Pakistan Public Private Partnership Programme: private participation in providing more and better public services through improved infrastructure

A. Background The government recognises the importance of improving and expanding infrastructure services for sustaining economic and social development in its Medium Term Development Framework (2005-2010) (MTDF).
Improved quality and service coverage in power and water supply, sewerage treatment, transport and logistics are vital for Pakistan's economy and the livelihood of its people. Tight fiscal constraints require innovative approaches - away from the traditional role of the government as the service provider - to ensure that the massive investment needs are financed with the assistance of the private sector.
The government estimates that less than half of the infrastructure investment needs can be covered by public funds under the MTDF. A combination of policy reforms, institutional support, incentives and financing modalities is required to encourage private-sector participation in financing, constructing and managing infrastructure projects.
Since the early 1990s, Pakistan has established a policy and regulatory framework for Public Private Partnership (PPP) in the telecom and energy sectors. Unlike in these regulated sectors, the framework for PPP infrastructure service procurement in transport and logistics, and municipal services in water supply, sanitation, solid waste management, social sector, and real estate does not exist.
Experience in the regulated sectors suggests that a policy, tariff standards, technical design and service standards, and model contracts are useful for accelerating the closure of transactions and instilling confidence of all participants.
The closure of PPP investments, especially at the provincial and municipal levels is a very challenging process and often year long efforts do not result in closure of a transaction. Various levels of government jurisdiction and regulation blur clear assignment of ownership and accountability. The Local Government Ordinance (LGO) (2001) assigns accountability in the unregulated municipal services to local Government.
However, the local governments usually lack the requisite skills and financial resources to fulfil service functions at acceptable scope and service standards.
Many economically and socially worthy projects lack the ability to raise the requisite revenues to ensure adequate returns for the investor risk. Also infrastructure projects require long gestation periods to ensure affordable tariff levels, which expose private investors' investment to undue risk. PPPs with appropriate arrangements in the sharing of risks in financing, operating and maintaining infrastructure services are a solution.
B. INTRODUCTION PPPs have been adopted by various governments around the world as a service delivery tool. Instead of the public sector procuring a capital asset and providing a public service, the private sector creates the asset through a dedicated standalone business (usually designed, financed, built, maintained and operated by the private sector) and then delivers a service to a public sector entity/consumer, in return for payment that is linked to performance.
PPPs permit the public sector to reduce their capital expenditure (and redirect to promote urgent social needs) and convert the infrastructure costs into affordable operating expenditure spread over time. PPPs allow each partner to concentrate on activities that best suit their skills.
For the public sector that would mean focusing on developing policies and identifying service needs, while for the private sector the key is to deliver those needs efficiently and effectively.
PPP agreements are especially useful in unregulated sectors where transactions can be structured in a manner that allows 'regulation by contract' on a project to project basis.
The government has set up an Infrastructure Project Development Facility (IPDF) under the auspices of the Ministry of Finance (MoF), to generate PPP projects with Implementing Agencies (tine ministries, provincial governments, local bodies, state owned enterprises etc).
IPDF will provide direct access to a professional PPP Unit that will help Implementing Agencies to improve proposals and prepare them for tendering, without becoming a contract signatory to those transactions.
Once approved by IPDF's Project Feasibility Committee, the project may be submitted for any necessary complementary financing to a proposed independent financing body - the infrastructure Project Financing Facility (IPFF) for any 'residual' financing needs that are not available in the market.
Both IPDF and IPFF will be tasked to provide easy and timely access for PPP Implementing Agencies, to ensure that viable good quality PPP deals are concluded in a timely manner to meet Pakistan's increasing infrastructure demands. The day to day operations of both institutions will be independent from the government and reporting to the government will be made through their respective boards.
A separate Task Force (TF) of senior officials from ministries and provinces has been established through a Finance Division Circular to advise on overall PPP policy reforms, aided by a Secretariat being established in the IPDF. The Secretariat will be supported by Working Groups tasked to focus on specific topics of that policy.
It is intended that the deliberations and recommendations of the Task Force will shape the PPP enabling environment in Pakistan, in parallel with the operations of the IPDF and IPFF.
PPP PROJECT EVALUATIONS WILL FOCUS ON, BUT WILL NOT BE LIMITED TO, THE FOLLOWING SECTORS:
(i) Transport and logistics including provincial and municipal roads, rail, seaports, airports, fishing harbour, as well as warehousing, wholesale markets, seaports, slaughter houses and cold storage.
(ii) Mass Urban Public Transport including buses, amid intra and inter-city rail.
(iii) Municipal Services Including water supply and sanitation; solid waste management; low cost housing, and health/education facilities.
(iv) Small Scale Energy Projects other than those being facilitated by Private Power Infrastructure Board (PPIB) and the Alternative Energy Development Board (AEDB).
Although, PPPs will become an integral component of the Government's overall strategy for the provision of public services and public infrastructure across all sectors, this does not imply they are the preferred option for improving the efficiency of services delivery but that they enjoy equal status among a range of possible service delivery options available to the Government.
Sector specific policies may be developed as necessary to provide more detailed guidance on the approaches and norms to be adopted in particular sectors when seeking PPPs.
The federal government will co-ordinate with provincial governments on the development of policies concerning services for which provincial and local governments are concerned. Regardless of sector or level of government, PPPs should be pursued where they represent priority projects, are affordable to the government and consumers, and represent value-for-money, ie they better approach than would be delivered through public procurement.
C. OBJECTIVES
THE GOVERNMENT'S OBJECTIVES IN PROMOTING PPPS ARE TO PROVIDE:
-- More services, as there is a huge backlog in basic services such as water and sanitation, solid waste management, transport and rural electricity. Not only do we need to catch up with the backlog, we need to start building infrastructure for future needs as well.
-- Better services, as the quality of existing services is deteriorating due to lack of incentives and funding for infrastructure maintenance and up-gradation. The result is unclean water, unhygienic living conditions and inability to provide proper health care and education.
-- Affordable services, as certain segments of the population cannot pay cost recovery tariffs, whereas the private service provider needs to recover costs in order to sustain operations. In such cases the government will provide targeted (to low income consumers), explicit (not hidden as budget support) and performance based (only provided once the service such as 24 hour clean drinking water to the consumer's dwelling - is actually delivered) subsidies.
-- Timely services, as the government does not have the capacity or the fiscal space to meet the immediate service demands of its citizens.
THESE OBJECTIVES WILL BE ACHIEVED THROUGH:
-- Faster project implementation (as design and construction risks are usually passed on to the private sector in PPPs) and higher quality/lower cost (as in PPPs private sector compensation is linked to its performance and the overall operations/maintenance risk is also be passed on to it). IPDF will play a key role in ensuring that projects are structured in a manner that ensures proper risk allocation.
-- Leveraging public funds with private financing from local and international markets. For every Rupee that the government spends it will strive to leverage the maximum possible from the private sector. The government would like to limit its contributions to providing targeted subsidies to low income consumers, to allow cost recovery by the private service provider. IPFF will provide 'residual' long term financing that may not be available in the market.
-- Enhanced accountability in service delivery - by linking service provision to a firm contractual arrangement. The Implementing Agencies will define the service levels very clearly in the contracts in terms of outputs and outcomes required from the private sector. They will be required to put in place strict monitoring mechanisms. Non performance by the private sector will be penalised and may result in termination.
-- Public sector management shift from budget expenditure to whole life cycle cost management. Most of the services in the public sector are of poor quality because the Implementing Agencies are not efficient in determining whole life costing of assets, with the result that once they are commissioned they are not maintained and refurbished/upgraded in time. Since the focus in engaging with the private sector is on services it provides, the private sector will ensure that the underlying assets are of good quality and maintained adequately.