignment depends on a sufficient transfer of risk to the private partners (OECD, 2008).

In most cases, what the public sector desires is to get value for their money. Therefore, it is no surprise that the public sector will engage only in those projects where it stands to gain significantly. Therefore, both parties have to walk into the contract knowing what they are ideally getting into. For instance, they should understand the benefits accruing to each, risks, and what the entire public stands to gain.

Principles of PPP

Due to financial shortages in the public sector, the private sector takes the load of financing the project with repayments being made in a number of ways. The benefit of this is that the public sector could focus their spending on other matters, allocating public funds available for investment in other core areas such as healthcare and education. A dual 3-lane motorway costs up to £25 million per mile(Transport Watch) they are expensive in construction with risks to be mitigated. Risk is allocated to the party best suited to deal with it; risk allocated to the private sector ensures genuine care for the quality of project rather than profits. They are normally long partnerships with concession periods of 20-40 years.

Dealing with international companies, the country could also utilise an offset agreement in addition to the original PPP contract, where in exchange for the original contract, the private sector entity could be asked to provide training of staff in the public sector or technology share. Traditional procurement routes are input based systems whereas PPP is an output based, this is to say therefore, to ensure a successful project, the contract must focus on performance rather than design. Rather than laying costly motorways, in a sense the public sector can buy maintained roads. The Logistics Performance Index includes quality of trade and transport related infrastructure (e.g. ports, railroads, roads) on a rating ranging from 1 (very low) to 5 (very high); Nigeria is rated 2.4 (Logistics Performance Index, 2016)

Despite this, the reality remains that PPP is complex to design and implement. They should be considered when there is a clear demonstration that this will add extra value to the overall project when compared to traditional routes. Under a public–private partnership in infrastructure projects, the private partner may participate in some combination of design, construction, financing, operations, and maintenance depending on the format. The government must asses what type of procurement is best suited, then if PPP is possible before discussing the best suited format. If the public sector has no experience in a certain field then they could be prone to exploitation.

Nigeria was given a score 28/100 (Transparency International, 2016) in the latest transparency indicators with 0 being the lowest score. This raises red flags as PPP could be exploited for personal gain, where contracts could be awarded based on personal favours or bribes rather than the companies’ actual merit. According to Transparency International’s Bribe Payers Survey of over 3,000 business executives worldwide, public works contracts and construction is the sector with the highest propensity of paying bribes to officials and other firms (Transparency International 2011) Allegations of fraud, corruption or collusion were made in about one fourth of the 500 approved World Bank financed projects with a road component between 2000-2010 (World Bank 2011a).

Formats of PPP

Another key to the success of the project is the format of the partnership. PPP could be applied in multiple formats, from a moderate public sector orientated Civil Works and Service Contracts format to a Build-Own-Operate format which is a more private sector orientated format. The PPP formats scales down to the different arrangements on the basis of the extent to which the private party risks present themselves (World Bank Group a). The terms and conditions of the PPP are set in an agreement that potentially lists the responsibilities of each part involved purposely to allocate the risks involved accurately.

The following are some the existing PPP formats:

Build-Operate-Transfer(BOT):

In a BOT model, the private sector has the role of designing and building the project. The construction of project is funded by the public sector. Upon completion of construction, the private sector operates and maintains the facility for a period of time. When the concession agreement comes to an end, the ownership of the facility passes back to the public sector.

One main advantage to this scheme as to most schemes is utilising funds made available by the private sector. Major risks such as design, construction and financing risks are generally allocated to the private sector (world bank 2010) with the only risk facing the public sector is payment risk along with force majuere which is a common clause in contracts that essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties (Schaffer et al 2011)

The service provider (Private sector) does not own the infrastructure but is a concessionaire. In return for access to the provided service, the provider is entitled to payments known as unitary charge. Unitary charges would be used to finance the construction and operation of the road to a certain standard.

Build-Own-Operate-Transfer (BOOT):

The types of PPP are those that have their focus on the output rather than the input. Essentially, the BOT and the BOOT entail designing and constructing together with long-term operations. The private entity owns the project. Throughout the concession period, the private company owns and operates the facility aiming to recover the initial costs of the project. The concessions are also used to maintain the quality of the highway. Both BOOT and BOT are used extensively in countries around the world for infrastructure projects. Like BOT, BOOT have recourse to substantial private sector funds and risk shared is similar. In conclusion, it is similar to BOT except rather than receive a fee for operation, it receives the payments from the asset as if it owned it in the from of tolls.

Build-Own-Operate(BOO):

There are many similarities between BOOT and BOO with the main difference being that the ownership stays with the private sector entity rather than transferring back to the public sector. Under a BOO the private sector designs and builds the infrastructure, finances the construction and owns, operates and maintains it. According to the ICRC, non of the projects follow a BOO format or similar in Nigeria, excluding maritime projects (Infrastructure Concession Regulatory Commission 2016). Risk associated with BOO is higher than previous formats, while risk associated with public sector is minimal. Power plants often adopt a BOO format.

Leases / Affermage:

The lease and affermage contracts are those where the private operator controls and operates the utility without the option of financing its establishment. Some conditions that necessitate the embracing of the contract include when there is no commercial debt or even private equity especially for water supply and sanitation services. In addition, it is viable whenever the awarding authority desires to integrate public financing with private sector efficiency. Equally, it is ideal when there is need to pass greater commercial risk to the private operator.

Civil Works and Service Contracts:

The civil works and service contracts in a PPP are important in spearheading the utility project towards its successful completion. The two concepts are managed through reforms that are critical in ensuring that their management is successful. They have terms that govern their working. For instance, in the purchase of goods and services, there are standard bidding documents that are important in procurement processes. Equally, in civil works contracts, the construction industry has already well prepared and established guidelines to govern the standard procedures.

Viability

The private finance initiative is a methodology that the private sector uses in the move to provide funds for facilitating some of the major capital investments in which the independent firms are contracted to enhance the completion and management of the public projects. This means that the private companies other than the government meets the upfront costs of the projects. As such, looking at what the country will accrue from the venture while gauging it against the investments, then the initiative is viable

The practicality of the PPP as a procurement route for the new project of building a road between two cities is unquestionable. There are a number of successful toll based road projects in developing countries such as the Philippines and Mozambique (develop (ref)

The understanding of PPP is critical in achieving immense developmental milestones in any sector (Morledge, 2006). The government is a critical play in PPP, it is the regulatory body that invites the private sector into participating or investing in its projects. Therefore, as the leading negotiator, it sets the pace besides providing an encouraging environment for the achievement of the project goals. Despite the private sector playing a key role, it is important that the government comes up with the rules of engagement that the private sector will use to gauge their potential or their interest towards participating in the project.

The private sector is always a for profit entity. This means that before anything else, it must have a gain factor in any deal that it enters into with the government. Essentially, this means that it will assess all the possible negative and positive effects of the project before making a potential move. Overall, it has a significant role in enhancing the achievement of success for the project at any given time.

The number of underlying factors to consider before entering into a binding PPP agreement are many. The establishment of this understanding then reveals that in the achievement of the project goals through the PPP is something achievable (Rosenau 2000). The new project will achieve the realisation of fast and convenient travelling in addition to increasing security and comfort. This means that within a short time after the completion of the project, it should be in a position to record a reduction in the number of accidents together with injuries recorded by users on the road. Equally, the road is destined make travelling much quicker than it is presently. The public sector will reap great benefits in reduced air pollution as traffic would be greatly reduced.

The partnership will be important because of the advantages that it will present. For instance, it will enhance public perception and the fact that the public has the possibility of exercising a high level of control over the operations of the utility. Equally, transparency and accountability becomes easy to control. Due to the fact that 30% of the users are heavy load vehicles, the roads will deteriorate at a faster rate. Having the private sector deal with maintenance of the road and linking repayments to quality ensures good quality in construction materials and management of the project. The public sector would save huge amounts in what would be their responsibility in alternative routes of procurement.

The private sector that will enjoy those benefits because it is the active user of the road. This means that if the private sector it considers the benefits integral to it its growth, then it will consider the PPP an important undertaking. Equally, the government will benefit from the project because through the private sector, it is likely to experience a better economy on completion besides rating high on infrastructure development; smooth running of PPP projects encourage and attract more investment from the private sector.

The environmental issues are indeed something to reckon with desperately. If the road is constructed, the noise pollution and safety issues that have been burdening people living along the road are will disappear. Excellent noise barriers will significantly reduce noise pollution. Groundwater in the area will be protected. Careful study of important environmental and cultural attractions has been made and will be taken into consideration during construction. This means that the achievement of these environmental goals cautery of the PPP agreement will make it viable. They will benefit both the government and private sector in many ways.

Finally, the new road will create a great opportunity for development in the region, trade, tourism and commercial life will become busier due to significantly improved transport connections. The road will attract investment and increase passenger numbers. The government’s aim is to increase opportunities for its people. On the other hand, the private sector creates many opportunities. This means that the opening up of the road will have mutual benefits. As such, the PPP will be a viable venture given the fact that it contributes actively towards the achievement of both party’s desires.

Repayments could follow a PFI model where they are paid for availability or a concession model where tolls collected. One major thing to consider is the pricing if a toll based model is opted for. The N4 Toll Road project in Mozambique was strongly opposed by the locals as they could not afford to pay tolls; On the other side of the road in South Africa, road users were unhappy having to pay for a road that used to be free (United Nations Development Programme 2010) The concessionaire is usually faced with demand risk, for example, would people pay to use this when other longer routes exist. Political risk is an issue especially in the developing countries because of the possibility of dramatic overnight political change

Although, it still has a great deal of disadvantages such as conflicting interests or tax issues; Birgonul and Ozdogan conducted researched on Turkish BOT (PPP) projects. They mention the following as reasons of low rate of realisation of BOT projects in Turkey: Unwillingness of government to provide guarantees against country risks, lack of adequate legislation and inexperience of government in packaging BOT projects. The ICRC was established in 2008 to regulate partnerships it still appears as the most ideal in working towards the provision of essential services in a country. Nigeria encourages PPP and has experience in such ventures, this will avoid transparency issues that may arise. “Government is committed to PPP definitely. As a matter of fact, we have no choice. Even in our budget projection, we expect that PPP will contribute substantially to the development of our infrastructure.” (Prof. Yemi Osinbajo 2015)

Many countries have taken steps to ensure that PPP runs smoothly. Kuwait recently introduced Kuwait’s Law No 116/2014 regarding BOT partnerships which sets out rigorous guidelines for partnerships to tackle issues of incompetence in the public sector and transparency (Kuwait News Agency 2014) . Kuwait also set up the KAPP which has a similar role to the ICRC in Nigeria. According to PPP India, of the 700+ PPP projects in India, 54.3% of these projects were roads/highways (PPP India 2011). This emphasises how critical the role of PPP is in developing countries’ transportation systems and infrastructure.

Alternative Routes

Traditional/Design-Bid-Build:

The alternative basic procurement routes for the proposed project is the traditional contract that is simply referred to as design, bid, build (Sturmfels, 2008). The method is significantly important because of the fact that has simple systems in place. In the traditional system, competitive tendering is used to come up with the contractor for the construction project. In this face, the new project will require many contractors to issue proposals for constructing the intended projects. They should come up with full designs that they will present to the tendering committee prior to the award of the project. The client has a considerable level of control over the design. When it comes to the part of the contractor, there is no design responsibility whatsoever. The project at times tends to take a little bit longer . Equally, the project costs is known in advance, making it easy for the parties involved to make adjustments whenever required

In dealing with the traditional method, it is mandatory to appoint a professional consultant who will foresee the contract on behalf of the client (Savas and Savas, 2000). This means, in the case of the new road, the client, who will be the government, will have to appoint such a consultant in advance. The consultant would provide the design, progress of the new road, and stages of procurement. The structure of the traditional system is simple enough, although it takes long to actualise because of the need to put some things into perspective, and also enhance the realisation of proper verification procedures.

In summary, a traditional Design-Bid-Build route would not be viable as it requires substantial funding from the public sector. In addition, the public sector deals with design risks as it specifies the design as well as cost overrun risks. The process is lengthly and construction cannot start until the full design is completed making it a time-consuming process.

Design and build:

No one project delivery method is best for all projects. Both of the delivery methods examined may have merit for certain types of projects. the main contractor is appointed to design and construct the works, as opposed to a traditional contract, where the client appoints consultants to design the development and then a contractor is appointed to construct the works. Design and build is an efficient route of procurement if time and cost are an issue. Guaranteed maximum price sets out boundaries for cost overruns. Incorporating changes to the designs is easy to arrange. Design and build is one of the three procurement routes favoured by the government for publicly-funded projects, as it allows a fully integrated team to work together on the project from the beginning. Communication is also efficient as one organisation is responsible for designing and constructing. the risk of design and construction transfers to the contractor.

Conclusion

Overall, when comparing the alternative systems and PPP, the latter appears much superior because of the integral elements that it puts in place to enhance the achievement of the desirable developmental milestones. The understanding of how the PPP works is important in working towards eliminating possible barriers that might make it difficult to achieve the intended objectives. When dealing with issues to do with public projects, it is important to involve the private sector to emphasise on the importance of their role since they actively contribute to the economic growth of a country. Private sector provides funds for costly infrastructure projects; repayment methods incentivise private sector partner to deliver the project in the highest of quality and on time as repayment is often based on availability and performance basis.