CONFIDENTIAL

READING MATERIAL (A)

Salman Choudhry (choudhry.salman@gmail.com
Public Private Partnerships in Pakistan:
Public-Private Partnerships involves the investment of private capital to design,
finance, construct, operate, and maintain a project for public use for specific term during
which a private investment consortium is able to collect revenue from the users of the
facility. When the consortium‟s limited term of ownership expires, title to the project
reverts to the government at no cost. By then, the consortium should have collected
enough revenue to recapture its investment and turn a profit on the investment.
While privatization represents a take-over of a publicly owned entity, PPPs) are
more like mergers, with both sides sharing the risks and benefits. For the state, the main
attraction is that the private sector can bear part of the financial burden of investing in
infrastructure. Since the private sector is expected to be more efficient than the state in
running certain concerns and is also likely to charge actual costs of services from
customers, the burden of subsidies can be minimized. The other attraction is that state
resources can be freed to provide funds in areas and sectors needed for the socio-
economic uplift and stabilization of the less advantaged citizens. The state can thus return
to its core business of providing good governance, enhancing knowledge and skills, and
providing basic needs for its citizens. For this it is necessary to restructure the role of
government so that operation can be separated from policy, and independent regulatory
authorities can be established. Finally, the issues of the degree of independence of
regulators, the financing of long term debt instruments needed for the private sector, and
transparency in awarding contracts have to be addressed.
PPP is a viable option with a great potential which by combining skills, expertise
and other resources from different entities can help achieve outcomes that are
unattainable by independent action. There is growing realization in government about the
significance of such partnerships. There is also greater willingness and capacity among
the private sector today to engage in profitable partnerships with the government.

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There are several reasons for the public sector to incorporate the private sector in
development projects and infrastructure development, and reasons vary among countries.
For instance, in the emerging economies of Asia, the main reason has been the scarcity of
government resources to finance the infrastructure. Other elements include efficiency
improvements and reforms and modernization of public services.
The opportunities for developing PPPs in Pakistan are considerable. Pakistan‟s
public sector investment in infrastructure has declined as a percentage of GDP since the
early 1990s resulting in a huge backlog in the provision of infrastructure. Currently, the
public sector can only accommodate about half of the annual infrastructure requirements
of $ 3.5 – 4.0 billion per year. Accordingly there is need to obtain private resources and
improve efficiency of these investments. With a growing economy and government
commitment to decentralization and market solutions to infrastructure, there has been an
increase in local and international interest in PPPs. The government recognizes that there
is an urgent need to leverage public sector resources to deliver infrastructure if the MTDF
growth rates are to be sustained. Accordingly, private sector participation in general, and
PPPs in particular, are part of the strategic thrust of the Framework.
Features of PPPs
Under PPPs, public and private sectors work together on the implementation of
projects, retaining their own identity and responsibilities. They collaborate on the basis of
a clearly defined sharing of tasks and risks to achieve benefits of added value and
increased efficiency. PPPs are procurement tool where the contract payments are usually
structured in such a way that the public authority and/or users pay only for services
rendered satisfactorily. Project related risks are largely transferred to the private entity. In
a PPP, the focus of the government shifts to policy, strategy and monitoring role rather
than service delivery. In the short run a PPP may shift a financing requirement from the
public to the private sector, or may defer the costs incurred on the budget but does not
increase the quantum of services that the economy can accommodate. In the long term,
the benefits are in improved management and use of funds. Accordingly, affordability has
to be the cornerstone of the planning process.

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The spectrum of options for PPPs from low to high private sector participation
includes works and services contracts, management and maintenance contracts, operation
and maintenance concessions, and full privatization.
International Experience and Lessons Learned
PPPs have become prominent over the last decade It is estimated by the World
Bank that an investment of US $ 890 billion was made globally in public – private
infrastructure projects during 1990-2003. The leading sectors have been telecom (47 per
cent) and energy (33 per cent), followed by toll-roads (8 per cent), water and sanitation (5
per cent), railways (3 per cent), seaports (2 per cent) and airports (2 per cent). The share
of South Asia in this investment (6 per cent) has remained low and there is considerable
potential for an increase in the region. Between 3-6 per cent of the infrastructure PPP
projects have either been cancelled or investments have been under stress due to a variety
of reasons including inexperience, incomplete contracts and risk allocations, inadequate
capacity of institutions, factors affecting investment climate, issues relating to cost
recovery and affordability, and regulatory framework.
The United Kingdom was one of the first countries to start the private finance
initiative. The PPP programme was applied across a broad range of sectors (transport,
education, health, prisons, defence, leisure, government offices, environment, housing,
courts, technology and others) based upon long term arrangements and fixed price, output
based contracts. About 80 per cent of the projects were completed on time and within
budget compared with 30 per cent in the public sector. PPPs have also been used
extensively in South Africa and Canada, and several developing countries with positive
results. Pakistan has also gained some experience in the telecom, energy and transport
sectors.
Issues and concerns that have emerged include the following:
 There is a serious concern that private contractors/operators cut corners in
order to maximize profits. This takes the form of cutting wages and benefits

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of the employees, or shifting them into „contract‟ appointments, where they

have fewer employment rights and benefits such as pensions.
 It is also argued that the long term cost of paying the private sector to run
certain municipal services is much more than what it would cost in the
public sector.
 Local officials are liable to be held accountable for infrastructure services
even though they may no longer have direct control over the delivery of
those services.
The local authorities need to play an important role in partnership arrangements
and should facilitate, monitor, evaluate and control the performance of the private partner
and finally decide whether to extend or cancel contracts with private partners. Indicators
should be developed to measure the performance both in terms of efficiency and
effectiveness, of the private partner and these should be reflected in contractual
arrangements to ensure accountability.
Underlying all these concerns is a culture that requires direct control over service
provision in order to demonstrate public accountability. Only in this way, it is possible to
ensure that services are delivered at the appropriate time to the people having regard to
quality standards. Unfortunately there may be no formal measurements to judge whether
this is so. The position may be made worse with a traditional accounting system, which is
geared to a management control process designed to manage and audit expenditure
against budgets rather than to measure outputs and minimize costs.
Consequently, when government departments are asked to publicly demonstrate
the level of value for money they offer in the services they provide directly, they are
often unwilling to do so because the controls and processes are not designed to answer
such questions, and the management culture militates against a commercial approach.
That is not to say that the use of a private partner will change this. In fact only a devoted
administration with competent professional staff and adequately designated authority
commensurate with responsibility would be fully able to develop, negotiate, manage,
monitor and enforce a contract for service provision with a private sector organization.

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The key points that have emerged from international experience for successful
implementation of PPPs include the following:
i) High level political and institutional support for PPPs is crucial.
ii) Government has central role in defining what it wants and as the
regulator.
iii) PPP deals must make sense in terms of delivering both the desired
outcomes and commercial returns.
iv) Good PPPs involve optional risk allocation, demonstrable value for
money, clarity of affordability and certainty of public service payment
obligations based on delivery of outputs.
v) Output based techniques are important for targeted and efficient
subsidy allocation.
vi) A well defined policy framework is required that
(a) sets out clearly the processes, priorities and scope of PPP;
(b) drives transparent procurement processes;
(c) includes a communication strategy to improve public and private
sector understanding of PPPs;
(d) provides clarity of long term government obligations that work
across federal and provincial levels;
(e) includes mechanisms to recognize implicit/explicit government
liabilities and public sector balance sheet requirements; and (f)
includes mechanisms to deal with incumbents.
vii) A well defined legal framework is required that provides clarity,
defines contracting authority powers, minimizes procurement costs and
timetables, for example, through standard/model contracts, improves
dispute reduction, and accommodates future development.
viii) Public sector capacity should be enhanced, among others through a
centrally located core of policy and implementation expertise including

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guidelines and project evaluation and procurement expertise, and

mechanisms to ensure professional management and the purchase of
relevant expert advice.
ix) Private sector/supply side issues should be addressed including
availability of long term local currency finance, PPP bid capacity and
financing skills, and building capacity of local skills.
x) Early identification of projects and prefeasibility studies for
prospective investors is important.
Status of PPPs in Pakistan
Pakistan, for a long time, has financed infrastructure and development projects
directly from budget allocations, and therefore lacks the institutional and regulatory
capacity necessary to facilitate private participation in infrastructure provision. There is
also need for a change in the mindset of public functionaries. The reasons why private
sector infrastructure projects have not materialized in Pakistan include: (i) reforms have
not progressed as fast as anticipated; (ii) present governance structures are not suited for
the broad participation by the private sector in infrastructure envisaged in liberalized
environment; (iii) the public-private interface needs substantial strengthening, including
enhancement of skills and institutional mechanisms within the Government for effective
interaction with the private sector; and (iv) it remains difficult to disaggregate and
allocate risks in the domestic capital market.
Currently, important pilot PPP transactions are being prepared and completed on
BOT including $ 300 million Karachi Mass Transit Project (which in conjunction with
power plant and real estate development could grow to a size of $ 600 – 700 million),
Lahore-Sheikhupura -Faisalabad provincial expressway, Lakhpass Tunnel, Karachi
Wastewater Reuse, Gujrat Solid Waste Composting, Karachi-Hyderabad Superhighway,
Lodhran-Khanewal Section of N-5, Tarnol Interchange at N-5, and many other important
groundbreaking efforts. However, these critical PPP pilot transactions are currently
taking considerable time and cost to prepare and to complete. The preparation periods
and costs must be significantly reduced or else the much-needed private investments in

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infrastructure will not reach closure. Private Investors who have proposed PPPs in Punjab
and Sindh Provinces have noted that they are unable to pay for project preparation costs
when it takes several years to address issues related to legal and regulatory framework for
PPP preparation and implementation.
Development of PPPs During MTDF
With PPP as a core focus of MTDF, the work to be undertaken as a matter of
priority would include; (i) establishing a policy framework and coordinating the PPP
programme across government agencies; (ii) establishing core centre of expertise; (iii)
reviewing and establishing legal framework; (iv) establishing a communications strategy;
(v) identifying prospective projects in line with market capacity; and (vi) identifying
funding mechanisms. Some aspects of further work on PPPs are elaborated below.
Legal and Regulatory Issues
During the MTDF period, a review and assessment of current and proposed
legislation in the country which affects the ability to carry out PPPs would be conducted.
The assessment will also include whether the existing laws and proposals are in harmony.
This will facilitate the process of drafting regulatory framework for PPPs, and provide an
“umbrella” enabling structure that would explicitly allow government agencies to enter
into PPPs for providing infrastructure and other services at the national, provincial and
local levels.
The regulatory framework will empower the Government to conduct, identify,
design, tender, evaluate, award and regulate PPP projects. First, it would be flexible
enough to cater to all kinds of PPPs across sectors and would provide the enabling
environment necessary to undertake simplest to most complex projects. Second, it will
clearly lay out the procurement process for PPPs and assign roles and responsibilities.
Finally it will create a central agency to regulate procurement of PPPs by establishing
„gateways‟ through which all projects must pass through. The actual procurement,
implementation and monitoring of the projects would lie with relevant line ministries,
departments, provincial or district governments.

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Institutional and Capacity Issues

International experience strongly indicates that PPPs are likely to be more
successful if governments move from an ad-hoc, case-by-case approach to creating a PPP
Unit, staffed with professionals with the skills to take PPPs through the entire project life
cycle and provide programme support. While every project is different, PPP projects
share similar features and can benefit from a consistent and structured approach to project
identification, design, tendering, evaluation, negotiation and award, which reflect best
practices. Governments in countries with successful PPP programs, such as the
Philippines, Malaysia, Ireland, Italy and South Africa have created PPP Units to provide
the skills to take PPPs through the life cycle. This results in stronger projects that have a
better chance of being implemented more quickly.
For the PPP Unit to be effective, it is necessary that it should be created in such a
public institution that has clout, credibility and effective coordination with all the
ministries. The process will not only need buy-in from other public sector stakeholder,
but the private sector must also perceive it as an arm of government that is serious and
has the proper mandate and credentials.
Based on international experience, a dedicated PPP Policy and Support Unit will
be established in the Planning Commission as a matter of priority to deal with policy,
programme and project activities. Project activities would be geared towards processing
specific PPP projects through the PPP cycle. Programme activities would be more
general, cross cutting activities to support the portfolio of PPP projects. Project support
activities for PPP would include assistance in identification, design, preparation of
Request for Proposal and Request for Qualification documents, evaluation of proposals,
negotiations, award, and in cooperation with regulatory bodies, post award monitoring.
Programme activities would include stakeholder consultation, public awareness,
marketing and credit enhancement. The credit enhancement activities would include
working with multilateral agencies to provide financing and guarantees, as well as to
identify government support measures that are needed to bring the project to financial
closure.

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Skills that would be required for implementing PPP activities include legal,
financial, economic, procurement, project management and technical such as engineering
and sector specific skills in telecommunications, power, transport, water, social
infrastructure and other services, as required. Any centralized capacity that is developed
would not eliminate the need for Government departments to develop their own capacity
and use their own expert advisors. Rather, it would assist in building such capacities and
developing a wider pool of expertise, within and outside government, to bolster the
implementation of PPPs in the long run.
In order for the Planning Commission to comprehensively appraise/evaluate
projects proposed for PPPs, its capacity would be augmented to (i) assess complex
project finance based PPP structures and their implications in terms of contingent
liabilities arising out of guarantees issued, (ii) the cost of risk for risk retained by the
Government, (iii) the timing and payment of subsidies (and issues related to cost
recovery) in a targeted manner that offers value for money, and (iv) policy issues in terms
of what is acceptable and not acceptable in terms of guarantees and the risk undertaken.
These policies can be fed into the guidelines that would be developed by the PPP Policy
and Support Unit.
The PPP Policy and Support Unit would have proper delegation in terms of
relevant legislation and would provide detailed guidelines for developing the project
through the entire project life cycle. Thus guidelines will be developed for each stage,
including; Inception, Needs Analysis, Options Analysis, Feasibility, Procurement
(Drafting request for Qualification Document, Request for Proposal Document, Bidding
procedures and bid evaluation procedures, most importantly the model concession
agreement), negotiations, and post award contract monitoring.
The Unit would have capacity to deal with transaction execution as well as
infrastructure planning at the federal level. The Unit would not initiate projects, but
would help implementing entities by providing hands-on technical assistance. Since
many of the PPP projects will be at the provincial and district/local level, the Unit will

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also provide training to relevant officials. It would also assist in setting up provincial and
district/local level PPP implementation capacities.
The basic theme in having this strength developed at the federal level is to create a
focal point for PPPs throughout the country. This focal point will become a centre of
excellence for best practice and a resource into which everyone can tap. The Unit would
be able to use the economies of scale provided by all sector entities to develop credit
enhancement and financing instruments that can be applied throughout the country. Thus
special funds or instruments could be created and negotiated with multilateral and
financial institutions on the strength and needs of the several projects that individually
could not have attracted much attention in terms of creating customized products.
The development of PPP Unit would include the following:
i) Charter for the Unit laying out its objectives, roles, responsibilities,
authorities and the overall structure to be created.
ii) Terms of Reference for the positions identified in the organizational chart.
The positions would be paid market related salaries. The supervisory
positions would require experience in managing teams of multi-disciplinary
professionals, with appropriate status, profile and respect in the market.
iii) Development of rules of business, guidelines and operating procedures.
iv) Organizational structure, with matrix system of functional (such as
financial, legal and engineering) staff also having sector (such as transport,
water and sanitation) responsibilities.
Skill Requirements for the Proposed PPP Unit
The Proposed PPP Unit will have expertise in the following fields:
i) Technical: Technical skills relate to sector specific skills, such as electrical
engineering and civil engineering, and water and sanitation systems.
ii) Economics: Expertise in economics will be needed to conduct economic
cost benefit analysis of projects; develop tariff regimes; constructing
forecasting/ demand modes; understanding fiscal space and liability issues
arising out of these deals; estimating infrastructure investment requirements

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in relation to the fiscal space available; estimating the true cost of subsidies
and contingent liabilities and monitoring during project operation.
iii) Legal and Regulatory: Expertise to address legal and regulatory policy
framework issues.
iv) Communications: Communication skills will be required to design and
publish brochures and for marketing designing, developing and maintaining
a website alongwith a database; interact with media; issues press releases
and organizing press conferences and road shows; and publish an
informative periodical.
The line ministries/executing agencies will have to develop the following
expertise:
i) Finance: The following three types of financial skills will be required.
a. Financial Analysis: Expertise in developing cash flow
models, conducting sensitivity analysis, costing risk
(conducting value for money analysis) and developing cost
recovery models.
b. Project Finance: In the project finance structure, the focus is
on project cash flows rather than collateral. Project finance
being a very specialized area, expertise will be required to
create project finance models, but also be able to analyze and
negotiate over modes submitted by bidders.
c. Corporate Finance: In certain sector/transactions financing
may be done on the balance sheet of an investor. Expertise is
needed not only to be able to evaluate such financial
proposals, but also to understand the risks and exposures that
such proposals may have due to the bidding firms‟ own
vulnerability.
ii) Procurement: Procurement skills will be required to develop tender
documents such as the Request for Qualification (RFQ), Request for

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Proposal (RFP) and most importantly Model Concession Agreement;

interacting with potential bidders and assisting their due diligence;
designing a fair and transparent bidding process; and receiving &
evaluating bids.
iii) Legal: Legal expertise will help understand financial implications of
various legislations, the financial implications of various legal clauses (e.g.
ones pertaining to termination, penalties, risk, guarantees etc.), draft
contracts, negotiate contracts and developing standardized contractual
terms.
Infrastructure Fund
An Infrastructure Fund would be created as a ring fenced Special Purpose Vehicle
(SPV)/ Account and managed by the Ministry of Finance/Fund Managers. The actual
implementation of projects will be decentralized. Transaction execution capacities will
need to be developed at the provincial and district/local level to structure transactions in a
way that can be taken to the market by creating bankability and business value. The
capacity will include taking the project through the entire project life cycle with technical
assistance from the PPP Unit. These capacities will be further supplemented by recruiting
qualified transaction advisors. The PPP unit will appraise, monitor and evaluate the PPP
projects. The projects after scrutiny jointly with the sponsoring/executing agencies will
be put to CDWP/ECNEC for clearance and then implemented through line
ministries/departments. The CDWP/ECNEC in taking any decisions would be informed
of fiscal space available for investments at any given time and made aware of the true
costs and exposure in projects by getting credible estimates for contingent liabilities and
retained costs. Concession agreements would be concluded by the line
ministries/executing agencies with the private operators.
The Fund would act as a financial intermediary that would extend funding in
shape of guarantees to fill viability gap of a project during its operations. Private Sector
operating PPP project would be able to en-cash the guarantee for meeting its shortfalls

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during the operation phase of the project and once the project enters into profit making,
the en-cashed amount would be repaid back to the Fund.
It is envisaged that the Infrastructure Fund will be initiated through contributions
by the government and supplemented by financing from international development
partners including the World Bank and the Asian Development Bank. The Infrastructure
Fund would be used for (i) prefeasibility studies, (ii) equity contributions, if required, (iii)
guarantees, and (iv) grants, in exceptional cases, to fill the gap between income and
expenditures.

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