RuralE.Evolution
Deliverable D2.3 “Provisional Guidelines for successful
application of PPP in RES Agro-energy district”
RuralE.Evolution
Public-Private Partnerships for RES Agro-energy districts
Issued by: Aristotle University of Thessaloniki
REVISED
DATE: 20th September 2010
Version 2
CONTRACT N°:IEE/07/579/SI2.499063
The sole responsibility for the content of this document lies with the authors. It does not necessarily reflect the opinion of the European
Communities. The European Commission is not responsible for any use that may be made of the information contained therein.
Table of Contents
1
PPP UTILIZATION IN AGRO-ENERGY DISTRICTS ......................................................................... 4
1.1
1.2
1.2.1
1.2.2
1.2.3
1.2.4
1.2.5
1.2.6
1.3
1.4
1.4.1
1.4.2
1.4.3
2
INITIATIVE TO ADOPT A PPP SCHEME FOR A SPECIFIC AGRO-ENERGY DISTRICT ...... 10
2.1
2.2
2.3
3
4.6
4.7
4.8
4.9
4.10
SET UP THE PLANNING TEAM ............................................................................................................... 20
STUDY OF THE TARGET AREA’S CHARACTERISTICS ............................................................................. 21
SELECTION OF SUITABLE PARTNERS / ACHIEVEMENT OF SUCCESSFUL PARTNERSHIPS ........................ 22
IMPLEMENTATION OF A CONSENSUS BUILDING STRATEGY ................................................................ 23
SELECTION OF SUITABLE TECHNOLOGY/PRODUCTION PLAN ACCORDING TO LOCAL CHARACTERISTICS
25
INSTITUTIONAL STRUCTURES AND CAPACITY BUILDING .................................................................... 25
IDENTIFICATION OF THE SUPPLY CHAIN .............................................................................................. 26
AVAILABILITY OF THE LAND ............................................................................................................... 27
DEFINITION OF THE LOGISTIC PLAN ..................................................................................................... 28
MONITORING AND REPORTING ON RESULTS ........................................................................................ 29
BUSINESS PLAN ...................................................................................................................................... 30
5.1
5.2
5.3
5.4
5.5
6
IDENTIFICATION OF AREAS’ NEEDS ..................................................................................................... 13
ROLE OF STAKEHOLDERS.................................................................................................................... 13
MARKET TESTING ............................................................................................................................... 16
POTENTIAL BENEFITS .......................................................................................................................... 16
IDENTIFICATION OF POTENTIAL ACTORS ............................................................................................. 16
EXPLORATION OF THE AVAILABLE NATIONAL LEGAL/REGULATORY AND POLICY FRAMEWORKS ........ 17
SELECTION OF THE RIGHT PPP OPTION ............................................................................................... 17
COMMUNICATION STRATEGY TO REACH STAKEHOLDERS & THE COMMUNITY .................................... 19
PPP IMPLEMENTATION ....................................................................................................................... 20
4.1
4.2
4.3
4.4
4.5
5
TYPE OF INITIATIVE (PUBLIC OR PRIVATE?) ....................................................................................... 10
REASONS TO ADOPT A PPP ................................................................................................................. 10
NEEDS AND OBJECTIVES OF THE COOPERATION .................................................................................. 11
PPP PREPARATION ............................................................................................................................... 13
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
4
THE RATIONALE BEHIND PPPS FOR AGRO-ENERGY DISTRICTS .............................................................. 4
SUSTAINABILITY OF AGRICULTURAL & ENERGY POLICY IN EUROPE ..................................................... 4
Establish the Internal Energy Market ............................................................................................. 5
Ensure a Secure Energy Supply ...................................................................................................... 5
Reduce Greenhouse Gas Emissions ................................................................................................ 5
Develop Energy Technologies ......................................................................................................... 5
Consider the Future of Nuclear Energy .......................................................................................... 5
Implement a Common International Energy Policy ........................................................................ 6
BENEFITS FOR EUROPEAN RURAL AREAS .............................................................................................. 6
LESSONS LEARNT FROM EUROPEAN AND WORLDWIDE CASE STUDIES ................................................... 7
Conclusions on Success factors in the Implementation of PPPs ..................................................... 7
Conclusions on Weak factors in the Implementation of PPPs ........................................................ 9
Conclusions of PPP implementation in Global Cases, Including Developing Countries ............... 9
IDENTIFICATION OF THE BUSINESS MODEL ......................................................................................... 30
DEFINITION OF ECONOMIC & FINANCIAL ISSUES ................................................................................ 31
FINANCIAL IMPLICATIONS OF RISK ..................................................................................................... 35
DEFINITION OF THE STRATEGIC PLANNING .......................................................................................... 36
DEFINITION OF LEGAL & CONTRACTUAL FRAMEWORK ...................................................................... 36
REQUIREMENTS OF PARTNERSHIP CONTRACTS ...................................................................... 37
6.1
6.2
6.3
6.4
6.5
EXAMPLE: ITALY ................................................................................................................................ 39
EXAMPLE: GREECE ............................................................................................................................. 41
EXAMPLE: SPAIN ................................................................................................................................ 42
EXAMPLE: PORTUGAL......................................................................................................................... 43
EXAMPLE: HUNGARY.......................................................................................................................... 43
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7
PPP PROCESS WITHIN RURAE-EVOLUTION PROJECT ............................................................. 47
7.1
7.2
7.3
PREPARATION AND SIGNATURE OF THE MEMORANDUM OF UNDERSTANDING (MOU) ........................ 47
CREATION OF THE PPP AND START UP OF THE COMPANY .................................................................... 48
FOLLOW-UP AND CONSTRUCTION OF THE PLANT ................................................................................ 50
8
CLOSING OF PPP .................................................................................................................................... 51
9
REFERENCES .......................................................................................................................................... 64
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1
PPP utilization in agro-energy districts
1.1 The rationale behind PPPs for agro-energy districts
Agro-energy districts represent a useful model for the achievement of important energetic and
environmental goals in Europe and the world. Agro-Energy refers to the energy function of
agriculture. It can make significant contributions to achieving social and environmental
sustainability at local, national, regional and global levels. In fact, agricultural and livestock
resources are abundant in most parts of the world, and various commercially available
conversion technologies could transform current traditional and low-tech uses of these
resources to modern energies. If Agro-Energy is produced efficiently and in a sustainable
manner, benefits compared to fossil fuels can be achieved including food security, rural
development, local self-reliance, sustainable agricultural management, biodiversity
conservation and climate change mitigation, whilst offering improved energy supply and
security.
Unfortunately, regulatory, financial and awareness lack constraints do not allow a wide
proliferation of this concept. Attention should be placed on the trade-offs of Agro-Energy
systems. Main concerns include development priorities, environmental impacts, conflicts with
other land uses, technological conversion efficiency, high raw material costs and the costeffectiveness of Agro-Energy technologies. In economic terms, incentives might be necessary
at least to put Agro-Energy on a more equal footing with fossil fuels, for which environmental
and social costs are not internalised. PPPs can provide this incentive and create this
comfortable ground for the development of an energy production plant. Eventhough, there are
still constraints in the application of PPPs in agro-energy districts, there is a growing tendency
to take actions in the field of renewable energy making agreements between public and
private enterprises.
1.2 Sustainability of agricultural & energy policy in Europe
The European Union (EU) faces serious energy challenges concerning sustainability and
greenhouse gas emissions as well as security of supply, import dependence and the
competitiveness and effective implementation of the internal energy market.On the other
hand, reforms over the past 15 years in the EU’s Common Agricultural Policy (CAP) have
created crop program rules that discourage crop rotation and other sustainable practices. This
is in order to maintain high base acreages, which then qualify for subsidies (EUROMED
2008; European Communities 2004).
Energy accounts for 80% of all greenhouse gas (GHG) emission in the EU; it is at the root of
climate change and most air pollution. The EU is committed to addressing this - by reducing
EU and worldwide greenhouse gas emissions at a global level to a level that would limit the
global temperature increase to 2°C compared to pre-industrial levels. However, current
energy and transport policies would mean EU CO2 emissions would increase by around 5%
by 2030 and global emissions would rise by 55%. The present energy policies within the EU
are not sustainable.
A European Energy Policy is acknowledged as the most effective response to these
challenges, which are faced by all Member States. The EU intends to lead a new industrial
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revolution and create a high efficiency energy economy with low CO2 emissions. To do so,
it has set itself several important energy objectives.
1.2.1
Establish the Internal Energy Market
An internal energy market has been developed on a Community level to ensure that
consumers have the opportunity to choose a supplier, at a fair and competitive price.
Nevertheless, as highlighted by the Communication on prospects for the internal energy
market and the inquiry into competition in the gas and electricity sectors, there are obstacles
which continue to prevent both the economy and European consumers from fully benefiting
from the advantages of opening up the gas and electricity markets. Ensuring the effective
implementation of the internal energy market thus remains crucial.
1.2.2
Ensure a Secure Energy Supply
Minimising the EU's vulnerability concerning imports, shortfalls in supply, possible energy
crises and uncertainty with respect to future supply is a clear priority. This uncertainty is all
the more problematic for Member States dependent on one single gas supplier. The new
energy policy emphasises the importance of measures which ensure solidarity between
Member States and of the diversification of supply sources and transportation routes.
Measures supporting strategic oil stocks must be reinforced and the possibilities for
improving the security of gas supply must be explored. Increased security of electricity
supply, which remains crucial, must also be guaranteed.
1.2.3
Reduce Greenhouse Gas Emissions
Energy accounts for 80% of all greenhouse gas emissions in the EU. Determined to fight
against climate change, the EU is committed to reducing its own emissions by at least 20%
by 2020. It also calls for the conclusion of an international agreement which will oblige
developed countries to reduce their greenhouse gas emissions by 30% by 2020. In the
framework of this agreement, the EU would set itself a new objective of reducing its own
emissions by 30% compared with 1990 levels. These objectives are at the heart of the EU's
strategy for limiting climate change. Of course, reducing greenhouse gas emissions involves
using less energy and using more clean energy.
1.2.4
Develop Energy Technologies
Energy technologies play a central role in offering both competitiveness and sustainability in
the energy sector while increasing security of supply. They are likewise crucial for attaining
the other energy objectives. The EU, today a global leader in the renewable energy sector,
intends to consolidate its position and play an equally leading role in the rapidly growing
market for low carbon energy technologies. The EU must therefore develop existing energyefficient technologies as well as new technologies, in particular those devoted to energy
efficiency and renewable energies.
1.2.5
Consider the Future of Nuclear Energy
Faced with increasing concerns with regard to security of supply and CO2 emissions, nuclear
energy has the benefit of being one of the low-carbon energy sources offering the most stable
costs and supply. The decision whether or not to use nuclear energy is made by Member
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States. Nevertheless, the illustrative nuclear programme emphasizes the need to have a
common and coherent approach with respect to security, safety and non-proliferation as well
as concerning the dismantling of installations and the management of waste.
1.2.6
Implement a Common International Energy Policy
The EU is not able to achieve the objective of secure, competitive and sustainable energy
alone. To do so requires the involvement and cooperation of both developed and developing
countries, energy consumers and producers and countries of transit. To ensure efficiency and
coherence, it is crucial that Member States and the EU are able to speak with a single voice
on international energy issues.
The EU will be a driving force in the development of international energy agreements, in
particular by strengthening the European Energy Charter, taking the initiative in an
agreement on energy efficiency and participating actively in the post-Kyoto climate change
scheme.
EU relations with consumer countries (such as the United States, India, Brazil or China),
producer countries (Russia, Norway, OPEC countries and Algeria, for example) and
countries of transit (such as the Ukraine) are of prime importance from the perspective of
geopolitical security and economic stability. The EU will thus strive to develop energy
partnerships with these countries which are transparent, predictable and reciprocal, in
particular with its neighbouring countries. The EU also proposes a new partnership with
Africa which will deal with a large variety of energy issues.
The EU is committed to helping developing countries to implement decentralised energy
services which are low-cost, reliable and sustainable. The EU encourages these countries, in
particular Africa, to immediately invest in renewable energies and the new generation of
clean energy technologies.
1.3 Benefits for European rural areas
Environmental concerns are becoming a factor for selecting the PPP model. Governments are
encouraged to adopt PPPs as a tool for sustainable development. Investors in PPPs too have a
financial motivation for taking environmental considerations into account, because the
effective use of resources and reduction of waste both in design and construction, means
lowered whole life costs, and hence higher margins. Citizens too demand more attention from
their governments to the social and environmental impact of projects.
The objective of PPPs is to involve private partners in the implementation of projects or the
provision of services, aiming not only at securing additional financial resources, but also at
benefiting from their know-how, human resources, innovative approach and ability to
efficiently manage complex projects for the public benefit.
The main benefits of PPPs are the following:
• Ability to finance more projects
The Government, along with the local authorities, has to respond to the constantly increasing
needs and requirements of the citizens for modern and qualitative provision of infrastructure
and services. The use of private funds, complementary to the public ones, may contribute to
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the faster implementation of projects and the delivery of services. PPP schemes are a new
means of achieving the strategic priorities of public entities, complementary not only to the
traditional public works, which by no means will be limited, but also to other forms of
partnership between the public and the private sector, such as the concession agreements of
the Ministry of the Environment and Public Works or the collaborations of Local Authorities
with private partners, that continue to be implemented. Under PPP schemes, public entities
implement and offer to citizens more works and services in a faster and more efficient
manner.
• Transfer of risks to the private sector
The integration, depending on the structure chosen, of the design, financing, construction, and
operation of a project under a PPP structure, along with the transfer of relevant risks to the
private partner, creates incentives for a more diligent and efficient design and implementation
of the projects. This, in effect, results in substantial reductions, if not abolishment, of cost and
time overruns. Moreover, the fact that the private partner also undertakes the responsibility
for maintaining the projects results in services of higher quality, with greater functionality
throughout the project’s life cycle.
• Enhancement of the investment environment
PPP schemes mobilize more funds than those that the public sector alone could mobilize,
providing, hence, the opportunity to various parties and investors of the private sector to get
involved in infrastructure projects, innovate and develop new activities. The long-term nature
of PPP projects results in setting up financially stable companies with predictable cash flows.
These cash flows feed the market and thus promote the growth of the economy.
1.4 Lessons learnt from European and worldwide case studies
A successful PPP should fulfil three conditions at a minimum:
a) Benefits for private sector: generate a profitable revenue stream or expand market
access.
b) Benefits for the consumer: delivery of services that people want and would not have
access to at the same price, in a business as usual situation, e.g. improvement of
provided services
c) Benefits for the government: fulfilment of a political need, social obligation,
development imperative.
Based on the performed case studies, interviews carried out, partner’s experience and TEGs
thorough discussions during the course of the project, conclusions on the strong and weak
points in the implementation of PPPs are listed below.
1.4.1
Conclusions on Success factors in the Implementation of PPPs
1. Private sector is in general a better and more experienced manager than the Public;
thus, projects that provide public goods can be managed in a more efficient way
through the private partner.
2. There is need for full understanding / acknowledgement of the Social Character of the
PPP.
3. Private parties bring more innovation capacity in the partnerships that the public can
absorb.
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4. The partnership structure is essential. Some PPP players (interviewees) consider the
dedication and cooperation among the parties the most important success factor,
together with the value of the concept.
5. The re-structuring of the partnership is not common but wherever detected, did not
seem to create problems to the overall progress of the project. For example, in the case
of the TC of middle Burgenland, after finalizing the implementation phase, the banks
stepped out of the project because they had only low interest to operate the TC; so, the
communities overtook a stronger role until the stabilization of the project. Then
private investors will overtake the major ownership of the project with an optimized
contract.
6. The replication of a PPP project, like in Burgenland, where the Technology Centre
was the third to be established in the area, is definitely a success factor, especially if
the same persons are involved again. There is high level of experience and also, the
project concept has been already tested decreasing the risk of failure.
7. The consideration of experience and lessons learned abroad is very useful.
8. In projects where all partners were involved financially (mutual benefits shared) there
is a very good chance to achieve the expected results and end up with a successful
project (see example of Vatsounia in Greece).
9. For some countries, like Greece, the macroeconomic situation and EU regulations on
state deficit promote PPPs.
10. In some cases, like the manure plant in Spain, a successful PPP project leads to other
initiatives that are interesting for the existing consortium. In general, a development
initiative among local agents in a rural environment can be a good source for new
initiatives.
11. A strong insurance policy for the private actor and a risk mitigation plan is essential in
order to have profit assurance for the private sector.
12. Knowledge Transfer is a common procedure in PPPs; capacity building of the public
officials can potentially improve the management efficiency of the relative department
in a Municipality (or other public actors) and lead to more PPP opportunities in the
future.
13. A solid and simple to follow legislative framework is necessary.
14. The setting up of one or more PPP units at a central government level that provide
guidance is very important because most energy PPP projects are implemented locally
at a small-scale basis, where knowledge on PPPs is more limited than in national
scale.
15. Community acceptance is very important, as the PPP usually directly affects the local
community; in this framework media coverage and public opinion observance could
offer valuable assistance.
16. In many cases, public opinion is willing to support PPP after understanding the
benefits of implemented projects.
17. Political backing and political will is important, even though there are cases of small
communities that managed to create a PPP without receiving essential political
backing.
18. Energy PPPs make extensive use of local resources, leading to price reduction of the
offered public goods, improvement of living standards and sustainable development of
the areas.
19. Jobs are created for the plant management, building, maintenance, etc.
20. The relationship between investment and pricing is an important factor.
21. The level of resources available in the system and the degree of maturity and
development of the actors are also important factors in the PPPs development.
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1.4.2
Conclusions on Weak factors in the Implementation of PPPs
1.
2.
3.
4.
For many countries, the process of PPP implementation is long and bureaucratic.
Usually there is loss of control by the public sector.
There are political risks.
Political preferences matter. Generally speaking, the Government's “pro-business
orientation” create a much better environment for encouraging public research actors
and private companies to make joint innovation efforts.
5. As far as the supply concerns (for example of animal waste or agricultural residues),
there is need to ensure it in a long-term period in order to recover the investment.
6. Lack of competition might create an inefficient structure.
7. Blurriness in the partners selection procedure can jeopardise the venture; the guarantee
of meritocracy and the performance evaluation during the contracting procedures is
essential
8. Lack of experience in the administration of the public units; the capacity building at
central level is not always accompanied by parallel actions at the local and regional
level.
9. A common issue arising in public discussions on PPP in Greece and other countries is
an “accusation” of disguised privatisation.
10. In many countries, the institutional framework is broadly formulated and oriented
towards construction projects. Further specifications especially for energy are
necessary.
11. Often partners have different expectations and understanding of their roles.
12. PPPs have been a very controversial discussion topic in the debate on the role of
public and private bodies in a modern state. There are cases where PPP have been
accused as “easy solutions” or a “sell-out of the country”; some projects might not be
protected from political volatility.
1.4.3
Conclusions of PPP implementation in Global Cases, Including Developing
Countries
AUTH as WP leader has also investigated the global situation, as far as PPP in energy sector
concerns. Many international organizations, like the Asian Development Bank (ADB), seek to
forge strong internal PPPs in the countries in which they operate, as they have tested that such
partnerships provide a valuable bridge between the two sectors. The problems in PPPs in
developing countries are quite different than the ones raised in Europe. For example, many
international companies are unwilling to expose themselves to capricious regulatory
frameworks and changing government policies. On the other hand, in the USA, PPPs are not
very common, even though energy issues seem to get PPPs moving.
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2
Initiative to adopt a PPP scheme for a specific agroenergy district
2.1 Type of Initiative (Public or Private?)
During these last years, municipalities are better organizing themselves to take actions in the
field of the renewable energies, making agreements with private enterprises, creating
awareness to the citizens of the benefits related to renewable energies, involving town and
citizen associations into common projects, cooperating with industrial associations and
technology institutes for feasibility studies, trainings, and strategy decisions.
Quite often a renewable energy consortium is created when there is a clear and strong policy
will to proceed in Municipalities. The first step is almost always the Mayor’s decision
supported by his advisers to take part into a renewable energy initiative, and implement
changes and improvements into the Municipality district.
Afterwards, the appropriate private companies (technology sellers, installers and
maintenance) are contacted for a request for tender to next start up the project. Among
different types of renewable energy, only wind energy has achieved a rather advanced
relationship between public and private. This is because many times both partners (public and
private) come to an agreement by which the municipality does not spend any money for the
installation and moreover receive royalties according to the electricity sold, or discounts into
the annual electrical bill. In relation to other types of renewable energies the market is not yet
matured as much as the wind one, where the investments are also quite high.
Due to the EU policy regulation, the energy prices, and the territories sensitizing to the
renewable energy and environmental benefits, more and more municipalities are taking action
to improve energy efficiency and competences and also trying to increase the renewable
energy use and exploitation into their territories, working together with the Energy Agency
and not always influenced by the private sector.
2.2 Reasons to adopt a PPP
According to the EC guidelines for successful PPPs and the results of the RuralE.Evolution
survey, PPP projects are able to offer a number of advantages, including:
•
•
•
Acceleration of infrastructure provision - PPPs often allow the public sector to translate
upfront capital expenditure into a flow of ongoing service payments. This enables projects
to proceed when the availability of public capital may be constrained (either by public
spending caps or annual budgeting cycles), thus bringing forward much needed
investment.
Faster implementation - the allocation of design and construction responsibility to the
private sector, combined with payments linked to the availability of a service, provides
significant incentives for the private sector to deliver capital projects within shorter
construction timeframes.
Reduced whole life costs - PPP projects which require operational and maintenance
service provision provide the private sector with strong incentives to minimise costs over
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•
•
•
•
•
the whole life of a project, something that is inherently difficult to achieve within the
constraints of traditional public sector budgeting.
Better risk allocation - a core principle of any PPP is the allocation of risk to the party
best able to manage it at least cost. The aim is to optimise rather than maximise risk
transfer, to ensure that best value is achieved.
Better incentives to perform – the allocation of project risk should incentivise a private
sector contractor to improve its management and performance on any given project.
Under most PPP projects, full payment to the private sector contractor will only occur if
the required service standards are being met on an ongoing basis.
Improved quality of service -international experience suggests that the quality of service
achieved under a PPP is often better than that achieved by traditional procurement. This
may reflect the better integration of services with supporting assets, improved economies
of scale, the introduction of innovation in service delivery, or the performance incentives
and penalties typically included within a PPP contract.
Generation of additional revenues – the private sector may be able to generate additional
revenues from third parties, thereby reducing the cost of any public sector subvention
required. Additional revenue may be generated through the use of spare capacity or the
disposal of surplus assets.
Enhanced public management – by transferring responsibility for providing public
services government officials will act as regulators and will focus upon service planning
and performance monitoring instead of the management of the day to day delivery of
public services. In addition, by exposing public services to competition, PPPs enable the
cost of public services to be benchmarked against market standards to ensure that the very
best value for money is being achieved.
2.3 Needs and objectives of the cooperation
In reviewing the potential for PPPs, the key variable is the local government’s policy as it
relates to service delivery in general and PPP specifically. The policy will determine the
criteria to be applied, the weighting of the various criteria and the extensiveness of the review
itself.
Local government will need to address specific questions:
• What are the potential obstacles and constraints for these PPP opportunities?
• What are the experiences of other local governments?
• Would the private sector be interested in these opportunities?
• Is PPP the best method to deliver these services or facilities?
To determine the potential for a PPP, local government will need to address various
considerations. These include:
• local government policy
• the legislative authority
• the taxation framework
• reporting and accounting
• financial issues
Local government policy
The local government’s policy for the provision, financing and cost recovery of services will
be a key factor in assessing whether PPPs are seen as an accepted approach to service
delivery. The policies established by local government will be based on the values and
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objectives of the community and the elected Council or Board. They will also form the basis
for the local government’s plans and strategies for the provision and financing of services. If
PPPs are not seen as a viable or accepted approach to service delivery based on fundamental
values and policies, it is clearly not in the community’s best interest to proceed with
individual PPPs. More commonly, local governments will establish policies that identify the
circumstances (e.g., type of service, component of the service system) under which PPPs may
be considered. In addition to local government’s servicing and financing policies, they must
also consider the implications for other policies, including land use and development, human
resources and economic development. Efforts should only be directed toward advancing
proposals that are consistent with established local government policies.
Legislative authority
The legislative framework set out in the Municipal Act provides considerable flexibility for
local government to enter into PPPs. There are, nevertheless, constraints and procedural
requirements that will impact the ability of local governments to enter into PPPs. Local
government must also adhere to other provincial and federal statutes.
Taxation framework
In determining whether an opportunity is suited to a PPP, the local government should
recognize the interests of the possible private sector partner. One of the incentives that will
attract private partners is the ability to minimize the amount of tax they are required to pay.
Local government has the authority to exempt from municipal property taxes the “public use”
portion of property subject to a PPP agreement. In cases where the local government provides
an exemption, it can request a matching provincial property tax exemption.
Reporting and accounting
In addition to taxation considerations, local government should also consider accounting and
financial reporting considerations that apply to PPPs. Public sector accounting standards are
still evolving in the area of PPPs. The specific accounting treatment should be determined by
the entity’s accountant at the time any arrangement is proposed.
Financial issues
Local government needs to consider a range of financing issues before proceeding with a
PPP. Financial issues that should be considered prior to implementing a PPP project include:
• Can private sector financing compete with public sector financing for the type of service
or project being considered?
• What is the effective cost of borrowing?
• Can private sector companies be bonded for a project of this type and magnitude?
• Are there any senior government grants available for projects of this type?
• Are partnerships eligible for such grants?
• Is the project financially self-sufficient or can it become self-sufficient?
• What support mechanisms are the public sector prepared to make available (e.g.,
recourse financing, subsidies, supplies, equipment)?
• Is it possible to define an equitable and appropriate rate-setting mechanism?
• Is the financing structure without recourse to the local government?
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3
PPP preparation
3.1 Identification of areas’ needs
The first step in preparing a PPP is the study of the area where the project will be developed
in order to identify the desired coverage targets and service needs. The party that conceived
the idea for an agro-energy district will have to carry out a sector analysis and define the
technical specifications of the proposed PPP project.
As a result of the sector analysis, the government is able to determine to what degree an
enabling environment exists for PPP and what activities are required in advance of PPP to
create such an environment. The diagnostic is important to: (i) identify the strengths and
weaknesses of the sector and the most promising areas for efficiency increases, (ii) regularly
gauge and report on the progress of reform, and (iii) tweak the reform program as needed. The
sector analysis is likely to be performed with the support of a team of local and/or
international engineers, lawyers, economists, financial analysts, energy and policy specialists
etc.
The preparation stage is the time to develop the preliminary technical specifications.
Development of the final technical specifications of a project is an iterative process which
builds on feedback from the market and the affordability of the project at each design stage.
The technical design of a project starts with identification of desired coverage targets and
service standards. From these starting points, estimating the cost of these desired services
(factoring in presumed efficiency gains) and cost recovery tariffs is possible. In case of large
project where high level governance is involved, there are the options of putting these cost
recovery tariffs in place, subsidizing cost-recovery, or revisiting the initial targets and service
standards. These preliminary specifications will ultimately be enshrined in the PPP contract
dictating the technical outputs expected from the partnership.
The technical preparation builds on (and refines) the analytical work that has been done in
preparing the sector analysis.
3.2 Role of Stakeholders
Despite the long experience with PPPs, they remain controversial among a range of
stakeholders. This is partly attributable to the diverse range of stakeholders involved in the
process and the difficulty in reconciling their interests and concerns. In addition, too often the
stakeholders have not been properly consulted or engaged in the process. Consultation is
increasingly seen as important for several reasons:
•
•
•
Inadequate consultation or communication with stakeholders increases the danger of
opposition, potentially late in the process, leading to delays or even cancellation.
Furthermore, the stakeholders are critical to the sustainability of a PPP. Even if the
contract is awarded despite opposition, the difficulty and risk of the project increase
drastically if public support is not present.
Stakeholders provide valuable input to the design and practicality of an approach.
Allowing stakeholders to comment on PPP strategies allows for a sense of buy-in and can
lead to innovative approaches.
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•
•
Broad public support and understanding of the reform agenda encourage politicians to
stay committed.
Dissemination of information leads to increased credibility of project partners.
Despite these compelling reasons, some public organizations see risk in public consultation
either through the danger of raising expectations that may not be met, through losing control
of the flow of information, through the danger of being unable to reconcile differences, or
because information might fuel opposition. These risks are easily outweighed by the benefits
of communication and the crucial role it plays in building support for, and understanding of,
PPP.
Each role is critical, yet specific stakeholders will have different interests that influence how
they approach their role. There must be a consultation process to reconcile and prioritize
issues, leading to broad agreement on the objectives of PPP. Table 1lists the roles of the PPP
process stakeholders and Figure 1 illustrates their interests.
Table 1: Role of Different Stakeholders in the PPP Process
Stakeholder
Political decision makers
Role
Establish and prioritize goals and objectives of PPP and
communicate these to the public
Approve decision criteria for selecting preferred PPP option
Approve recommended PPP option
Approve regulatory and legal frameworks
Company management
and staff
Identify company-specific needs and goals of PPP
Provide company-specific data
Assist in marketing and due diligence process
Implement change
Consumers
Communicate ability and willingness to pay for service
Express priorities for quality and level of service
Identify existing strengths and weaknesses in service
Investors
Provide feedback on attractiveness of various PPP options
Follow rules and procedures of competitive bidding process
Perform thorough due diligence resulting in competitive and
realistic bidding
Strategic consultants
Provide unbiased evaluation of options for PPP
Review existing framework and propose reforms
Act as facilitator for cooperation among stakeholders
Source: Heather Skilling and Kathleen Booth. 2007.
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EMPLOYEES
 Ensure fair treatment
of present employees
 Provide career
opportunities
 Improve productivity,
efficiency, and morale
GOVERNMENT
 Maximize revenue
 Provide universal
access to service
 Ensure affordable
basic service
 Promote fair
competition
 Attract investors
 Improve public
welfare
Stakeholder
Interests
CONSUMERS
 Ensure fair pricing
 Improve quality and
reliability of service
 Increase
accountability and
responsiveness
INVESTORS
 Ensure stable,
transparent regulatory
process
 Enable organizational
restructuring and asset
allocations that favor
efficient operations
 Provide trained human
resources
 Generate more
investment
opportunities
Figure 1: Examples of Stakeholder Interests in PPPs [1]
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3.3 Market testing
Market testing must also take place as a mean to secure better value for money in
provision of public services. Initial steps in the market testing process are to identify
feasibility and scope of services subject to market testing, and to check whether
potential value for money gains are sufficient to outweigh the costs of testing the market.
The likely level of interest can be assessed through analysis of previous investments in
region, country, and sector, and by assessing the market interest.
the
the
the
the
As with all private sector involvement exercises, a public partner will seek to:
1) conduct market testing to discover if the private sector is willing and able to perform the
required tasks;
2) give potential bidders the opportunity to provide feedback on the proposed scheme;
3) give sufficient publicity and time for potential bidders to prepare proposals;
4) provide output/outcome performance specifications that clearly identify the service
requirements;
5) put in place an objective and fair bid assessment process.
3.4 Potential benefits
The potential benefits of the proposed partnership must be well-defined. Properly structured,
PPPs are able to deliver value for money to the public sector, acceleration of investment
programs and a genuine transfer of risk to the party best able to manage it. Effective risk
transfer, particularly during the construction phase, can generate significant cost savings that
easily outweigh the higher funding costs of the private sector partners.
FAO is striving to develop Agro-Energy for food security, rural development and climate
change mitigation through the following 5 objectives:
• stimulate the integration of agro energy issues into the agricultural sector;
• promote the potential of agro energy in the energy market;
• promote sustainable management of energy resources, of energy conversion systems and of
end-uses;
• enhance food security and rural development through the implementation of agro energy
systems;
• contribute to climate change mitigation through the implementation of agro energy systems.
3.5 Identification of potential actors
The public partner wants to encourage the further development of high quality service
providers in the market for public services. This requires that a competitive selection process
be used which insists on quality services, socially-responsible terms and conditions, and high
safety standards. If the public partner lays down reasonable expectations, abides by them over
time, and provides a level playing field, quality firms will be attracted to the market. This will
make it difficult for less socially responsible service providers to survive. Experience shows
that it is competition that delivers the benefits from PPPs, not private provision per se.
Dealing with a consortium, for most PPP projects, the following are the usual steps to select
it:
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








conduct a market testing exercise;
issue request for Expression of Interest (EoI) from the private sector;
pre-qualification of private sector companies including those that have submitted an
EoI;
issue RFP to pre-qualified private sector companies;
exclude proposals not meeting mandatory essential requirements;
conduct assessment on the proposals. Negotiate with the one or two best conforming
bidders to achieve improvements to bids whilst under competitive pressure;
select a preferred bidder or bidders to develop detailed, fully negotiated contract
documents (reserve the right to revert to alternative bidders if contract negotiations
break down);
request best and final offer;
recommend the preferred bidder to the relevant bid evaluation committee.
3.6 Exploration of the available national legal/regulatory and policy
frameworks
At the moment there is no comprehensive study of the PPP market at a global level. In order
to give some perspective on the topic, Table 7.2 provides details of PPP activity in 29
countries for which information is available, drawing on practitioner and other sources.
3.7 Selection of the right PPP option
There are a number of common contractual structures that are considered to be PPPs these
have been also presented in the chapter 4 of this deliverable (PPP classification).
A typical structure for a PPP project under the DBFO (Design Build Finance and Operate)
model is shown in Figure 7.3.
Selecting an appropriate PPP option is based on a diagnosis of:
• PPP options available (as described in chapter 4);
• technical constraints and goals of the sector (as identified in the diagnostic);
• legal and regulatory constraints (as identified in the diagnostic);
• institutional issues (as identified in the diagnostic);
• commercial, financial, and financing requirements and constraints (as identified in the
diagnostic);
• interest of the market (local and international as described below);
• special requirements of the sector based on characteristics of the system or population.
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Figure 2: Typical PPP project structure DBFO Model (Design Build Finance and Operate).[2]
The list of reform objectives should be compared with the results of the diagnostic and
features of each contract type, its advantages and disadvantages, likely outcomes and
prerequisites. From this analysis, it is possible to determine which option is most likely to
succeed at meeting the greatest number of (or the most critical) objectives.
Priorities for a PPP might include increased coverage, improved services, efficiency
improvements with associated reduction in government subsidy, or customer satisfaction. The
government and its advisors would use cost/benefit analysis and would consult with a wide
range of possible private partners (operator survey) to gain insight on the appeal, or lack of
appeal, of the options under consideration.
Particular PPP forms are used more widely and are more readily applied to particular sectors.
For instance, BOTs (Build Operate and Transfer) are more often employed in the
development of toll roads and wastewater
plants while management contracts might be seen in health-care or water services.
That said, no PPP option could be applied without tailoring it to the local context. The options
provide a menu of contract types that can be modified to suit specific project requirements.
Incorporating different components of different contract types or using several contracts in
combination may be necessary. Additional modifications may be necessary to facilitate the
financing of the transaction, to respond to concerns of potential partners, to improve lowincome service provision, and to address labor issues.
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3.8 Communication
community
strategy
to
reach
stakeholders
&
the
For stakeholders to play an active role in the PPP process, they must be given not only a
forum for participation but also the information they need to participate effectively.
The appropriate forum to communicate and build support for PPP is through an iterative
dialogue with stakeholders. Each communications program must be tailored to the local
context and PPP, but would include some or all the components below:
•
•
•
•
opinion research: opinion research gathers data on stakeholders, their perceptions, and
behaviours with respect to the issues concerning a specific PPP. The research influences
the content and media of the communications program as well as the reforms themselves.
The research is conducted on a relatively formal basis through questionnaires, polling, etc.
stakeholder consultation: consultation is a less formal process through which themes and
policies of interest are discussed within or across stakeholder groups. It is intended to
gather information and build an understanding among the reformers as to current
perceptions and understanding and the basis of those opinions. A key part of stakeholder
consultation is to manage expectations with respect to how feedback will be incorporated
into the reform process; that is, the feedback may not translate into direct change in the
PPP design or process but will be one stream of influence. This might be accomplished
through focus groups or stakeholder discussion groups.
public awareness: public awareness efforts are aimed at a broad range of stakeholders
and designed to increase general awareness of an issue. This is a proactive distribution of
information that will help inform public reaction to PPP. This might be done through TV,
radio, town meetings, and newspapers.
public education: public education is the process of providing stakeholders with the tools
and information required to increase understanding of an issue or to take on a new role.
This is a more specific and detailed program than public awareness.
Communication activities have to begin early in the process and continue through to closure
and even during implementation. The project structure should incorporate mechanisms to
ensure ongoing communication with the public and customers.
The communication program associated with PPP has to occur not only at all stages of PPP,
but on several levels: at the policy or key decision-makers’ level, the level of the enterprise,
among the stakeholders specifically affected by a PPP, and among the public at large as
needed.
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4
PPP implementation
A road map to implement an agro-energy district PPP should include the main actions showed
in Table 8.1
Table 2: Main action in PPP implementation
1
Set up the planning team (financial manager, technical manager, etc.)
2
Study of the target area’s characteristics
3
Selection of suitable partners / Achievement of successful partnerships (banks,
public entities, etc.; competence of the Public Entity to implement the project,
determine both sectors interest in this PPP)
4
Development of Business plan
(a) Identification of the Business Model (how to get value from the Agro-energy
District)
(b) Definition of Economic & Financial issues (namely the feasibility, bankability
and value for money of the project)
(c) Financial Implications of Risk (e.g. Revenue Risk, Construction Risk, Political
Risk, etc.)
(d) Detection of the right time to enter the market (start-up of energy production
plan)
(e) Definition of the strategic planning
(f) Definition of Legal & Contractual framework
5
Implementation of a Consensus Building Strategy
6
Selection of suitable technology/production plan according to local characteristics
7
Institutional Structures and Capacity building (PPP unit, technical assistance, etc.)
8
Identification of the supply chain (actors, environment)
9
Availability of the land (e.g. land purchase, if necessary)
10
Definition of the logistic plan
10
Monitoring and reporting on results
4.1 Set up the planning team
The Planning team could be considered similar to the ‘Project Steering Committee’ (PSCom )
used in the management of multi-disciplinary projects by works departments. The role of the
PSCom would be to oversee the progress of the project from start to finish, give general
direction of the project and make major policy decisions.
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The PSCom is not a contract administrator for the day-to-day contract administration. The
PSCom will either be chaired by or report to the officer in the client department with overall
authority for the project. The composition of a PSCom should be limited to an optimal size
for effective operation. For example, sub-groups on different expertise fields could be formed
separately and only the sub-group chairman representing the interest and concerns of the
corresponding subgroup members would be members of the PSCom.
The PSCom should contain the experience and expertise appropriate to its needs, and
include/employ the services of an experienced Contract Manager responsible for day-to-day
management and capable of ensuring adherence to the desired project timetable. In addition to
members of the client department’s own staff, the PSCom might include architects, engineers
with various specialisations, lawyers, and financial advisors; it may contain individuals from
both within and outside the public agency; and its composition may change according to need
at different stages of the project.
Where advisors to the PSCom are employed from outside government, the client department
will need to ensure against any conflict of interest arising. The client department should
contractually prohibit advisors from later working on the same project for private sector
bidders where this might risk the tailoring of advice or the use of inside information. Under
the conventional procurement approach the Works Branch and works departments may serve
as the works agent of the client department. Under the PPP approach, the client department is
responsible for forming its own PSCom which should possess the necessary skills and
knowledge to manage the contract during different stages of the project.
4.2 Study of the target area’s characteristics
According to what has been presented in the deliverable D3.1, the original identification of
the area was performed following:
i) agricultural characteristics of the area;
ii) interest expressed by local authorities to participate to the project activities;
iii) connections of RuralE.Evolution partners with authorities and local entrepreneurial
tissue.
The identification of the original target area was accompanied by a declaration of interest by
local authorities to participate to the action (enclosed to the negotiation package). Due to the
particular nature of the action (for which a close relation with the above actors is required)
and given some modifications occurred to the original situation (administrative elections for
local authorities; modification of the Consortium composition, decadence of interest by some
local authorities), some target areas were subject to modification.
This kind of modification was considered predictable since the beginning of the project (being
out of the direct control of the consortium) and do not affect the regular implementation of the
action (some determining only a slight delay in the project activities, being occurred in the
phase preliminary to the beginning of task. In a first analysis the main industrial activities of
the area and the needs of energy (electricity, heat and fuels) have been considered, in
particular evaluating the actual energy sources and their distribution as infrastructure. Then
the agroenergy potential of the territory has been considered, evaluating the local energy
services companies as potential and suitable partners to constitute a PPP.
A pre-feasibility analysis of the project has been done, considering bioenergy production
potential, identification of existing bioenergy production systems, prefeasibility of plant
location. The regulatory framework has been considered also and so the infrastructures were
analyzed. At the end of the analysis the place had proved to have strength, weaknesses and
opportunities and threats, reported in a SWOT analysis.
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4.3 Selection of suitable partners / Achievement of successful
partnerships
Once PPP has been structured and the preparatory work is underway, the transaction manager,
responsible for ensuring that the process runs smoothly, transparently, and timely, should be
in place. During the transaction stages, it is important to have more formal interaction with
potential bidders on the specifics of the transaction as designed. During these interactions, the
public partner needs to guard against potential manipulation of the PPP design and process by
the bidder to its advantage. Likewise, bidders should not enjoy any advantage (e.g., additional
information) in the bidding process through such consultations. Discussions must avoid any
bias toward a particular bidder and should be broadly held with sector stakeholders as well.
The government may find it useful to be supported by PPP advisors in its interactions with
potential bidders.
Two specific points of interaction with the potential bidders are:
 bid conference. During the bid conference, the government presents an outline of the
project and bidders are invited to react and question. However, in a formal setting
surrounded by competitors, some bidders may withhold concerns, be unwilling to
share good ideas, or may collude with other bidders to push for a particular change.
 bid document consultation. Alternatively (or in addition to a bid conference), bidders
may be invited to individually comment on the draft bidding documents, including the
draft contract. This approach allows the government to identify issues of concern
across the range of bidders. Government should send each bidder a full set of the
responses to all questions raised, thus avoiding any semblance of favoritism.
A bidder will expect to have a clear understanding of the time line, the sequence of activities,
the decision points, and the decision makers. This information should be given to bidders in
writing and should be regularly reviewed and reconfirmed. This clarity is necessary to provide
bidders with a sense of confidence in the transparency and reliability of the process.
The bid package, contracts, and any marketing documents as well as protocols for
communicating with the public and potential bidders need to be developed. The starting point
in the actual procurement process is the public notification of the opportunity and the
prequalification of bidders.
Under this process, an official notification is placed in local and international print and
electronic media, advising the public of an opportunity to participate in the project. The
content of the advertisement depends on applicable procurement rules. Companies are invited
to request a prequalification package and seek access to further information.
An important aspect of information dissemination is the establishment of a data room.
Prequalified bidders are invited to use this centralized repository of all information related to
the PPP project, which is to be available to potential bidders. The information should be
organized according to topics and as detailed, and granted equally and fairly to bidders.
During a transaction, the room will be staffed by an attendant and bidders must sign and
submit to data room rules (e.g., regarding access times, making photocopies, using other
technical equipment, etc.). The amount of time and effort required to populate a data room
should not be underestimated. Although the accuracy and completeness of the data in the data
room are normally not guaranteed, the process organizers and the government nevertheless
need to ensure that the data are not false or misleading. Bidders typically apply a degree of
skepticism to the veracity of the data; nevertheless, they will question the seriousness of the
process if very little data are available.
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Prequalification ensures that only bidders with the minimum required expertise and financial
strength are able to bid for the opportunity. This saves the government from the need to
eliminate more rigorously from an overly large pool of bidders later in the process. It also
encourages bidders that they will be included among a smaller number of equally capable
competitors.
The prequalification documents usually contain:
• project information, such as the key characteristics of the project and the operating context
(such as an information memorandum);
• instructions to bidders outlining the anticipated bid process and evaluation criteria;
• a list of the documents required of the prospective bidders to demonstrate their suitability for
the project.
In response, the prospective bidders submit information including:
• legal status of bidding entity;
• experience on comparable projects (including any relevant subcategories in terms of size of
project, region, particular expertise);
• financial status/resources of bidder;
• ability to raise financing;
• staff and resources to be directed toward the project.
A predetermined scoring matrix should facilitate assessment of the prequalification
applications.
The matrix sets out each criterion to be scored, the score assigned to each, and the respective
weighting. The matrix can include special criteria such as expertise in servicing low-income
customers or may prioritize local bidders if desired. It is important to be realistic about the
potential pool of bidders and set the threshold sufficiently high to discourage not serious or
unqualified bidders, while maintaining a pool of bidders large enough for effective
competition. The prequalification results in a short list of bidders invited to respond to the
bidding package. Generally, a short list of between 3 and 5 companies is a manageable and
competitive size.
4.4 Implementation of a Consensus Building Strategy
Technically sound public-private partnerships projects can fail without a full understanding of
socio-political dynamics and the value of communication in their design implementation.
Today public asset divestment programs undertaken by public bodies around the world are
under severe scrutiny from civil society organizations and citizens. Privatization programs can
take different forms and degrees in the transfer of asset ownership and management of the
service to consumers. Specifically, they can be complete sector divestments (telecom, other
productive industries), private participation in infrastructure (energy, ports, railways, and
roads), or public private partnerships (water services). For any of these initiatives, it is crucial
to incorporate communication analysis and stakeholder engagement at the policy and program
formulation stage. In this context all the privatization terminology will be used
interchangeably vis-à-vis the sectors and countries profiled in the publication.
It is now widely accepted that the success of PPP depends on the maturity of the institutions
in the market economy, including legal frameworks on property rights, private contracts,
dispute resolution mechanisms, and rules of entry and exit for business enterprises. For
privatization programs to be sustainable, however, they need to be properly understood,
taking into account the interests and perceptions of all stakeholders. This necessitates using
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strategic communication as policy design tool, rather than something added on once a policy
has already been formed.
In the 1990s, many privatization programs in developing countries proceeded slowly or were
aborted because of significant misconceptions and opposition among the general public.
Whether opposition was voiced by political leaders, labor unions, media, specific stakeholder
groups, or the public at large, these programs failed or were damaged because steps were not
taken to secure the necessary political and social support. Communication activities for the
range of private sector participation initiatives are more than just “public relations.” Their
challenges and obstacles cannot be solved with traditional public relation tools, such as press
releases, press conferences, and lobbying activities. Privatization programs require a carefully
conceived and systematically applied approach to communication — one that integrates
communication analysis and planning at each stage of the design and implementation. When
used effectively, strategic communication can significantly increase political and social
sustainability by creating space for dialog and stakeholder participation in the decisionmaking process.
A strategic communication program for public private partnerships serve two broad purposes.
First, it helps to avert failure by identifying current and potential sources of both support and
opposition. This information is crucial not only in setting priorities for communication
objectives, developing sound messages, and selecting the best possible communication
channels, but also in using those channels effectively and creating new ones if needed.
Communication research can raise awareness of an unsustainable status quo, uncovering
existing attitudes on a range of relevant issues, such as the drain on public funds due to poor
management of state-owned enterprises, political interference, clientelism, and nepotism. A
well-designed communication program can explain the role of private interest in creating
incentives to make society, as a whole, more prosperous. Second, a systematic approach to
communication helps to achieve a well-tailored privatization and private sector participation
program, serving as a two-way check and feedback mechanism at every stage, from planning
through execution. Public communication programs offer managers in public institutions and
state-owned enterprises tools for the privatization process that coordinate well with national
economic programs and fit political and social needs.
Communication programs create mechanisms for dialog with stakeholders through which
expectations for privatization can be managed. Failure to use communication programs results
in negative consequences found in countless development projects involving privatization.
Neglect of consensus building among stakeholders for privatization weakens a project’s
opportunity for success and sustainability. The consensus-building process needs to be
considered at every stage, from the initial conception and strategic planning through the
implementation. When preparing for privatization initiatives, a government and its advisers
should make substantial efforts to engage political parties, managers of publicly owned
enterprises, unions, workers, civil servants, business leaders, potential investors, national and
international civil society organizations, and consumers about the program’s operations and
benefits. General consensus may not be possible, but information flow and awareness raising
among all stakeholders are often prerequisites for success in the range of privatization
initiatives.
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4.5 Selection of suitable technology/production plan according to
local characteristics
The selection of suitable technology/production plan has been discussed in deliverable D3.1.
In a first analysis the main industrial activities of the area and the needs of energy (electricity,
heat and fuels) have been considered, in particular evaluating the actual energy sources and
their distribution as infrastructure. Then the agroenergy potential of the territory has been
considered, evaluating the local energy services companies as potential and suitable partners
to constitute a PPP.
A pre-feasibility analysis of the project has been done, considering bioenergy production
potential, identification of existing bioenergy production systems, prefeasibility of plant
location. The regulatory framework has been considered also and so the infrastructures
were analyzed. At the end of the analysis the place, biomass and technology were
individuated on the basis of a SWOT analysis.
4.6 Institutional Structures and Capacity building
PPPs require a range of stakeholders within and outside public structures to assume new roles
or perform existing roles in improved ways. Often, new entities are created, such as regulators
or PPP units, to manage the process. Public partners must ask a series of key questions to
understand the institutional requirements of the reform strategy. These questions might
include:
•
•
•
•
•
•
•
are the institutional and legislative frameworks in place to support sector improvement
and PPP, in particular. What are the impediments according to the public body, users, and
utility;
do the level of autonomy and accountability of stakeholders match their proposed
obligations;
are the relevant public sectors prepared to relinquish or revise their roles;
are the relevant public sectors prepared to delegate some control to private partners within
defined policy and regulatory parameters;
does each institution have the funding, staff, training, and equipment required to discharge
its functions;
does each institution understand its role and know how to develop the procedures for
accomplishing this role;
is there a key stakeholder—i.e., a leader—with the capacity and the political will to lead
and drive the reform agenda forward.
These institutional roles must be clarified at the latest by the time the PPP process is
complete. However, the greater the degree of uncertainty about institutional roles during the
PPP process, the higher the level of perceptive risk is likely for potential investors. At the
same time, there must be some flexibility to refine and update institutional roles as the sector
evolves and matures. Increasingly, as decentralization takes root, public organization has the
additional burden of determining at what level of government each role is best performed.
In the institutional analysis, it is important not to overlook the capacity to support bidding,
negotiation, and contract compliance and monitoring. Public partners may have unrealistic
expectations of the ability of their own organizations in that respect.
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4.7 Identification of the supply chain
Biomass can be converted into useful forms of energy using a number of different processes.
Factors that influence the choice of conversion process are: the type and quantity of biomass
feedstock; the desired form of the energy, i.e. end-use requirements; environmental standards;
economic conditions; and project specific factors. In many situations it is the form in which
the energy is required that determines the process route, followed by the available types and
quantities of biomass.
Biomass can be converted into three main products: two related to energy – power/heat
generation and transportation fuels – and one as a chemical feedstock. Conversion of biomass
to energy is undertaken using two main process technologies: thermo-chemical and biochemical/biological. Mechanical extraction (with esterification process) is the third
technology for producing energy from biomass, e.g. rapeseed methyl ester (RME) bio-diesel.
Within thermo-chemical conversion four process options are available: combustion, pyrolysis,
gasification and liquefaction. Bio-chemical conversion encompasses two process options:
digestion (production of biogas, a mixture of mainly methane and carbon dioxide) and
fermentation (production of ethanol).
A distinction can be made between the energy carriers produced from biomass by their ability
to provide heat, electricity and engine fuels. A useful means of comparing biomass and fossil
fuels is in terms of their O:C and H:C ratios, known as a Van Krevlen diagram. The lower the
respective ratios the greater the energy content of the material. The major conversion
technologies and processes are shown in figure 8.2.
Figure 3: Biomass to energy conversion chains. [3]
Understanding the full impact of Bioenergy systems on communities requires improved
understanding of the nature of the complete market chains, and of the different business
models, technologies, institutional arrangements and power dynamics at the various stages in
the chain, which can lead to very different outcomes.
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Figure 4: Actors involved in a bioenergy production chain in Tanzania [4]
Figure 4 presents the actors involved in a bioenergy production chain from sisal in the coast
of Tanzania. Lying on the Coast of Tanzania, bordering Kenya, Tanga Region has a
population of around 1.7million, with a growth rate in population from 1998-2002 of 1.8%
and a population density of 60 persons per square kilometer. The population of Tanga Region
has been increasing since 1957, and as a result of high population density, forests have
become endangered and wood scarce. The increasing need for income and food is not
matched by increased economic development or food production.
Sisal is the most important cash crop, used to produce yarns, ropes, carpets, clothing and
composites, and sold to the domestic and international markets. Since 1999 Katani Ltd, a sisal
growing company, has developed a system of smallholder and out-grower sisal farming, on
land owned by the company and in the surrounding areas. Katani has developed the first
biogas plant in the world to convert sisal biomass to biogas. This is used to run electricity
generators which power production machinery, with excess electricity supplied to outgrowers/smallholders homes, schools and hospitals.
4.8 Availability of the land
Land premium waiver or development rights should not be used as the major incentive for a
consortium to provide the facility/service. Otherwise, the well established tender
procedure/policy will be in jeopardy and projects may be criticized for bypassing the proper
procedures. Land revenue will effectively be hypothecated. That said, where there are
ancillary areas not needed by the required facility and the consortium identifies some
commercial opportunities within the site, granting of commercial development rights may be
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considered but this again, must not be the major incentive and must not undermine the normal
tender procedures.
The treatment of land as an asset should be dealt with on a case-by-case basis. As a matter of
principle, the disposal of land should be under a fair, transparent and competitive process.
Depending on the length of tenure and nature of the service involved in a PPP project, the
disposal of land can be by way of a Licence; Short Term Tenancy (STT); long lease in the
form of a Private Treaty Grant (PTG) or granted by public tender; or an enabling ordinance.
Dealing with the problem of land acquisition contract, there are differences of opinion on
whether it is best to have one unified contract, or two separate contracts that are crossreferenced to each other (one contract conferring the right to use the land/facilities and the
other relating to the other PPP issues).
Those in favour of a unified document argue that there is no need for a ‘separate’ service
agreement, and that the private sector commonly dispenses with a service agreement. The
advantage of incorporating all the rights and obligations in one document is that there should
be a consistency of drafting, and less chances of inconsistencies and omissions arising.
Those in favour of keeping separate documentation argue that:
 the land disposal document should be kept reasonably lean and simple, focusing on the
development and use of government land, and conferring title. It is not an appropriate
document for setting out detailed operational arrangement such as fees, entrance
charges, opening times etc;
 the commercial arrangements in a complex PPP project can be very intricate and are
best dealt with independent of the land documentation. Otherwise, preparation of the
land document will take much longer and will still involve more than one drafter;
 under a PPP approach, many parameters and terms and conditions are determined
through negotiations with the private partner. This process is not as open and
competitive as the normal tendering process for land. Hence, giving up land
development rights is theoretically less efficient. As the private partners are allowed to
retain the incomes arising from the commercial facilities, revenues are hypothecated;
 modification of even minor provisions in an executed land document requires formal
legal documentation, which is a lengthy, complex process that will reduce flexibility
in arrangements. It may have land premium or revenue implications that may not be
acceptable to the consortium;
 PPP issues such as profit-sharing are commercially sensitive and should not be
incorporated into the land grant, which will be subject to public scrutiny through the
Land Registry search facilities. It should be noted, however, that in many jurisdictions,
the requirements for probity and transparency dictate that copies of the project
documentation be made publicly available except for only limited commercially
sensitive information.
4.9 Definition of the logistic plan
Biomass is a renewable energy source which can be used as fuel in energy plants. Interest in
biomass as an energy source is increasing for several reasons. The use of biomass is CO 2
neutral and therefore does not contribute to global warming. It is an alternative for fossil fuels
(with limited resources) and as an energy crop it is an alternative for arable farmers. Several
types of biomass can be distinguished: rest-products (like demolition wood and waste paper),
agricultural by-products (like straw and tops) and energy crops (like willow, poplar and
miscanthus).
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The costs for biomass as a fuel are divided into three parts: the purchase prize, the logistic
costs for the collection, and the costs for establishing and running the energy plant. The costs
of the logistics of the biomass fuel collection may determine for a major part the feasibility of
these plans, especially when the purchase prize is low as may be expected when rest-products
or byproducts are used. The logistics, which include transport, storage, handling and pretreatment can be set up in many ways. Thus, it is difficult to estimate the logistical costs.
The biomass fuel collection is a logistical process consisting of flows originating in source
locations directed towards the energy plant. There can be direct transport or transport via
collection, pre-treatment or transshipment sites. The logistics of the collection include
transport, storage, handling and pre-treatment. These can be modeled by a network structure
A node corresponds with a location and an arc with transport. Usually there are three transport
options: road, water or rail transport.
Nodes can correspond with:
- a source location, where biomass becomes available;
- a collection site, where biomass from several source locations is collected;
- a transshipment site, needed when different kinds of transport means are used;
- a pre-treatment site, included in case of more complex pre-treatments, like pelleting of
waste paper;
- the energy plant, the target location for all biomass.
Pre-treatments, like size reduction and drying of biomass, are involved to improve transport
and storage characteristics or when the biomass characteristics do not correspond with the
requirements set by the energy plant. Pre-treatments are possible in every type of node, a
separate pre-treatment site is included only when specialized equipment is needed that can not
be placed at all locations in the logistic chain.
4.10 Monitoring and reporting on results
The monitoring process in the early stages of developing the project will deal with:
 Oversee the design and construction phases;
 Monitor the project once it becomes operational;
 Establish and manage the day to day relationship with the consortium;
 Keep abreast of developments in the field covered by the project and consider the need
for change;
 Manage the agreement of any changes during the life of the contract;
 Monitor the achievement of key performance indicators;
 Recommend and calculate payments/abatements;
 Report regularly to the PSCom (Project Steering Committee);
 Advise the PSCom (Project Steering Committee) of any serious performance failures
and the need for dispute resolution measures to be initiated.
Over the life of a project the individuals holding key posts will inevitably change. It is vital
therefore that comprehensive records are maintained of all interactions and, wherever
possible, new post holders are fully briefed by the departing incumbent. Particular care must
be taken if there is a handover of responsibilities at the time of commissioning the project
facilities.
The Contract Manager will usually need a support team. The make-up of the support team
will vary at different times, and may include both civil servants and contract staff. They may
not need to work full-time on a particular project.
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5
Business plan
5.1 Identification of the Business Model
As with any major public project that involves changing the way public business is done the
first step is to ensure that there is a case (a business case) for proceeding. A business case
addresses the issues that the proposal seeks to resolve. It will include the compelling case for
change, in terms of the existing and future business needs; the options considered; the
preferred option that represents the optimum balance of estimated expenditure and revenue,
anticipated savings, expected benefits and the risks identified together with risk allocation and
mitigation proposals; and an implementation plan to achieve the intended outcome.
In the early stages it might not be clear whether a PPP or another delivery option will best
resolve the issues being considered. Therefore, the development of the business case for a
PPP will often be done in two stages. The stage 1 business case study involves a high level
selection from among the different delivery options the one that best meets the service needs.
In the stage 1 business case study, the options to be evaluated should include those of the
public sector (e.g. in-house provision, contracting-in, trading fund, corporatisation, etc.) and
private sector (e.g. contracting-out/outsourcing, PPP, etc.). To be considered as having a
prima facie case, a PPP should meet most, if not all, of the following criteria:
 there is a major investment programme, requiring effective management of risks
associated with construction and delivery;
 the private sector has the expertise to deliver the programme and there is good reason
to think that it will offer value for money;
 the structure of the service is appropriate, allowing the public sector to define its needs
as service outputs that can be adequately contracted for in a way that ensures effective,
equitable and accountable delivery of public services in the long term;
 risk allocation between the public and private sectors can be clearly made and
enforced;
 the value of the project is sufficiently large to ensure that procurement costs are not
disproportionate;
 the technology and other aspects are stable and not susceptible to short-term fast paced
changes;
 planning horizons are long term, with assets intended to be used over long periods.
If this exercise provides a prima facie case for a PPP, resources would then have to be
invested in the stage 2 business case study. The stage 2 business case study focuses on
confirming the justifications.
The stage 2 business case study should include a detailed analysis of the likely costs, benefits
and risks of the PPP option to the government, baseline costs, PSC (Public Sector
Comparator), critical success factors, project management and implementation plan,
procurement strategy, risk management strategy, benefits realization plan, etc.
It should be noted that some of the issues will be covered in both stages 1 and 2 of the
business case study, e.g. evaluation of options, selection of the preferred option, etc. Stage 1
addresses the issues at a higher level and in less detail. With more information available, stage
2 will review, validate and update the assumptions and estimates made earlier and map out the
way forward. For example high level cost estimates gathered from a market-testing exercise
might be sufficient for comparing different options in stage 1; whereas a properly prepared
PSC (Public Sector Comparator) will be required to demonstrate value for money of a PPP in
stage 2.
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The EU plans to issue a Government Business Case Guide in 2008 to provide more guidance
on the conduct of business case studies.
As with other procurement methods, the lowest priced option does not necessarily offer the
best value for money. Value for money refers to the best available outcome taking account of
all benefits, costs, and risks over the whole life of the procurement. Value for money is
determined through a comparative analysis of the benefits, costs and risks of the available
procurement alternatives.
Assessing the value of these variables requires a degree of judgment and the use of both
quantitative and qualitative analysis. Value for money combines economy, efficiency and
effectiveness. It can manifest itself as:
 delivery of a service capability at a lower cost;
 greater certainty of an expected financial outcome due to less exposure to significant
risk;
 increased benefits to the end user of a service due to the public sector’s focus on
service delivery rather than asset procurement.
Assessment of value for money is not in itself affected by the budget impact of alternative
procurement methods. The assessment should also be independent of the accounting
classification of a private financing arrangement i.e. whether or not any borrowing is off the
government’s balance sheet. The budgetary implications of alternative procurement methods
should be considered separately as part of the government resource management framework.
PPP procurement inclusive of private financing should be used where it offers superior value
for money compared with other procurement methods.
5.2 Definition of Economic & Financial issues
A PPP deals with cash flows over long periods of time, and the value of money is affected by
the time that this money is received or paid. Two interlinked types of calculation are normally
used to make decision:
- a discounted cash flow (DCF) calculation, which gives a value to today, or ‘net
present value’ (NPV), for a future cash flow;
- an internal rate of return (IRR) calculation, which determines of the overall
rate of return on an investment based on its future cash flow.
DCF and IRR calculation are used in a variety of different ways by the different parties to a
PPP project.
Dealing with the public sector a DCF calculation may be used:
- when deciding whether to proceed with the procurement of a project an
Economic Rate of Return calculation (a form of IRR) may also be used in this
case;
- in a Public Sector Compartor;
- to evaluate bids for a PPP project;.
Dealing with investors, the project IRR – i.e the IRR cash flow before debt service or equity
returns – may be used to assess the general financial viability of a project without taking
account of its financial structure. However the main measure for investors is the Equity IRR –
i.e. the IRR of the equity cash flow (distributions) versus the original equity investment. This
is commonly used as a hurdle rate for investments –i.e. in order for an investment to be
justified the equity IRR must be x% or above.
Dealing with PPP contracts, the equity IRR may be used to calculate:
- the initial Service Fees;
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-
revisions to Service Fees, or compensation for changes in circumstances
during the life of the PPP Contract in some cases;
- refinancing-gain calculations;
- compensation to investors for early termination of the PPP Contract, for which
a DCF calculation may also be used.
and the Project IRR may be used to calculate the payment due on termination for a default by
the Project Company.
Concerning lenders, they use the Project IRR to calculate their Loan-Life Cover Ratio.
Another important economical issue dealing with PPP management is the public sector
investment decision process. There are various measures which a Public Authority may use to
determine if an investment in new public infrastructure is economically justifiable.
Nevertheless additional factors need to be taken into account to make this decision:
- value for money;
- affordability;
- balance-sheet treatment.
When deciding if an investment is economically justifiable, a Public Authority:
- identifies the benefits and costs of the project, including its indirect effects;
- prepares a cost-benefit analysis, a key element of which is the discount rate to
be applied to future benefits and costs;
- or calculates the economic return of the project (i.e. an IRR calculation which
uses the same economic data).
Having decided that a new facility is economically justified, how can a public Authority
decide whether the PPP route is the right one? This question has two aspects:
- does the PPP offer good value for money compared to public-sector
procurement?
- is the project been procured.as a PPP in a way which offers good value for
money?
A Public Sector Comparator (PSC – also known as Public Sector Benchmark) is an attempt to
answer the first of these questions. A PSC is an assumption of what the NPV cost (sometimes
known as the net present cost (NPC)) of the project would have been had it been acquired
through a conventional public-sector procurement, which is then compared with the NPV cost
of the PPP. The latter may also be estimated, or it may be known if bids have been received
for it. If the PPP’s NPV cost is lower than PSC, the PPP can be justified. (This is not the same
as the economic cost-benefit analysis discussed above – here only the two sets of project costs
are being compared). Even if payments are not made by the Public Authority, as in the case of
a Concession, the user charges represent revenue foregone by the public sector, and hence the
analysis is the same as for a PFI-Model Facility.
But a PSC raises a number of difficult issues – in particular:
- how comparable costs are to be produced;
- what discount rate is to be used to make these costs comparable in NPV terms;
- how adjustments are to be made for risk transfer and other differences between
the two types of procurement, including tax.
While Value for money is important for the public authority, an equally relevant question is
that of ‘Affordability’, i.e. whether it can actually afford to pay the Service Fees (in the PFI
model – Private Finance Initiative), as the Public Authority will probably have a set budget
for the project, within which it has to work. Equally in the Concession Model, the Facility has
to be affordable for users.
Dealing with the balance sheet treatment, if it is clear that the choice is between a project
which is outside the public-sector budget (at least in relation to its initial capex), and n o
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project at all, which as discussed above is the unusal motive for going down the PPP path,
then there needs to be a method for deciding whether or not a project is ‘on-balance sheet’ for
the Public Authority and hence the public sector as a whole. It is clearly not an ideal approach
for Governments to set their own public-accounting rules for PPPs, and there are international
efforts to create consistency in this respect, based on the United Nations System of National
Accounts (‘SNA’) last updated in 1993. The International Monetary Fund (IMF) has a ‘Task
Force on the Harmonization of the Public Sector Accounting’, which covers, inter alia, the
topic of ‘Government/Public Sector/Private Sector Delineation’. Within the European Union,
Eurostat, the Statistical Office of the European Communities, provides the European Union
with statistics from EU member countries on an harmonized basis, and as a part of this
process has to decide what should and should not be included within the figures for publicsector budgets. Eurostat’s rules on government accounting which are based on SNA, are
therefore a useful starting point in considering balance-sheet treatment for PPPs.
Figurre 5: Decision tree for Eurostat balance-sheet treatment [5]
Concerning financial structuring, it deals with the process by which bidders and their lenders
structure the financing for a PPP project. The Service Fees are the final output of this process,
since these have to cover the Project Company’s financing and operating costs and provide a
return on the bidders’ equity investment. A financial model is used to make the required
calculations for the bid, and at various other phases of the project; the model has to work
within the constraints of:
- the Public Authority’s requirements for the PPP Contract term and Service-Fee
profile;
- lenders’ requirements for term and payment profile of their debt;
- lenders’ Cover Ratio requirements;
- investors’ Equity IRR requirements;
- and the complex interplay between all of these.
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The financial model covers of the whole of the Project Company’s operations, not just the
Facility itself, and thus takes into account tax and accounting issues that may affect the final
cash flow of the Project Company.
A financial model is used in different ways during the bidding and development phase of a
PPP project:
- initial feasibility from the Public Authority’s point of view: a ‘shadow’
financial model will be produced by the Public Authority’s financial adviser,
which will attempt to predict the bidder’s costs, financing structure and other
assumptions (in Australia this is called the Private Financing Predictor
(‘PFP’)), and hence whether the outcome in terms of Service Fees is likely to
be acceptable from the public-sector point of view;
- structuring the bidders’ financing and reviewing the benefits of different
financial terms and arrangements;
- calculation of the Service Fees required to cover capex (Capital Expenditure),
opex (Operating and Maintenance Costs), debt service and the investors’ return
as a basis for the bid;
- as part of the lenders’ due-diligence process;
- fixing the Service Fees where these depend on interest rates at Financial Close.
After Financial Close the model continues to be used:
- as a basis for lenders to review the changing long-term prospects for the
project and thus their continuing risk exposure;
- to price variations and compensation payments in the PPP Contract;
- to calculate any Refinancing Gain to be shared between the Public Authority
and the Project Company;
- as a budgeting tool for the Project Company.
However, given that the original objective of the model has changed, it will require some
adaptation to undertake these tasks, especially the last. As there are three parties involved –
the Public Authority, the Sponsors and the lenders- there could theoretically be three parallel
financial models, but this is seldom the case. The more usual course is for the Public
Authority’s financial adviser and the lenders to review the model prepared by the Preferred
Bidder (or the latter’s financial adviser), calibrate it against the Public Authority’s shadow
financial model to ensure that the results are the same (given the same assumptions) and then
use the bidders’ model thereafter, in the ways listed above. Alternatively, there is some merit
in the Public Authority providing a template financial model to be used, with suitable
adaptation, by all bidders, to make comparison of bids easier.
It may be asked why the Public Authority should have access in this way to the Preferred
Bidder’s financial model – isn’t the data in this model commercially confidential? But this is
unlikely to be the case because:
- the Public Authority needs to be able to check whether the bid is financially
viable, and can thus deliver the initial investment in the PPP project and its
long-term service requirements;
- if the financial model is used to calculate the Sercice Fees at Financial Close it
obviously has to be agreed by both parties;
- there has to be an agreed Base Case, because should compensation be required
later it has to be measured against the outcome in the PPP Contract which both
parties originally agreed was reasonable.
Therefore transparency between the parties on model assumptions and calculations is the
better practice.
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5.3 Financial Implications of Risk
Well prepared and implemented projects will have a higher chance of avoiding and/or dealing
with problems that may arise. Experience demonstrates that for both conventional and PPP
procurements poor drafting of the contract/performance requirements and/or poor contract
management can lead to problems downstream. The key in entering into contracts of all kinds
is to be aware of such possibilities, take expert advice, and manage the contract letting and
negotiation processes accordingly. As with any project involving investments, the due
diligence, risk allocation, and negotiation processes inherent in letting a PPP contract give the
opportunity for many potential problems to be identified and resolved prior to contract
finalization. Some potential problems and the means of addressing them are:
1) benefits not being shared with the public partner;
 rigorous negotiation by the public partner for terms to protect its interests and
adequate supervision;
2) bottom line considerations assuming disproportionate importance;
 avoidance of underbidding by consortia, equitable variation conditions;
3) business culture co-existing uncomfortably with public service;
 identification of consortia with a clear commitment to public service;
4) buy-out costs of replacing a poorly performing operator;
 rigorous selection of consortia, early identification and rectification of poor
performance;
5) disruption to service, and costs incurred, when exercising step-in rights;
 rigorous selection of consortia, maintenance of an appropriate level of market
competition, adequate contingency arrangements;
6) high financing costs;
 appropriate allocation of risk and innovative financing arrangements;
7) inadequate accountability;
 rigorous selection of consortia and adequate supervision;
8) lack of competition;
 encouragement of the market through market testing/development and well managed
contracting processes;
9) lack of flexibility, especially over the longer term;
 appropriate contractual change management/variations procedures;
10) liquidation and use of company structure to avoid liability;
 rigorous selection of consortia, strong step-in rights, linking payment to performance,
requirement for parent company guarantees, additional security etc;
11) lock-in to an unsatisfactory contract - leading to costs of exercising a break clause;
 rigorous output/outcome based definition of requirements and contractor selection;
12) Loss of control;
 Clear service definition, effective contract management, early identification and
rectification of poor performance;
13) unavailability of experienced/qualified PPP contractors;
 encouragement of the market through well managed contracting processes and a
continuing deal flow;
14) unmitigated risks due to inappropriate allocation;
 management of risk allocation, drawing on expert advice;
15) unreliable levels of service;
 rigorous selection of consortia and adequate supervision.
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5.4 Definition of the strategic planning
Once the client department has identified a project or a service that is required, and is
considered to have potential as a PPP, a feasibility study should be conducted. A decision to
proceed with the PPP approach would usually follow from the feasibility study
recommendations which should address the following:
 providing service specifications, which can be agreed upon by stakeholders and tested
in the market;
 assessing the financial viability of the project;
 assessing whether the client department has the necessary legal powers to let
successfully a contract for the provision of the service in question and, if not, what can
be done to address the absence of such powers e.g. amending existing legislation.
5.5 Definition of Legal & Contractual framework
In drawing up the detailed arrangements for a PPP project, the client department will need to
ensure that public partner’ interests are adequately protected. These provisions cover issues
such as restrictions on assignment or disposal of rights and obligations, restrictions on
mortgages and charges, claiming damages to make good defects/upon the service provider’s
failure to perform obligations, compensation to the service provider for added value, control
over change in equity ownership and shareholding etc.
Subject to the proper construction and interpretation of any relevant legislation in any
particular situation, the public partner has extensive constitutional and common law powers to
make commercial contracts including PPP contracts. Public partner cannot transfer to the
consortium its basic accountability and responsibility to the public for the delivery of public
services. In addition, public partner may have a continuing, not delegable duty of care to
recipients of certain services provided by the consortium – particularly those recipients in a
position of vulnerability, to whom public partner owes a duty of care. This not delegable duty
of care may arise at common law or under legislation. The existence of non-delegable duties
limits the extent to which Government can transfer legal responsibility for the provision of
services to the consortium. This is the case even where the financial consequences of a breach
of the duty can be transferred e.g. by indemnification from the consortium, adequately
supported by insurance carried by the consortium. Where public partner has a non-delegable
duty in delivering a service, it may remain liable for any negligence on the part of the
consortium engaged to provide the services on public partner’ behalf. In this way, a nondelegable duty imposes a similar liability on public partner for the acts of the consortium as
for the acts of its own employees.
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6
Requirements of partnership contracts
Regardless of the option selected, the essential elements to be included in a contract are:
• the parties to the agreement;
• interpretation: Sets forth the definitions of important terms and providing guidance on
the interpretation of the contract’s provisions;
• the scope, territorial jurisdiction, and duration of the agreement;
• the objective of the contract;
• circumstances of commencement, completion, modification, and termination of
contract;
• the rights and obligations of the contractor;
• the rights and obligations of the government;
• the requirement for performance bonds to provide security for government if the
construction and/or the service delivery falls below standards;
• insurance requirements to provide security for the insurable matters;
• government warranties;
• private sector warranties;
• consequences to a change in law;
• service quality, and performance and maintenance targets and schedules;
• the identification of regulatory authorities, if any, and the extent of their roles and
authority;
• the responsibilities of the contractor and the government with regard to capital
expenditures;
• the form of remuneration of the contractor and how it will be covered, whether from
fixed fee, fixed fee plus incentives, or another arrangement;
• how key risks will be allocated and managed;
• the contractor’s rights and responsibilities with regard to passing through or entering
public or private property;
• reporting requirements;
• procedures for measuring, monitoring, and enforcing performance;
• procedures for coordinating investment planning;
• responsibility for environmental liabilities;
• procedures for resolving disputes;
• delay provisions describing what is and is not an excuse for a delay in construction or
operations;
• force majeure conditions and reactions;
• procedures to be followed when either party to the PPP contract wishes to change any
material portion (variation) of the contract;
• identification circumstances;
• the rights of each party to any intellectual property brought to the project or created
during the project, including the steps to be taken to protect the intellectual property of
third parties, such as information technology software manufacturers;
• conflict of interests and dispute resolution;
• description of the conditions under which either party may terminate the contract, the
processes to be undertaken in that regard, and the consequences to each party of a
termination;
• the circumstances that may permit either the government or any financial institution to
“step in” to the contract to protect its rights under the PPP contract;
• consequences of a change in the ownership or key personnel of the private partner;
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• mechanisms whereby the parties to the PPP contract will interact with each other going
forward;
• requirement that each party comply with all laws pertaining to the project, including
obtaining environmental, zoning, planning, and other permits;
• conditions by which public sector employees are employed by the private sector
contractor, including any restrictions on terminations or redundancies for operational
reasons;
• conditions precedent: describes any conditions precedent to be fulfilled by either party
before the contract takes effect.
This list is illustrative and does not capture every clause required in a contract. The final
content of the contract will depend on the project scope, local legal requirements and
precedent, and advice of legal advisors.
Normally there will be several contracts in a PPP project, including:
 the Project Agreement, which is the key document between the government and the
consortium;
 the Direct Agreement(s);
 sponsor arrangements (equity; equity subscription and shareholders agreements);
 debt: subordinated loan agreements, and credit and security documentation;
 back-to-back contracts e.g. design, constructor, operation and maintenance.
See Figure 6.
Figure 6: Key Contractual Relationships in a PPP Project (DBFO Model) [2]
A number of jurisdictions, including the UK and Australia, have produced some
‘standardized’ documents. These have taken into account a considerable amount of local
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experience and are often credited with speeding up, and reducing the cost, of the
bidding/negotiating stages.
6.1 Example: Italy
The Italian legal framework for the realization of PPP operations contract are covered in most
part by the Legislative Decree no. 163/2006. Within it, in line with the directives of the EC
2004, are defined and ruled the concessions of public works and service concessions,
including the sponsorship contract. Also the approval of the Finance Act in 2007 made it
possible the employment of property leasing contracts for the construction of public works.
In Italy at the moment there are 7 forms of PPPs:
1) contract of concession to build and management based on public initiative (art.143 of
“Code of public contracts for works, services and supplies” , D.Lgs. n.163 of 2006). This
is the traditional concession to build and operate in which the public administration, once
the infrastructural needs have been individuated, elaborates a preliminar project and
inserts this in the programming instruments already approved. On the basis of the
preliminar project made by the public administration it starts the private tenering
procedure to inidividuate a winner.
The private income is received during the operation phase while there are also risks of
financial and technical nature. The public contribution aims to grant to the private the
obtainement of an economic and financial balance.
2) contract of concession to build and operate based on private initiative (art. 153 and
following of “Code of public contracts for works, services and supplies” , D.Lgs. n.163
of 2006). This is a particular procedure in which the private sector is the promotor for the
realization of a public facility or service and presents to the public administration a
specific project that is linked with infrastructures already inserted in the programming
instruments of the administration itself. The private income is received during the
operation phase while there are also risks of financial and technical nature. The public
contribution aims to grant to the private the obtainement of an economic and financial
balance.
The proposal, once declared of public interest by administration, is the basis of a public
tender, aimed to the identification of the dealer, articulated in two moments.
3) other concessions of operation; these are contracts between the public authority and a
private subject for the supplying of a service. The private income is perceived during the
operation of the service and can be linked to a price. This is balanced by the risks in
operation the service. Compared to the previous two forms in this case the supplying of
the service is not linked with the realization of a facility, and if a kind of facility is
required, its value is not significative with respect to that generated by the supplying of
the service.
4) mixed public-private company; the D.lgs n.267 of 2000 with art. 113 and following,
identifies two typologies of public-private companies: stock companies with the purpose
to realize with the contractual obligation of majority participation of public bodies, to
which can be assigned the only operation of services with or without economic
significance; companies limited by shares realized without the contractual obligation of
the majority participation of local bodies, for the operation of public services that have no
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economic significance and for the realization of the facilities necessary to the operation
of services or for the realization of infrastructures and other works of public interest.
5) urban transformation company. Urban transformation companies have been introduced
with art. 120 of dl.lgs 267/2000. These represent a particular typology of mixed
companies and are based on a specific social purpose, that is the design and realization of
urban transformation works, that will operate urban plans. Private income derives from
the commercialization of the works realized on the upgraded area.
6) public sponsorship contract. These are contracts subscribed between a public body,
that assumes the qualify of sponsee, and a private operator, sponsor; the first will display
the name and/or logo of the private sponsor that will pay for this.
7) immovable leasing. These are contracts of lease of movable or immovable properties
acquired or build by the lessor following indications of the leaseholder, who will assume
all the risks, and who will have the possibility to become the proprietary of the leased
properties at the end of the contract, by paying and established price. The law 27
December 2006, n. 296 (Finance Act 2007) art. 1, paragraphs 912-914 and 907.908
allows the use of the leasing contract for the construction, the acquisition and completion
of public works or public utilities, by the commissioners required the application of the
code of contracts public works, services and supplies.
Procedures for awarding the concession contract and management. The above mentioned
PPPs forms in Italy can be summarized in the following Table 10.2.
Figure 7: PPP forms in Italy [6]
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6.2 Example: Greece
The Legal Framework of PPPs
Law 3389/2005 (Official Journal A 232/2005) establishes a new legal framework for the
implementation of PPPs in Greece. This legal framework aims to promote the implementation
of PPP projects, taking into consideration the experience gained from concession agreements
that were successfully implemented in Greece, but also the important attempts over the last
year to implement privately funded projects, many of which, however, were not successful
because of the inadequate preparation of the contracting authority, the incomplete business
justification or the unrealistic estimation of their feasibility. For the first time, Law 3389/2005
introduces a stable legal framework that overcomes the above mentioned obstacles.
Specifically the law defines the Public Entities (Central Administration, local government
organizations, legal entities under public law) that can implement partnership contracts with
Private Entities, in areas falling within the scope of their competence. The private sector
undertakes a significant part of risk, related with financing, constructing and providing
infrastructure or services. Their investment is repaid either by the Contracting Authority or by
the end users. This means that these projects are funded, in total or partly by funds and
resources of the private sector. PPPs are not allowed to engage in projects or activities that are
the direct and exclusive province of the State, under the terms of the Constitution of the
Hellenic Republic, such as national defense, police work, the award of justice, and the
execution of judicially imposed penalties and sentences.
Law 3398/2005 provides incentives for both public and private entities to be engaged in
partnerships for constructing infrastructure or delivering services, mainly through the
simplification of relevant procedures. It defines the minimum content of a PPP contract, with
clear description of the rights and obligations of both parties, regulating particular issues such
as financing, the participation of public entities in partnerships, the payment mechanism,
granting of permits, protection of the environment, treatment of archeological findings,
expropriations and cases of projects undertaken by Public Utility companies. Moreover, legal
issues related to these partnerships, such as the transfer of claims, validity of sureties in rem,
taxation and resolution of disputes are clearly defined.
Under Law 3389/2005, two new administrative bodies have been established, aiming at the
support of Public Authorities, in order to improve the effective preparation and management
of PPP projects:
• the Inter-Ministerial Committee for PPPs (IM PPP Committee) is a collective
governmental body that defines and specializes PPP policy, approves PPP projects that
fall under Law 3385/2005 for the provision of infrastructure and the delivery of services
by private funds, and coordinates and monitors the implementation of PPP projects;
• the Special Secretariat for PPPs (PPP Unit) has been established within the Ministry of
Economy and Finance. This Special Unit identifies projects that can be delivered via a
PPP scheme, promotes their implementation and provides support and assistance to IM
PPP Committee and to the Public Entities in the context of all necessary procedures for
the finalization of a PPP project.
According to the new legal framework, parliament ratification of PPP contracts is no longer
needed, while specific issues related with risk allocation, which were difficult to be dealt in
the case of traditional procurement methods, that fall under Law 3389/2005 are efficiently
manipulated. Finally, the procurement procedures are in line with the EC Directive 2004/18,
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aiming at the customization of relevant procedures and the improvement of the efficiency of
public administration.
Requirements of Inclusion to the Provisions of Law 3389/2005
Partnerships may be subject to the provisions of Law 3389/2005, provided that all the
following conditions are met:
• they aim at the construction of works or provision of services, which fall within the
scope of the Public Entities pursuant to a provision of the law, or a contract, or their
articles of incorporation,
• they provide that the Private Entities, against payment to be made as a lump sum or in
installments by the Public Entities or by final users of the works or services, shall
assume a substantial part of the risks associated with the financing, construction,
availability of or demand for the partnership object, and related risks, such as, for
example, management and technical risk,
• they provide that the financing, in whole or in part, of the construction of the works or
provision of services, shall be accomplished with capital and resources secured by the
Private Entities, and the total contractually budgeted cost for implementing the
Partnership object does not exceed two hundred million Euros, not including the Value
Added Tax payable.
By unanimous decision of the Inter-Ministerial Committee for PPPs, it is possible, in
exceptional circumstances, for Partnerships to be subject to the provisions of this law, even
though one or more of the above conditions are not met.
PPPs shall not be allowed to engage in projects or activities that are the direct and exclusive
province of the State, under the terms of the Constitution of the Hellenic Republic, such as
national defense, police work, the award of justice, and the execution of judicially imposed
penalties and sentences.
6.3 Example: Spain
PPP have existed in Spain for a long time and have been frequent in a wide range of areas
such as local services provision, industrial and services land promotion, infrastructure
management and economic promotion. Since the 90’s the political interest on PPP has
increased by reinforcing the Spanish innovation system and improving the efficacy and
efficiency of public policy by several fiscal and other measures. The most relevant ways of
collaboration in PPPs are infrastructure provision and R&D promotion.
In terms of infrastructure provision, the new Eurostat accounting treatment of PPPs has
revealed that the existing Spanish model, which uses a wholly state-owned company as
sponsor of a project is no longer viable. Thus, the Spanish government has recently launched
a new legislation with the aim of offering a more attractive and secure framework for
sponsors and financiers of infrastructure. A new public finance law, new general tax law, new
public patrimony law, new Subsidies law and many others have come to existence although
not all of them have come in force yet.
Following the successful experience of UK in the development of PFIs, the Spanish
Government has set aside a series of new regulations. The main reform affects the Public
Works Law which regulates public concessions and the Private Finance Initiative (PFI) model
has begun its development in Spain.
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The higher and higher expenditures of the local and regional authorities, the obsolescence of
the current infrastructures and the pressing need for new ones as well as the reduction of
European funds together with the necessity of outsourcing some auxiliary services, have
given rise to new contracting types in the form of Public Private Partnerships (PPP)/ Private
Finance Initiative (PFI) which allow the public authorities to meet the investment needs of the
public sector without increasing the deficit and also allow the private initiative not only to
maintain but also increase its contracting activities at the time of reducing its risks.
The PFI model facilitates and integrated real state solution to the public administration, which
allows to transfer the risk of promotion and financing to a consortium set by several private
companies able to finance the investment through own funds and external debt.
By means of PFI, the public administration controls the key services and subcontracts the rest:
construction, cleaning and maintenance, security, catering trade, logistics…with specialized
companies. But the real attraction of the PFI model for governments is that it reduces the
current capital expenditure, sending it out to the future by means of agreements of deferred
rents.
The changes introduced by the new Law 13/2003 provide greater certainty and flexibility in
some respects. A number of interpretation difficulties and questions remain which could make
some of the changes less useful in practice than is intended to be the case. However, the
legislation is clearly aimed at encouraging PPP projects in Spain and greater involvement of
the international capital markets. It raises interesting possibilities for a broader range of
experienced private sector players to structure public works concession financings in more
innovative ways.
6.4 Example: Portugal
A specific law on PPPs exists in Portugal, which considers PPP in a broad sense, e.g. it only
considers PPP for investments over 25 millions of Euro and for some specific areas, such as
roads and health. A large number of transport PPP projects have been developed, including
five motorways under the SCUT programme and four others, all with EIB involvement, to
develop the Portugese transport infrastructure. Other projects include water and sewerage,
subways, local transportation (e.g., light railway) and museums.
There is no appliance of PPPs in the energy sector. There is also a public procurement law
that applies to some cases of PPP, where the public actors include city halls or other public
partners. Unlike other countries, there is no official registration of PPP in Portugal.
6.5 Example: Hungary
As there is no official definition of PPP in Hungarian law, no clear distinctions can be made
when categorising a project as a PPP project. Therefore, no one piece of legislation can be
identified as the supreme law governing PPP; several legal provisions may be relevant
depending on the characteristics of the project.
Generally speaking, the legal framework consists of laws that are relevant to all PPPs and
laws that are project specific. The most important piece of legislation is the Act on Public
Procurement (Act 129 of 2003 and its modification Act 108 of 2008), which sets out the
entire bidding procedure. The Act on Concessions (Act 16 of 1991) provides for additional
procedural rules where the project matter is exclusively state or local government property
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under the Civil Code (Act 4 of 1959). For local PPPs, the Act on Local Governments (Act 65
of 1990) is the relevant piece of legislation. For central government projects, the Act on the
State Budget (Act 38 of 1992 and its modification Act 65 of 2006) and a number of
corresponding government decrees apply. When preparing bids and project agreements, the
Civil Code and sector-specific legislation must be taken into account.
The first thing to consider is the procedural framework, which in most cases is dominated by
the public procurement rules. The question of whether the contracting entity is considered a
public entity under the Act on Public Procurement and the nature of services procured,
together with the gross value of the PPP, determine whether or not a public procurement
procedure must be followed. The European and national legislation governing public
procurement clearly defines the entities and project values that necessitate the use of a
transparent and competitive public procurement procedure when purchasing goods or services
or facilitating construction projects. In most cases these criteria are fulfilled, making public
procurement mandatory. However, as most of the public procurement rules were enacted
before PPP projects became common, some provisions may hinder the development of PPP
projects.
The nature of the services to be provided in a PPP structure may mean that the tendering
procedure set out in the Act on Concessions is also applied. In certain cases both the public
procurement provisions and the tendering procedure set out in the Act on Concessions must
be applied at the same time. Both the Act on Public Procurement and the Act on Concessions
contain provisions governing the interaction of the two procedures to resolve any
inconsistencies. Article 10/A of the Act on Concessions could be considered an example of
specific PPP legislation. Where public services are provided by a concessionaire company in
which the state or local government has a majority stake and that is being passed on to private
investors, a tender must be issued for the provision of services that the concessionaire
company has been performing and that fall under the Act on Concessions. This could be
considered a case of the private sector taking over a public service, which may amount to a
full blown PPP if, while purchasing majority stakes in the concessionaire, the buyers
undertake to develop those public services further at their own expense and, even, at their
own risk.
The legislation leaves a number of questions unanswered, creating possible pitfalls for PPP
projects. These inconsistencies are not necessarily caused by national legislation directly but
may also go back to the problem of some EU-wide provisions not being completely PPP
compatible. One example is the handling of perfected securities created over PPP assets
where the private financing party steps in to replace an original service provider that failed to
meet its financial obligations towards the financing party. In such cases there is a risk that the
obligation to procure public services under the designated procedure laid down by the Act on
Public Procurement may prevent the financing party from: (i) performing the services itself
since it was awarded to the original service provider in a public procurement procedure; or (ii)
if not providing the services itself, passing the assets gained by perfecting the securities to
another enterprise that can provide the public services in question.
Governmental body handling PPPs
The Hungarian government has become reasonably active in using the PPP structures for an increasing
number of deals and projects. It established the Inter-Departmental PPP Committee in 2003 to
encourage the growth of PPP, spread information on PPP within different government departments
and comment on plans for potential PPP projects before such plans are submitted to the decisionRuralE.Evolution - IEE/07/579/SI2.499063
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makers. The committee also prepares proposals for shaping the legal basis of PPPs. It is chaired by the
administrative secretary of state of the Ministry of Economy and Transport (Gazdasági és Közlekedési
Minisztérium) and comprises representatives from the Ministry of Economy and Transport, Ministry
of Finance (Pénzügyminisztérium), Ministry of Justice and Law Enforcement (Igazságügyi és
Rendészeti Minisztérium), Prime Minister’s Office (Miniszterelnöki Hivatal) and Central Statistical
Office (Központi Statisztikai Hivatal), as well as the National Development Agency (Nemzeti
Fejlesztési Ügynökség). PPP units also exist within certain ministries. For example, the Ministry of
Economy and Transport has its own department of property management; the Ministry of Finance has
a PPP working group; and the National Sports Office has a PPP project office. At the Ministry of
Justice and Law Enforcement, the department of penalty enforcement was formed to supervise prison
PPPs. In 2005, one of the secretaries of state in the Prime Minister’s Office was also engaged in the
coordination of governmental PPP projects, although how this worked in practice is not clear from the
official description.
The last Government Resolution No 2028/2007 (II 28) (Resolution) defined the provisions on the
procedure of the PPP committee, which is the only piece of legislation dedicated to regulating PPP
specific matters. Under the Resolution the PPP committee must:
- evaluate and opine planned PPP projects;
- ensure the professional background and conditions for encouraging and propagating the PPP
structures in Hungary;
- publish information within the public administration about PPP structures;
- monitor and evaluate completed PPP projects; and
- develop a methodology for planning PPP projects and for related public procurement procedures and
contracting, as well as for monitoring such projects.
The government has also adopted Government Decree 24/2007 (II 28) on the undertaking of long-term
obligations with a specific view to the PPP concept, eg outlining the role of the PPP committee in
evaluating whether a PPP structure or pure state financing is appropriate. As a result of the activity of
the interdepartmental PPP committee, some laws have been slightly amended to facilitate PPPs.
Projects over a certain value must have approvals in addition to the PPP committee opinion. The Act
on the State Budget requires that long-term state undertakings with a net present value of between
Ft10bn (€38m) and Ft50bn (€190m) must have the prior authorisation of the government, while
projects with a net present value of over Ft50bn must be pre-approved by parliament. Also, if
parliament approval is required, it must be provided with information on the main elements of the
contract and the need for state financing.
Procurement policy
For purely local projects, the tenderer proceeds in accordance with its internal rules until the
publication of the tender. For central government projects or local projects that are financially
supported by central government initiatives, the tenderer needs to obtain prior approval for the project
from central government, which in turn consults the interdepartmental PPP committee. This
preparatory phase may take a considerable period of time for the tenderer (perhaps more than a year).
A key element is conducting feasibility calculations on the proposed project and calculating
the public sector comparator (PSC), which is a decisive factor. The PSC shows how much the
proposed project would cost if it were financed purely from the state budget (or the budget of the local
government concerned). The PSC should then be compared with the proposed budget of the PPP
version of the project.
The rest of the procedure is run in accordance with the Act on Public Procurements. Most PPP
procurements are announced as negotiated procedures with a pre-qualification phase (ie ‘negotiated
procedures with a published invitation to participate’ under the Act on Public Procurement). It is also
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common for the tenderer to publish a preliminary summary on the potential project a few months
before publication of the actual call for tender. Thereafter, the submission period for pre-qualification
is usually around the legal minimum of 37 days and the tenderer evaluates the prequalification bids
within a month. The negotiation period ranges from three to nine months, typically in two rounds.
The fees payable for the detailed tender documents are usually less than €1,000. Other costs
(without advisory fees) may amount to a few thousand euros. It is also common for bidders to be
required to provide approximately €4,000-€20,000 as a bid bond to enter into the negotiation phase.
These costs are regarded as an investment by the bidders and are not reimbursed by the tenderer.
The procurement procedure is fairly transparent and each party has the right to file a remedy
application with the Public Procurement Arbitration Committee (Közbeszerzési Döntőbizottság) and
with the courts.
Competition and market access
Competition is primarily ensured by the compulsory application of open and transparent tendering
procedures and the applicable laws expressly declare and acknowledge the principles of equal
treatment and fair competition. The Hungarian PPP market is open to foreign bidders irrespective of
whether international expertise is important. Although foreign bidders have been successful in sizeable
projects, only Hungarian bidders have been successful in smaller projects such as those launched
under the central initiatives co-ordinated by the Ministry of Education (Magyar Universitas Program)
and the National Sports Office (Sport XXI). This may reflect a lack of interest in smaller projects by
foreign investors, who have shown a lot of interest in major projects (eg the construction and operation
of the M5 and M6 motorways, as well as the Electronic Road Toll Collection System).
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7
PPP process within RuraE-Evolution project
7.1 Preparation and signature
Understanding (MoU)
of
the
Memorandum
of
An ultimate objective of the project (representing at the same time a measurable prove of the
soundness of PPP scheme for Agro-energy Districts) is the signature of five Memoranda of
Understanding between Public Authorities, agricultural entrepreneurs (or their consortia), and
eventual further financial players, in the five RuralE.Evolution target areas, expressing the
intention to implement a PPP Agro-energy district in the near future. The methodology
described in this guide will be applied in order to commit the local actors to become partners
of the future PPP.
Once a preferred partner is chosen, the two parties enter into negotiations. The scope of the
negotiations is defined and both partners select a negotiating team. Once a draft contract has
been prepared and the parties have come to an agreement, a memorandum of understanding is
prepared and the formal process of ratifying the contract begins. Negotiations are concluded
when Council or the Board and duly authorized representatives of the private partner
authorize the contract. Once the contract is negotiated, the local government debriefs the other
proponents.
The long-term success of a new infrastructure project is dependent on the correct
identification of both the benefits and the risks associated with it. Correct identification must
be followed by appropriate allocation of these benefits and risks – the latter to the party best
able to minimise or control them at realistic cost. The project sponsors and the SPV (Special
Purpose Vehicle or Consortium) should, in conjunction with the SPV’s lawyers, analyze the
risks arising under the project, identify each project contract to be put in place, and which
party is to take these risks and ensure that the appropriate provisions appear in the relevant
contracts to achieve this. The lenders and their advisers will need to satisfy themselves that
this has been achieved under the contractual structure and other relevant laws, in a way that is
consistent with the assumptions underlying the financial plan.
Given that a number of parties with different interests will be involved in the project, the final
pattern of risk allocation will be made within a contractual framework that reflects the
outcome of negotiations and commercial compromise, and one that also takes into account the
relevant legislative framework.
There are several different perspectives to keep in mind in any general discussion of project
contracts. These documents will be typically long term commercial agreements and designed
to protect the interest of the project sponsors. Secondly, they will allocate the perceived risks
associated with the project between the different participants. Finally the resulting allocation
will need to be bankable. Each of these considerations will pull the parties to them in
somewhat different directions as the documents are structured and negotiated.
There is of course no single definition of the term ‘project contracts’. It tends to be used
loosely to describe all the documents needed to allow the project to go ahead, other than the
financing documents. It represents all of the commercial agreements, licenses, contracts,
leases and corporate documents that underpin the project that is being financed. A typical list
might include the following:
 a concession agreement or government license;
 a consortium (or other collaboration) agreement between the sponsors;
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





a shareholders or other joint venture agreement;
corporate documents for the consortium and other project companies;
management contract for the consortium;
a construction contract (or engineering, procurement and construction contract (EPC);
contractors sub-contracts, equipment supply agreements and warranties;
security for the construction contractor’s ad, depending on the responsibility assumed
by the construction contractor, the equipment supplier’s, performance;
 an operation and maintenance agreement of technical services agreement;
 an off-take agreement for the purchase of the completed facility’s product;
 a site lease or other document of entitlement to land;
 possibly specific enabling legislation;
 ancillary government permits and planning consents;
 agreement with local utilities;
 project insurance and related documents;
 technology/operating licences;
It should be noted that not all the rights required by the consortium will be acquired by
contract. Some rights might arise as a matter of general laws, while in other cases the rights to
be granted as a part of a concession may result from the holding of a competitive tender.
7.2
Creation of the PPP and start up of the company
Following the Memoranda of Understanding, the partners will be able to initiate the
preparation activities based on the guidelines produced in this deliverable. A company will
more likely be established to supervise the construction of the agro-energy plant and take up
all the legal and financial responsibilities of the consortium. Its target area of the
Rural_Evolution project aims to establish a different agro-energy district, so the results will
only be available after the end of the project.
One of the major challenges is that using the PPP approach imposes many more demands on
public partner that are not works departments. In the traditional procurement of a building or
a facility, a works department takes responsibility for conducting or overseeing the design and
construction before handing it over to the client department upon commissioning. As a result
most client departments do not possess the necessary contract management skills.
It is unreasonable to expect non-work departments staff to develop rapidly the necessary
contract/project management skills to manage large, complex, high value projects. It is more
sensible, practical and cost-effective to employ someone who already has those skills. This
will often involve engaging non-civil servants.
Client departments should, as far as possible, structure their contracts in terms of capacity and
technical standards on the basis of foreseeable, stable expectations. Ideally, changes should be
avoided after finalization of the contract. However, in the case of lengthy contracts changes in
services involving both construction and operational changes are almost inevitable. The
contract needs to address these issues. Measures could include:
- taking account of deflation/inflation and other price-related variables ensuring the service
charges the public partner has agreed to pay in future years will not be in excess of future
market prices for such services;
- break clauses after a period of time,
- renegotiation clauses;
- periodic review mechanisms;
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referrals to mediation, arbitration, etc.
In particular, the contract should show whether the department or the consortium assumes the
risk of certain classes of change. For example, general changes in economic conditions, costs
of work and materials, as well as taxation and changes in general law may be met by the
consortium; whereas discriminatory specific legislation affecting the project may be met by
the department.
However, consideration should be given to managing situations where such changes fall
outside of normal bounds such that the consortium does not suffer unsustainable losses or
enjoys unconscionable profits. Due to the uncertainties of inflation rates and the quantum of
operating costs over a long term contract, the department will need to consider carefully the
manner by which service charges are to be varied in certain specified circumstances. It would
be unusual for prices to be fixed for the lengthy periods for which PPP projects are typically
let. The public partner should therefore only permit appropriate indexation mechanisms to be
incorporated when service charges are to be reviewed. For example, choosing an index that
may be short lived, or is not independently produced, is not a sensible approach. Nor is it
prudent to have too narrow a focus on a particular industry or sector. There will, of course, be
many other issues to consider in this context, including the circumstances where the particular
index specified in the contract is no longer published or the basis upon which it is calculated
is changed. The public partner should ensure that the price it has agreed to pay in future years
will not be in excess of future market prices for comparable services. Some form of
benchmarking or market testing may be required for this purpose. Benchmarking would
typically involve the consortium comparing either its own costs or the costs of its contractor
against the market cost of such services. Market testing, on the other hand, might require the
consortium to re-tender in the market any relevant contractor’s services to test the value for
money of those services.
-
Agreement between the department and the consortium may be required on:
- the amended method of services delivery;
- the adjusted price for the services;
- whether there are capital payment implications;
- changes to the performance measurement system.
The contract should contain clear terms and conditions governing the criteria for pricing a
variation in the contract; any grounds on which the consortium may refuse to implement a
variation; and any remedies available to the client department in the event of such a refusal.
The department will specify the outputs that it requires from technical equipment/facilities,
and the performance standards to be met, on the basis of known technologies and established
standards.
These standards will be set for a period for which the department is confident that they will
remain valid - for example 10 years. Successive generations of equipment are likely to be
developed which produce these outputs and meet these standards more efficiently and at a
lower cost. Where the consortium believes that replacing equipment will lead to lower whole
life costs, it will do so. It will not replace equipment that is functioning effectively and
producing the required outputs where there is no economic justification for doing so - any
more than the department would replace equipment in these circumstances. The department
may make it a requirement of the contract that it shares in any realized costs savings from
technology changes, or savings that might reasonably be expected from upgrades, which
could have been implemented but were not. Whether such a provision is appropriate will
depend on the likely impact on the contract price and other value for money considerations.
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The public partner, rather than the client department, normally enters into an agreement with
the contractor. If the client department’s functions are carried on by a different party within
the government the contract will continue undisturbed. If the department’s functions are
transferred to a quasi or non-government entity it may be necessary for the public partner to
underwrite the credit worthiness of the successor entity with respect to the contract.
If a function were discontinued altogether, the public partner would be faced with a service
that it no longer needed. A break clause could be included in the contract to deal with this
eventuality. If this had the effect of passing the risk of the service continuation to the
consortium, it would be reflected in the contract price. In order for the contract to obtain
financing, any break clause for the benefit of the Government would only be exercisable
subject to compensating the consortium appropriately for the loss of the contract.
7.3
Follow-up and construction of the plant
PSCom changes its role to monitoring and reporting the progress of the construction works of
the project. PSCom should satisfy itself that standards specifications, quality of works and
the operation of the facilities meet the minimum standards agreed in the contract PSCom to
facilitate commissioning. PSCom to satisfy itself that the facility, where appropriate, is able to
satisfy the delivery of contracted performance. Contract Manager takes up the day-to-day
monitoring role of the project once it becomes operational. Establish and maintain close and
regular contact (e.g. regular liaison meeting) with the consortium to resolve problems before
they become serious. Ensure comprehensive records of all interactions are kept properly.
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8
Closing of PPP
Dissolving a partnership at the end of the contract term is a legal process. This process is
subject to both contract and statutory law. The original PPP contract between the parties
should contain provisions to deal with dissolving the partnership. Provisions to this effect may
include:
• provision for disposal or transfer of assets (in cases where infrastructure or facilities
are being transferred to the local government from the private sector partner,
assurances of the state of the infrastructure or facilities need to be explicit in the
contract);
• allocation of net earnings or losses;
• repayment of capital;
• payment of liabilities.
Depending on the complexity of the agreement or the infrastructure or services that it covers,
the list of clauses that concern dissolving the partnership may vary considerably.
Once a contract has ended and the partnership has been dissolved, the local government may
find itself responsible for the provision of a service or infrastructure. The local government
should have a plan at the outset of how service will continue to be provided to users. This
plan may include:
• the local government provides the service or infrastructure for users;
• a new PPP arrangement is developed and is “solesourced” to the existing private
partner. This strategy will depend largely on a local government’s policies relating to
procurement, and inviting proposals for certain projects;
• the local government can determine if there are others interested in providing the
service or infrastructure after the initial contract is dissolved.
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9. PPP SCHEMES
DISTRICT
APPLIED
TO THE
AGRO-ENERGY
Dealing with an agroenergy district four main possible directions can be chosen:
1 auto-producing energy;
2 selling heat;
3 selling power;
4 selling heat and power.
Besides this other classification of biomass business can be made depending on the property
of the biomass plant, or of the biomass itself; this can be:
1) Private property;
2) Public property;
3) Public-Private shared property.
From the two above mentioned classifications the following schemes can be traced back:
1)
Auto-producing Heat and or Power with public biomass
Banks
Public Biomass (ex
Municipality owned
Wood)
Autosupply
(No Contract)
Public Body
Municipality)
PPA
And/or
Power
(ex
Concession
Heat
Plant
Society)
(Private
Figure 8: Auto-producing Heat and or Power with public biomass
Case Description
This case presents the reality in which the Public body produces biomasses that uses to autoproduce heat for its own needs. The public biomass can be produced for example from a
wood that is in the lands that belong to the Public Body. To reduce the investments and
allocate risks the Public Body can choose to make a concession to leave the production and
management of the biomass plant to a private society.
In this agro-energy district model the PPP contracts are the following:
- biomass conversion plant (BOT – Build Operate Transfer -, BOO – Build Own Operate -,
BOOT – Build Own Operate Transfer -). Banks can be involved to finance the public body
who is investing in a concession of a service (heat) and the private who is investing in a new
plant.
Referring to the case above the public Body can auto-produce heat and at the same time sell
power to the grid to maximise the incomes.
In this agro-energy district model the PPP contracts are the following:
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- biomass conversion plant (BOT – Build Operate Transfer -, BOO – Build Own Operate -,
BOOT – Build Own Operate Transfer -).
- PPA (Power Purchase Agreement). This kind of contract links the producer to the public
authority that buys the power produced. Example of this contract are attached to D2.2
deliverable. In the “CONTRACT REDACTION” phase, so besides the concession contracts
(BOT, BOO and BOOT) there is also the PPA (Power Purchase Agreement) to be considered.
Guidelines
The steps required to realize this PPP are, as already explained above:
PRELIMINARY ACTIONS:
- study of the target area characteristics;
 Biomass assessment;
 Biomass Harvest cost estimation;
 Storage cost estimation.
- identification of area’s needs;
 Analysis of public needs in terms of heat;
 Energy sinks individuation and characterization.
- market testing;
 Individuation of the most favourable technology;
 Analysis of final costs of energy to the end user depending on the adopted
technology.
 Chose whether produce heat or heat and power.
- identification of potential actors;
 Identification of Banks;
 Identification of bioenergy plant producers;
 Identification of operation and maintenance enterprises.
- communication campaign to reach stakeholders;
 Organization of a communication campaign.
PPP IMPLEMENTATION:
- Set up of the planning team (financing manager, technical manager, etc.);
 Individuate the chairman;
 Individuate subgroups;
 Individuate the Contract Manager.
- Selection of suitable partners / Achievement of successful partnerships (banks, public
entities, etc.; competence of the Public Entity to implement the project, determine both sectors
of interest in PPP);
 Develop bid documents;
 Organize the bid conference;
 Prepare a predetermined scoring matrix.
- Development of the business plan;
 The business model is: “Auto-producing Heat and or Power with public biomass”;
 Economical and financial issues are: the quantity of debt linked with the project,
the costs of supplying biomass for the public, the costs of the plant and operation
and maintenance phases; taking into account the incomes it is important to
compare different incentivation programs if available, besides the possibility to
produce only heat has to be compared with the cogeneration option.
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
Risk allocation is made reserving plant operation and maintenance phase to a
private society;
 the right time to enter the market will be strongly linked with incentivation
policies;
 definition of the strategic planning;
 for the definition of legal & contractual framework, it has to be considered the
following section.
- implementation of a Consensus Building Strategy;
- organize stakeholders meeting;
- organize local events;
- set-up a web site of the project.
- selection of a suitable technology/production plan according to local characteristics;
- identification of the supply chain;
- individuate logistic issues;
- individuate production site layout;
- define the logistic plan;
- check for land availability
- institutional structures and capacity building (PPP unit, technical assistance, etc.);
- connect to PPP national agencies (ex. Italian UTFP, Technical Unit of Project Finance).
CONTRACT REDACTION:
In this case it has to be chosen, based on the Municipality needs, the type of contract,
between: BOT, BOO and BOOT. These are all concession contracts, in which the diverse
term have to be set depending on the different national laws legislations. Some examples are
proposed in the attachment.
PPP MONITORING:
As above mentioned the monitoring process in the early stages will deal with:
- oversee the design and construction phases;
- monitor the project once it becomes operational;
- establish and manage the day to day relationship with the consortium;
- keep abrest of developments in the field covered by the project and consider the nee for
charge;
- manage the agreement of any changes during the life of the contract;
- monitor the achievement of key performance indicators;
- recommend and calculate payments/abatements;
- report regularly to the PSCom (Project Steering Committee);
Advantages and disadvantages
ADVANTAGES
-The public body reduces the total investment;
- The public body allocates the risks;
- The public body spares in heat costs;
- The private has a granted supply of biomass fuel (because it is the owner);
- The private has incomes coming from the concession of a public service;
- if the private sells electricity to the grid the incomes will be higher and so also the added
value of the starting fuel. So part of the incomes will be allocated also on the Public Body.
DISADVANTAGES
- The property of the plant can be not public (in case of BOO);
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- The community can refuse the biomass energy plant if it is not strongly promoted;
- The Public Body has to own biomass and grant a continuous supply with its own financial
resources;
- If the private doesn’t sell electricity the incomes will be lower and so also the allocation to
the public body of these.
- being not present a Special Purpose Vehicle (SPV) all the management of the Agroenergy
district contracts will be on charge of the Public Body.
2)
Auto-producing Heat with private biomass and/or selling electricity to the grid
Banks
Autosupply
(No Contract)
And/or
Power
Private Biomass (ex
Private
Short
Rotation Forestry)
PPA
SPV PublicPrivate shared
Heat
O & M
Contract
Concession
Public Body
Municipality)
(ex
Ownership?
Plant
Society)
(Private
Figure 9: Auto-producing Heat with private biomass and/or selling electricity to the grid
Case Description
This case presents the Public body (ex. Municipality) that realizes a participated publicprivate Special Purpose Vehicle. Legally the special purpose vehicle is often a Limited
Liability Company (LLC) of which some contracts are proposed in attachment.
It is the Special Purpose Vehicle that deals with the Private Society that furnishes the plant,
the public body that consumes heat and so spares money (ADVANTAGES), the SPV can
own and operate the plant or just operate the plant that is owned by the public Body. Anyway
the SPV must have contracts that regulate biomass acquisition from farmers and heat
contracting with the public Body and land lease and so on. Also the ownership of the plant
has to be cleared: is it of the public body or of the special Purpose Vehicle? Besides the
private farmers can play a role in the SPV participating of the incomes given by heat
contracting or just be suppliers of biomass being paid an agreed price for it. All these aspects
have to be cited in the specific contracts.
The case in which the Special Purpose Vehicle is involved also in selling electricity to the
grid implies that PPA (Power Purchase Agreement) has to be added to the contract
framework.
As for case number 1 the private farmers can participate to the incomes coming from heat and
electricity contracting or just be biomass suppliers and being paid for it.
In this agro-energy district model the PPP contracts are the following:
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- biomass conversion plant (BOT – Build Operate Transfer -, BOO – Build Own Operate -,
BOOT – Build Own Operate Transfer -). This is a contract that will regulate the connections
between the Special Purpose Entity (SPE) and the Public Body.
- the SPV can also stipulate contracts for fuel (with private farmers) contracts for land and for
Operation and Maintenance of the plant and for the property of the same.
- PPA (Power Purchase Agreement) in case of power production.
Banks are principally related with the SPV that attracts the most of the financing resources.
The steps required to realize this PPP have been already explained above.
In the “CONTRACT REDACTION” phase besides the concession contracts (BOT, BOO and
BOOT) there is also the contract on which the SPV is based and also the fuel contract and
land contract and the operation and maintenance contract etc.
Guidelines
The steps required to realize this PPP are, as already explained above:
PRELIMINARY ACTIONS:
- study of the target area characteristics;
 Biomass assessment
 Biomass cost estimation.
- identification of area’s needs;
 Analysis of public needs in terms of heat;
 Energy sinks individuation and characterization.
- market testing;
 Individuation of the most favourable technology;
 Analysis of final costs of energy to the end user depending on the adopted technology;
 Chose whether produce heat or heat and power.
- identification of potential actors;
 Identification of Banks;
 Identification of bioenergy plant producers;
 Identification of operation and maintenance enterprises;
 Identification of private producers;
 Identification of Special Purpose Vehicle personal.
- communication campaign to reach stakeholders;
 Organization of a communication campaign.
PPP IMPLEMENTATION:
- Set up of the planning team (financing manager, technical manager, etc.);
 Individuate the chairman;
 Individuate sub-groups (financing section, technical section etc.);
 Individuate the Contract Manager.
- Selection of suitable partners / Achievement of successful partnerships (banks, public
entities, etc.; competence of the Public Entity to implement the project, determine both sectors
of interest in PPP);
 Develop bid documents;
 Organize the bid conference;
 Prepare a predetermined scoring matrix.
- Development of the business plan;
 the business model is “Auto-producing Heat with private biomass and/or selling
electricity to the grid”;
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
Economical and financial issues are: the quantity of debt linked with the project, the
costs of supplying biomass, the costs of the plant and operation and maintenance
phases; taking into account the incomes it is important to compare different
incentivation programs if available, besides the possibility to produce only heat has to
be compared with the cogeneration option;
 Risk allocation for the public is made committing plant operation and maintenance
phase to a private society and creating a Special Purpose Vehicle to manage all the
agro-energy district so joining all the public-private interests involved;
 The right time to enter the market is strongly linked with incentivation policies;
 definition of the strategic planning;
 for the definition of legal & contractual framework, it has to be considered the
following section.
- implementation of a Consensus Building Strategy;
 organize stakeholders meetings;
 organize local events;
 set-up a site of the project.
- selection of a suitable technology/production plan according to local characteristics;
 identification of the supply chain;
 individuate logistic issues;
 individuate production site layout;
 define the logistic plan;
 check for land availability
- institutional structures and capacity building (PPP unit, technical assistance, etc.);
 connect to PPP national agencies (ex. Italian UTFP, Technical Unit of Project
Finance).
CONTRACT REDACTION:
The contract framework in this case is all referred to the Special Purpose Vehicle (SPV) that
in this case is the reference point for all the financial, technical and economical activities of
the agroenergy district.
In this case it has to be chosen, based on the Municipality needs, the type of contract,
between: BOT, BOO and BOOT. These are all concession contracts, in which the diverse
term have to be set depending of the different national laws legislations. Some examples are
proposed in the attachment.
If it is sold also electricity to the grid a PPA (Power Purchase Agreement) has to be used.
PPP MONITORING:
As above mentioned the monitoring process in the early stages will deal with:
- oversee the design and construction phases;
- monitor the project once it becomes operational;
- establish and manage the day to day relationship with the consortium;
- keep abrest of developments in the field covered by the project and consider the nee for
charge;
- manage the agreement of any changes during the life of the contract;
- monitor the achievement of key performance indicators;
- recommend and calculate payments/abatements;
- report regularly to the PSCom (Project Steering Committee);
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Advantages and disadvantages
ADVANTAGES
- the public body reduces the total investment;
- the public body allocates the risks;
- the public body spares in heat costs.
- in this case the Special Purpose vehicle created works as an attractor and reference point for
investments in the agroenergy district;
- the SPV will distribute incomes among its members (ex. Public Body, Privat biomass
producers etc.);
- the SPV will be not charged of technical management of the biomass plant, that will be done
through an Operation and Maintenance contract with a private society.
DISADVANTAGES
- the SPV has to join the different public and private interests into one compact Body; there
could be problems due to the lack of balance between them;
- the SPV has to be adequately composed and able to cover technical, economical and
management problems;
- if the private biomass suppliers are not inserted in the SPV the biomass supply can be a very
difficult aspect.
3) Selling heat to privates and possibly selling power to the grid
Banks
Fuel
Contract
Private Biomass (ex
Private
Short
Rotation Forestry)
Power
SPV PublicPrivate shared
Heat, Private
buyers
O & M
Contract
Incomes
Ownership?
Public Body
Municipality)
(ex
Plant
Society)
(Private
Figure 10: Selling heat to privates and possibly selling power to the grid
Case Description
In this case the Special Purpose Vehicle (SPV) buys biomass from private parties, contracts
with the public for Land Lease for example, contracts with private for plant acquisition and
operation and maintenance and contracts with private buyers for heat selling. This means that
the public advantages are the heat contracting incomes, while in this case the private partners
spare money. The private farmers that supply biomass can participate to incomes given by
heat contracting or agree on a fixed price for the biomass making a fuel supply contract with
the Special Purpose Vehicle (SPV).
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The case in which the SPV sell electricity to the grid is similar to the previous but it adds the
Power Purchase Agreement (PPA) to the contract framework.
Guidelines
The steps required to realize this PPP are, as already explained above:
PRELIMINARY ACTIONS:
- Study of the target area characteristics;
 Biomass assessment;
 Biomass harvest cost estimation;
 Storage cots estimation.
- Identification of area’s needs;
 Analysis of public needs in terms of heat;
 Energy sinks individuation and characterization.
- Market testing;
 Individuation of the most favourable technology;
 Analysis of final costs of energy to the end user depending on the adopted technology;
 Chose whether produce heat or heat and power.
- Identification of potential actors;
 Identification of Banks;
 Identification of bioenergy plant producers;
 Identification of operation and maintenance enterprises;
 Identification of private producers;
 Identification of private heat consumers.
 Identification of Special Purpose Vehicle personal;
- Communication campaign to reach stakeholders;
 Organization of a communication campaign.
PPP IMPLEMENTATION:
- Set up of the planning team (financing manager, technical manager, etc.);
 Individuate the chairman;
 Individuate sub-groups (financing section, technical section etc.);
 Individuate the Contract Manager.
- Selection of suitable partners / Achievement of successful partnerships (banks, public
entities, etc.; competence of the Public Entity to implement the project, determine both sectors
of interest in PPP);
 Develop bid documents;
 Organize the bid conference;
 Prepare a predetermined scoring matrix.
- Development of the business plan;
 The business model is “Selling heat to privates and possibly selling power to the
grid”;
 Economical and financial issues are: the quantity of debt linked with the project,
the costs of supplying biomass, the costs of the plant and operation and
maintenance phases; taking into account the incomes it is important to compare
different incentivation programs if available, besides the possibility to produce
only heat has to be compared with the cogeneration option. It has to be evaluated
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also the economical convenience to sell heat to private instead of sparing from
renewable heat consumption for the Public Body.
 Risk allocation for the public is made committing plant operation and maintenance
phase to a private society and creating a Special Purpose Vehicle to manage all the
agro-energy district so joining all the public-private interests involved;
 The right time to enter the market is strongly linked with incentivation policies;
 Definition of the strategic planning;
 For the definition of legal & contractual framework, it has to be considered the
following section.
- implementation of a Consensus Building Strategy;
 organize stakeholders meetings;
 organize local events;
 set-up a site of the project.
- selection of a suitable technology/production plan according to local characteristics;
 identification of the supply chain;
 individuate logistic issues;
 individuate production site layout;
 define the logistic plan;
 check for land availability
- institutional structures and capacity building (PPP unit, technical assistance, etc.);
 connect to PPP national agencies (ex. Italian UTFP, Technical Unit of Project
Finance).
CONTRACT REDACTION:
The contract framework in this case is all referred to the Special Purpose Vehicle (SPV) that
in this case is the reference point for all the financial, technical and economical activities of
the agroenergy district.
The SPV will be responsible of the management of: O & M Contracts, Fuel Contracts, Plant
Ownership contract, Heat contract etc.
If it is sold also electricity to the grid a PPA has to be used.
Also the contract for heat with private consumers has to be implemented.
PPP MONITORING:
As above mentioned the monitoring process in the early stages will deal with:
- oversee the design and construction phases;
- monitor the project once it becomes operational;
- establish and manage the day to day relationship with the consortium;
- keep abrest of developments in the field covered by the project and consider the nee for
charge;
- manage the agreement of any changes during the life of the contract;
- monitor the achievement of key performance indicators;
- recommend and calculate payments/abatements;
- report regularly to the PSCom (Project Steering Committee);
Advantages and disadvantages
ADVANTAGES
- the public body earns money by the property of a biomass plant that sells energy to private
users;
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- the public body allocates the risks given by the Operation and Maintenance costs, making a
concession of Build and Operate to a private society;
- in this case the Special Purpose vehicle created works as an attractor and reference point for
investments in the agroenergy district;
- the SPV will distribute incomes among its members (ex. Public Body, Private biomass
producers etc.);
- the SPV will be charged of technical management of the biomass plant so it will furnish the
adequate know how, and contract management;
- the SPV will work as an intermediate between public Body and private heat consumers.
DISADVANTAGES
- the SPV has to join the different public and private interests into one compact Body; there
could be problems due to the lack of balance between them;
- the SPV has to be adequately composed and able to cover technical, economical and
management problems;
- if the private biomass suppliers are not inserted in the SPV the biomass supply can be a very
difficult aspect.
4)
Private plant selling power to the public
Private Biomass (ex
Private
Short
Rotation Forestry)
Power sold to
the public
PRIVATE
PLANT
Case Description
This is a typical case of Power Purchase Agreement. In the field of renewable energies the
public wants to increase the REN production, so it has to promote it with favourable contracts
with the private plants.
Guidelines
The steps required to realize this PPP are, as already explained above:
PRELIMINARY ACTIONS:
- Study of the target area characteristics;
 Biomass assessment;
 Biomass harvest cost estimation;
 Storage cots estimation.
- Identification of area’s needs;
 Analysis of public needs in terms of heat;
 Energy sinks individuation and characterization.
- Market testing;
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 Individuation of the most favourable technology;
 Analysis of final costs of energy to the end user depending on the adopted technology;
 Chose whether produce heat or heat and power.
- Identification of potential actors;
 Identification of bioenergy plant producer;
 Identification of biomass suppliers.
- communication campaign to reach stakeholders;
 Organization of a communication campaign.
PPP IMPLEMENTATION:
- Set up of the planning team (financing manager, technical manager, etc.);
 Individuate the chairman;
 Individuate sub-groups (financing section, technical section etc.);
 Individuate the Contract Manager.
- Selection of suitable partners / Achievement of successful partnerships (banks, public
entities, etc.; competence of the Public Entity to implement the project, determine both sectors
of interest in PPP);
 Develop bid documents;
 Organize the bid conference;
 Prepare a predetermined scoring matrix.
- Development of the business plan;
 the business model is “Private plant selling power to the public”;
 definition of economic and financial issues (namely the feasibility, bankability and
value for money of the project);
 Economical and financial issues are: the quantity of debt linked with the project,
the costs of supplying biomass, the costs of the plant and operation and
maintenance phases; taking into account the incomes it is important to compare
different incentivation programs if available. Besides the possibility to produce
only power has to be compared with the cogeneration option.
 Risk allocation: there is no risk for the public;
 The right time to enter the market is strongly linked with incentivation policies;
 Definition of the strategic planning;
 For the definition of legal & contractual framework, it has to be considered the
following section.
- implementation of a Consensus Building Strategy;
 organize stakeholders meetings;
 organize local events;
 set-up a site of the project.
- selection of a suitable technology/production plan according to local characteristics;
 identification of the supply chain;
 individuate logistic issues;
 individuate production site layout;
 define the logistic plan;
 check for land availability
- institutional structures and capacity building (PPP unit, technical assistance, etc.);
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
connect to PPP national agencies (ex. Italian UTFP, Technical Unit of Project
Finance).
CONTRACT REDACTION:
In this case the most important contract is the PPA (Power Purchase Agreement).
PPP MONITORING:
As above mentioned the monitoring process in the early stages will deal with:
- oversee the design and construction phases;
- monitor the project once it becomes operational;
- establish and manage the day to day relationship with the consortium;
- keep abrest of developments in the field covered by the project and consider the nee for
charge;
- manage the agreement of any changes during the life of the contract;
- monitor the achievement of key performance indicators;
- recommend and calculate payments/abatements;
- report regularly to the PSCom (Project Steering Committee);
Advantages and disadvantages
ADVANTAGES
- There is no risk for the public;
- the public authority buys renewable energy and accomplishes to its objectives;
- the private partner sells electricity and obtains an income for it;
- the private farmers have a granted income for the duration of the project and they diversify
their activity becoming involved in energy production instead of conventional food
commodities production.
DISADVANTAGES
- the plant doesn’t sell heat to the Municipality to maximize its electricity generating
efficiency;
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References
[1] Public-Private Partnership Handbook, Asian Development Bank;
[2]: Serving the Community By Using the Private Sector, AN INTRODUCTORY GUIDE TO
PUBLIC PRIVATE PARTNERSHIPS (PPPS), March 2008 (Second Edition)
[3] P. McKendry, Energy production from biomass (part 2): conversion technologies,
Bioresource Technology 83 (2002) 47–54;
[4] Small-Scale Bioenergy Initiatives, FAO Final report, January 2009, Prepared by PISCES
and FAO by Practical Action Consulting;
[5] E. R. Yescombe, Public Private Partnerships Principles of Policy and Finance, Elsevier,
ISBN 978-0-7506-8054-7;
[6] G. Ferrante, Project Finance e Partenariato Pubblico Privato, FORUM RINNOVABILI
2008 Lo sviluppo delle fonti rinnovabili nella nuova politica energetica del Sistema Paese,
Roma, 18 Giugno 2008;
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