PRIVATIZATION VS PUBLIC PRIVATE PARTNERSHIP
PRIVATIZATION VS PUBLIC PRIVATE PARTNERSHIP
People tends to see other forms of private participation as Public Private Partnership (PPP). Please note that not all forms of private participation in a project could be term as PPPs. One major indicator in PPPs is significant risk transferred from the Public to the Private Party i.e the Private Party bears significant risk throughout the project lifecycle while the risk retained by the Public Party is transferred because the risk is most suitable for the Public Party to bear.
Also Read: UNDERSTANDING PUBLIC PRIVATE PARTNERSHIP (PPP)
PPPs are one way to procure an asset amongst other procurement methods. The Public Party (governments) may choose to procure projects using conventional methods such as Engineering Procurement Construction (EPC) or EPC + Finance (EPC+F) contracts. EPC contracts could be seen as one which government gets a contractor to carryout a project and pays the contractor base on milestones. In this case, government must have budgeted for such projects within the fiscal year while EPC+F could be seen as a contract whereby the contractor has the obligation to sources for the finance for the project. In this case, the contractor will go through various avenues to source for the financing of the project. Such avenues include using the Government to Government (G to G), Multilateral Banks, Export Credit Agencies (ECAs) as well as commercial banks both local and international. Note that the financial arrangement (Terms & Condition) for the Financing is still subject to acceptance of the government.
What is Privatization
There is this confusion always arising between Privatization and PPPs. There is a clear difference between these two forms of private sector engagement. Privatization is the permanent transfer of an asset that was previously owned by the government to the private party. In this case, government sales the entire asset to the private party and what the private party does to the infrastructure is none of governments business. The private party may choose to operate the infrastructure or dismantle such infrastructure to another location for profitability. It is better for government to always conduct need assessment before choosing any method to deal or procure its infrastructure. Although there maybe significant upgrade of infrastructure during privatization, government does not have direct control on what happens to the infrastructure after privatization. Also note that privatization cannot be used to procure new infrastructure (Greenfield Project), therefore, government can only use it to sale off existing non-performing infrastructure. In order for government at various level across the world to derive best value for money when planning to do business with private sector, PPP as procurement option is carefully designed to cater for the lapses encountered during privatization.
What is PPP
In our previous publication, we actually defined what is PPP. PPP is an acronym of Public Private Partnership, it is a long-term contract between the Public Party (government) and the Private Party (private sector) for the development or management of a public asset or services, in which the private sector bears significant risk and management responsibilities throughout the lifecycle of the project, and remuneration is significantly linked to performance and the demand or use of the asset.
There are key terms that must be noted in the definition of PPPs. One of which is long-term contract between the Public Party and Private Party. In this case, significant risk and responsibilities are transferred to Private Party throughout the contract lifecycle. The contract is usually long term due to the size of investment shown in the financial structure linked to the financial model.
Contracts: During the process of creating the relationship, the delegation of management by the public sector to the private sector usually demands the use of a contract, that is, a written document comprising the rights and obligations enforceable by either party. Normally the contract is a single document, with attachments, identified as binding. Sometimes the contractual relationship may be more complex, including different contract documents linking the private party with different public institutions (for example, a PPP for a new Integrated power high-speed railway project being governed by a license or authorization by the respective Ministry for the plant, together with a Power Purchase Agreement with the state-owned transmission company). In Nigeria, the Regulators of PPP which is the Infrastructure Concession Regulatory Commission (ICRC), recently provide a model for PPP agreements.
Public Party: This is the government which is the party granting the contract. In practice it is usually referred to as the Procuring Authority. Note governments at all levels (Federal, States and Local Governments) can enter into PPPs.
Private Party: This usually refers to key company or companies that would be involved in the delivery of the project and it is usually referred to the contractual party of the Public Party. Sometime times it maybe group of consortium parties which would form a Special Purpose Vehicle (SPV) to sign the contract.
Unlike Privatization, PPP provides a step-by-step approach on how the contract will be managed throughout the project lifecycle. The Private Sector carry’s out its obligation while the Public Party ensures that the contract is well managed after award. In PPPs they are penalties for parties that are unable to carry out its responsibilities, although they are guidelines to how this penalties will be administered.
