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1: Rationale, Objectives & Forms of Public-Private Partnerships (PPPs) in ICT

1: Rationale, Objectives & Forms of Public-Private Partnerships (PPPs) in ICT. Ned White Institute for Public-Private Partnerships (IP3) February 17 – 19, 2008. The Sequence of the Project Life Cycle for PPPs in ICT & e-Government. Module 3: Identifying, Analyzing & Structuring ICT

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1: Rationale, Objectives & Forms of Public-Private Partnerships (PPPs) in ICT

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  1. 1: Rationale, Objectives & Forms of Public-Private Partnerships (PPPs) in ICT Ned White Institute for Public-Private Partnerships (IP3) February 17 – 19, 2008

  2. The Sequence of the Project Life Cycle for PPPs in ICT & e-Government Module 3: Identifying, Analyzing & Structuring ICT Projects to be Viable PPPs Module 4: Tendering & Procuring PPP Projects in ICT Module 5: Negotiating Contracts & Financing PPP Projects in ICT Module 6: Managing PPP ICT Contracts & Monitoring Contractor Performance Module 2: Establishing Effective Policy, Legal, Institutional, & Regulatory Frameworks for PPPs in ICT/e-Govt. 1. Rationale & Objectives for PPPs in ICT

  3. 1: Understanding the Rationale & Objective for PPPs in ICT & e-Government 1.1 The Definition of “Public-Private Partnerships” 1.2 The Goals of PPPs in ICT 1.3 The Benefits of PPPs in ICT 1.4 Forms of PPPs Applicable for Use in ICT & e-Government 1.5 PPP ICT Case Example: Bangalore City Corp., India 1. Rationale & Objectives for PPPs in ICT

  4. 1.1 What ARE PPPs? • Definition: A Public-Private Partnership (PPP) is a form of legally enforceable contract between the public sector and private sector, which requires new investments by the private contractor (money, technology, expertise/time, reputation, etc.), in which payments are made only in exchange for performance, for the purpose of delivering a service traditionally provided by the public sector. 1. Rationale & Objectives for PPPs in ICT

  5. “Hard” vs. “Soft” forms of “Public-Private Partnerships” Policy “Partnerships” & Dialogs (“Soft”) Public - Private • Ensures joint support for the PPP policy • Common agreement on the overall framework • Implements the policy • Demonstrates results Pub.- Priv. Pub.- Priv. Pub.- Priv. Pub.- Priv. • PPP Transactions & Contracts (“Hard”) 1. Rationale & Objectives for PPPs in ICT

  6. PPPs have been called different things.. • “Re-Privatization” – Peter Drucker (1970’s) • “Privatisation” - UK and Malaysia (1980’s) • “Private Sector Participation” PSP - Indonesia & Egypt • “Peoplisation” - Sri Lanka • “Indigenisation” – Zimbabwe • “Equitization” – Vietnam • “Ownership Reform“ – China • “Disincorporation” - Mexico • “Marketization” & “Managed Competition” – U.S. Cities • “Partnerships” - South Africa • “Capitalization” - Bolivia • “Private Finance Initiative” (PFI) – United Kingdom • “Commercially Viable Municipal Utilities” - India 1. Rationale & Objectives for PPPs in ICT

  7. 1.2 – The Goals of PPPs in ICT & e-Government • Mobilize new private sector investment to leverage limited public sector funds for the development of ICT and e-Government networks • Attract more innovation in ICT & e-Government network designs and in more effective & efficient operation & management by the private sector • Utilize private sector customer service & delivery expertise in ICT & e-Government sectors 1. Rationale & Objectives for PPPs in ICT

  8. 1.3 – The Benefits of PPPs in ICT & e-Government: • Increased expansion of ICT & e-Govt. networks due to new, additional private sector financing & investments • The use of more advanced & innovative technology in the design of ICT networks e-Government services • Increased quantity and quality of public services delivery through ICT application & e-Government techniques and increased consumer satisfaction 1. Rationale & Objectives for PPPs in ICT

  9. Additional Reasons for PPPs in ICT & e-Govt: “Avoided Costs”: By contracting with the private sector to undertake a cost-recovering e-Government project, scarce Government capital budgets can be directed to other priority social services (education, health care, environment, etc.) With a PPP: Without a PPP: Private ICT Developer Govt. Capital Budget PPP Govt. Capital Budget AND OR Project A: ICT Network Construction Project A: ICT Network Construction Project B: Health Clinics Construction Project B: Health Clinics Construction 1. Rationale & Objectives for PPPs in ICT

  10. Additionality: • The increased economic benefits to consumer welfare of having needed ICT services accessible NOW because of the PPP, rather than having to wait until Govt. could provide the services much later 1. Rationale & Objectives for PPPs in ICT

  11. Reasons for PPPs in ICT & e-Government • Improved Efficiency & Service: • Higher quality of services & lower per unit costs. Better “Value for the Public’s Money” (This is a combination of both lower prices and/or lower risk to the Government over the entire life of the ICT project) • Increased public control over the delivery of public services: Management decisions are guided by legally enforceable contracts & clear, technical performance indicators – rather than by politics… • Technology Transfer: • Access to new, innovative technologies and experienced management not currently available through the public monopoly providing services in the sector • NOT Policy Change per se… • Increasing the size of the private sector (and the taxes they pay) is a welcomed side-effect of PPPs, but NOT a sufficient reason to undertake a transaction. PPPs can easily be more expensive and offer less quality than traditional public sector provision. • Careful feasibility analysis & risk-structuring for all PPPs is a MUST! 1. Rationale & Objectives for PPPs in ICT

  12. “Privatization” vs. “Competition”? Government Ownership 3? Monopoly Competition 2? 1? Private Ownership NOTE: The participation of the private sector in ICT is the MEANS of achieving the GOAL of more competitive delivery of public services. PPPs are NOT the GOAL itself. 1. Rationale & Objectives for PPPs in ICT

  13. “Value for the Public’s Money” is a combination of PRICE and RISK ? PPP Option #3 The Private Sector’s Price-Risk Offer Curve Average Tariff PPP Option #2 PPP Option #1 ? P’ P’’ Public “Utility” Curves P’’’ High Low Level of Sector RISK Bourne by Government Thus, “The Lowest-priced bid is often NOT the best bid”… Especially over a long (5-10 yr.) Contract Term. 1. Rationale & Objectives for PPPs in ICT

  14. Each Govt. Agency and each sector will have its own unique ability to share risks & afford tariffs The Private Sector’s Price-Risk Offer Curve Concession BOT Average Tariff Lease/ Affermage Management Contract Govt. C Govt. B Govt. A Level of Sector RISK Bourne by Government 1. Rationale & Objectives for PPPs in ICT

  15. 1.4 – Forms of PPP Applicable for Use in ICT e-Government Public Sector • Corporatization • Service Contracting • Management Contracting • Lease/Affermage • Concession/BOT • Divestiture/Asset Sales Private Incentives 1. Rationale & Objectives for PPPs in ICT

  16. Menu of PPP Structuring Techniques Divestiture (Investor-Owned Utility) High Concession Lease “REWARDS” (Returns to The Private Sector) Management Contract Service Contract Low High Low “RISK” (Private Sector Investment Required) 1. Rationale & Objectives for PPPs in ICT

  17. Service Contracting Service Public Services Corp. Pub. Services Corp. Private Service Contractor Fees Service 1 Service 2 Service 3 Service 1 Service 2 • A specific area of ICT/electronic service is “unbundled” from a Public Corporation, Govt. Dept. or Ministry (i.e. billing & collections, licensing, records management, customer service, etc.) • A prior full cost analysis of the service must be performed to compare current public performance levels (cost per unit) and with competitive bids to determine if a PPP offers better value for the public’s money, or not • An affordability analysis must identify the limit the public budget can afford to pay for this project; unaffordable projects should be rejected. • Private firms competitively bid on providing the ICT/e-Govt. service • Private investment requirements are relatively low, asset lives of 3-5 yrs. • Contractors are paid only for verified performance delivered • Operating efficiency is usually the principle objective • Labour participation is often critical, especially if ICT replaces human functions. 1. Rationale & Objectives for PPPs in ICT

  18. Management Contracting Public Services Corp. Management Fees Board Board Managmnt. Contractor MANAGEMENT MANAGEMENT • A Public Corp. identifies specific priority operating problems • Private firms competitively bid for the right to manage the Public Organization in exchange for a “Management Fee” • The Management Contract identifies specific target operating and performance levels that the Contractor must meet (incentives payment clauses are critical) • The Private contractor needs the authority to make all operating decisions (including hiring & firing), Government still owns the organization and its assets, and its Govt.-appointed Board still makes all long-term strategic decisions – including monitoring the PPP contractor’s performance. • New investments required by private contractors are usually low & Contract terms usually 3 - 5 years Management Employees Employees 1. Rationale & Objectives for PPPs in ICT

  19. Lease Board Board Working Capital Lease Fee Public Services Corp. Leased Corp. Lease Contractor • A Public Corporation or Asset Holding Company identifies specific short-term and long-term operating problems • Private firms compete for the right to lease some or all of its assets in exchange for a lease payment fee, terms usually 7 - 15 years • The Lease Contract specifies required performance measures and targets (including commercial incentives & penalties for lack of performance) • The private lease Contractor provides management, operating & maintenance decisions, spare parts, working capital, and keeps any remaining commercial profits • Government still maintains ownership of all long-term assets, is responsible for servicing long-term debt, and makes long-term planning decisions. • Public employees become employees of the private Lease Contractor Net Profits 1. Rationale & Objectives for PPPs in ICT

  20. Design-Build-Operate-Transfer (DBOT) • Govt. Dept. or Public Corp. competitively tenders for a private contractor to Design-Build-Operate & Transfer a new ICT/e-Govt. network or facility, requiring significant new long-term investment (>$20 million) to be recovered over a longer contract term of 7 – 15+ years. • Govt. Dept. still collects any fees or tariffs from end users (if applicable) for the services it provides, and it pays a single “Availability Payment” to the private contractor, as long as the contractor meets performance & maintenance standards • Often a consortium of private firms establish a new Project Company (SPV) to undertake this project, capitalized with equity from the private sponsors and new long-term loans from commercial banks. The lenders look to the projected future revenue generated by the project to repay all loans • Govt. does not provide a sovereign guarantee to lenders, nor do the private corporate sponsors (“Off-Balance-Sheet” financing). However, Govt. Min. of Fin. Usually needs to provide a financial performance guarantee for any “non-creditworthy” Govt. Depts. Or SOEs. • Key to success are clear, measurable ICT/e-Govt. performance standards; monitoring capacity by the Govt., and analytical capacity to determine if the PPP really delivers better value for the public’s money (not just avoided sovereign borrowing) 1. Rationale & Objectives for PPPs in ICT

  21. Design-Build-Operate-Transfer (DBOT) Private Sponsor 2 Design/Construction/ ICT Equip. Supply Private Sponsor 3 IT Operator Private Sponsor 1 Developer/Investor Equity Financial Perform. Guarantee Government (Min. of Fin.) $ Loan Single Purpose Project Co. (SPV) Lenders TAXES Repayments “Availability” Services Unitary Payments DBOT Contract Govt. Dept./ Public Corp. State Budget Public Services User Fees & Tariffs End Users 1. Rationale & Objectives for PPPs in ICT

  22. Concessions • Private sponsors incorporate a new single-purpose project co. (SPV) • This SPV receives a Concession Contract from the Govt. which legally “cedes” or transfers an exclusive right to provide new e-Govt. services directly to retail end users to this SPV for a specific period. • The PPP Contractor collects revenues from thousands of different retail end users, rather than from a single Govt. Agency. • The SPV is capitalized by equity from the owners and new project-backed debt from commercial banks & lenders. • Investment requirements are usually large (>$20 million) & contract terms 7-15+years. Sponsor 2 Sponsor 1 Sponsor 3 Equity $ Loans Single-Purpose Project Co. (SPV) Lenders Government Concession Contract Repayments ICT/e-Govt. Services User Fees End Users 1. Rationale & Objectives for PPPs in ICT

  23. Monopoly (one provider) Based upon “ceding” an exclusive right to provide services, usually enshrined in sector law Individual End Users now interface directly with the private concessionaire Higher collection risks Often involves taking over a poorly functioning Govt. ICT network – risk of unknown condition of assets/records. Incentive for improved system-wide operating efficiency Regulatory Body needed, to protect consumers & investors Monopsony (one customer) Existing (public) Utility simply buys a key input (e-Govt service) instead of providing it internally End users still interface with the existing Public Agency/Govt. Dept. Lower collection risk Usually involves a new greenfield project, with little or no risk of conditions of existing assets Adds capacity, but does not always improve system-wide operating efficiency Contract Compliance Office needed within the client Govt. Agency/Dept. Concession vs. BOT 1. Rationale & Objectives for PPPs in ICT

  24. Type of Contract Duration (years) What the Private Contractor Receives Nature of Private Contractor Performance Examples Service Contract (outsourcing) 1-3 Fee from government for performing a non-core service Definitive, often technical type of service Website design and management, ICT Capacity Building Management Contract 3-8 Fee from government for the service and a performance-based incentive Manage the operation of a government service Call center staffing; Seat Management, Parking enforcement, regional water supply management Lease 8-15 All revenues, fees or charges from consumers for the provision of the service; the service provider rents the facility from government Manage, operate, repair, and maintain (and maybe invest in) a service to specified standards and outputs Land for ICT Infrastructure Development, Existing airport or port facilities BOO & BOOT 15-25 The government mostly pays the service provider on a unit basis Construct and operate, to specified standards, the facilities necessary for service provision ICT Infrastructure; e-procurement systems; e-business portals; Network of Kiosks Concession 15-30 All revenues from consumers service provision; the service provider pays a concession fee to the government and may assume existing debt Manage, operate, repair, maintain and invest in public service infrastructure to specified standards Telecom operations and expansion, New airport or seaport facilities, toll road or bridge Review of PPP Structures: 1. Rationale & Objectives for PPPs in ICT

  25. 1.5 – PPP ICT Case Example Bangalore City Corporation (BCC), India • BCC was suffering from a continued “leakage” in their financial resources, while at the same time experiencing increased customer dissatisfaction over slow response rates and bureaucratic delays in processing transactions. • With assistance from the Asian Development Bank, BATF was contracted to improve the technical capacity of the financial management systems, and providing electronic access for improved transaction processing speed 1. Rationale & Objectives for PPPs in ICT

  26. Technology Architecture of BCC: 1. Rationale & Objectives for PPPs in ICT

  27. Role of the BCC’s new ICT System: • The role of information and communications technology (ICT) was not limited to the replacement of manual systems with computer-based systems. It included substantial revamping of business processes, a form of business process re-engineering. • ICT was also more than just an enabler for better information flows - it was used to: • Convert manual sheets to computerized data files, • Create new tools for management • Redefine audit and control mechanisms, and • Providing real-time information flow to and from banks connected to the system via leased dedicated phone lines. 1. Rationale & Objectives for PPPs in ICT

  28. Technical Design of BCC: 1. Rationale & Objectives for PPPs in ICT

  29. BCC’s PPP Project Results: • This PPP project, in which a private firm provided • The design and engineering; • Also served as government’s partner in the implementation and management of the system, • This PPP was successful in converting a government organization that had been plagued by financial leakage and slow transaction processing into an organization that continues to be financially viable and provides high-quality customer service. 1. Rationale & Objectives for PPPs in ICT

  30. Questions? 1. Rationale & Objectives for PPPs in ICT

  31. The Institute for Public-Private Partnerships (IP3)Washington | Cairo | Jakarta | Dakar Washington 1010 Wisconsin Avenue, NW, Suite 250 Washington, DC 20007 USA Cairo 19 Ahmed El Shattoury Street Dokki, Giza, Egypt Jeff Wuorinen Regional Representative, Middle East/North Africa E-mail: jwuorinen@ip3.org Tamer Shaltout Program Manager, Egypt E-mail: tshaltout@ip3.org Tel: 1-202-466-8930 Fax: 1-202-466-8934 www.ip3.org

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