Making Muni PPP Work
This section explains how to implement municipal PPPs and explores some of the key challenges and success factors in their implementation.
Before considering the potential to implement a PPP, it is important to first clearly understand the context of the municipality, the legal framework that determines authority and responsibility related to PPPs, the capacity of its institutions, the teams available to it, and the funding it provides for project development and implementation. To assist with understanding the municipal context, Module 1: Municipal Readiness provides a framework to assess a municipality’s readiness to implement PPP.
Some of the key issues a municipality needs to consider include:
- The municipality’s systems for planning and budgeting, which impact the ability to identify and select projects with good PPP potential as well as the municipality’s capacity to meet its obligations under a PPP agreement.
- The municipality’s internal resources, in terms of qualified staff and available funds, and whether they are sufficient to oversee a PPP project on a day-to-day basis, from selection and development through procurement and implementation.
- The applicable legal framework to make sure it has the necessary authority to contract with a private partner for delivery of a PPP project and that all relevant legal requirements are fulfilled.
- The municipality’s ability to procure qualified, project-level advisory services, including with support from regional or national PPP units or similar institutions, project development facilities, and regional or international development partners.
- The municipality’s creditworthiness.
To learn more about the municipal context, download the full Guidance Note.
When a private partner considers a municipal PPP, it will perform due diligence and test whether the risks and investment potential merit investment of time and money for due diligence. This section sets out a few of these questions to help the municipality understand the kind of issues that are important for prospective private partners. The feasibility study and the PPP agreement should address these issues. Municipalities should review their projects from the perspective of the private partner to understand better the private partner’s perspective and priorities in advance of the bidding process, and to prepare for the kind of questions/concerns that the private partner will raise. (See Module 19: Private Sector Context.) Key questions include:
- Is this project important?
- How much project preparation has been done?
- Is demand real, or just hopeful?
- Are revenues real or just hopeful?
- What can cause costs to go up or revenues to go down? How likely are those things? How much impact would they have?
- How will foreign exchange risk be managed?
- Will municipality fulfill its obligations? Does it usually do so?
- Can the courts be trusted to be fair? To enforce arbitral or other awards?
To learn more about the Private Context, download the full Guidance Note.
The full life cycle of a PPP consists of four phases: (a) selection, (b) development, (c) procurement and award, and (d) implementation. These phases are not necessarily linear, a project may move back and forth between these phases as needed to ensure that it is well prepared.
- In the Selection phase, the municipality identifies and selects a project for development as a PPP. (See Module 2: Project Concept Assessment Tool.)
- During the Development phase, the municipality undertakes a comprehensive feasibility study to assess the viability of the project: technical, economic, financial, fiscal, environmental, social, legal, risk allocation, and so on. (See Module 4: Feasibility Study.)
- During the Procurement and Award phase, the municipality conducts an open, competitive, procurement process to select a private partner for the realization of the project. (See Module 7: Procurement.)
- During the Implementation phase, the project is constructed, the private partner begins operations, and services are delivered. (See Module 12: Contract Management.)
To learn more about the PPP Project Cycle, download the full Guidance Note.
Municipal PPPs need a robust revenue stream to fund capital and operating expenses, including debt service and equity return. There are a few main sources of revenues for municipal project, including: user payments, land value, commercial revenues, and municipal or other public payments.
A municipal project should maximize sustainable revenues from all potential beneficiaries, and therefore the municipality should use the following hierarchy of revenue sources when designing a project:
- First, PPP should maximize sustainable revenues from service beneficiaries.
- Second, PPP should capture part of the land value increase resulting from the infrastructure. (See Module 16: Harnessing Land Value Capture.)
- Third, PPP should maximize sustainable commercial revenues. (See Module 17: Capturing Commercial Value.)
- Finally, only then should public money be used as project revenue or public guarantees to enhance project viability, and only where that public support represents value for money for the government, the community, and the economy.
To learn more about Funding PPP, download the full Guidance Note.
Whether a project is considered small will depend on the size and wealth of the municipality, the capacity of the PPP team, and the size of other investment projects in the country, but generally ‘small’ is project costs of less than US$ 5 million equivalent. Small projects have the following challenges: relatively expensive to prepare, less attractive to experienced investors, lack of access to local commercial financing, and more difficult to obtain formal approval.
A growing practice in small PPP has led to the development of mechanisms to mitigate some of these challenges. These mechanisms include:
- A simplified approval process for small projects;
- Forming a centralized team of PPP specialists with a mandate to provide advice and support to small PPP;
- Using standardized processes and documents;
- Aggregating small projects into one single project or portfolio of projects; and
- Foregoing limited recourse financing, allowing investors to finance the project on-balance sheet.
To learn more about Implementing Small Projects, download the full Guidance Note.
