Contracts and Procurement Management: PPP Report on Road Extension

This report examines the application of Public-Private Partnerships (PPPs) in contracts and procurement management, specifically focusing on a road extension project. It begins with an introduction to PPPs, emphasizing their role in infrastructure development and the allocation of capital costs. Task 1 delves into the principles, merits, and demerits of PPPs, including risk transfer, output-based specifications, and the involvement of private sector expertise. The report then explores various PPP formats, such as Build-Transfer (BT), Build-Lease-Transfer (BLT), Build-Operate-Transfer (BOT), and Design-Build-Finance-Operate (DBFO), assessing their suitability for the road project. The Private Finance Initiative (PFI) is highlighted as a viable procurement route, with an analysis of its characteristics and advantages. The report concludes by providing a comprehensive overview of PPPs, their implications, and their relevance in modern infrastructure projects.

Contracts and procurement
management

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK ..............................................................................................................................................1
Principles of Public-Private Partnership with Merits and Demerits............................................1
Examining the Formats of PPP that can be used in the scenario.................................................3
Viability of Private Finance Initiative and Public Private Partnership as a Procurement Route.5
Critical Analysis of Alternative Procurement Routes..................................................................7
CONCLUSION................................................................................................................................9
REFERNCES.................................................................................................................................10

INTRODUCTION
Public and private partnerships are becoming common tool for developing better services
in the country. The aim behind the amalgamation is to bring in expertise with adequate funding
so that the proposed project can be completing as per requirements. Basically, in this concept the
government does not bear the capital cost for developing infrastructure but it lets the private
parties to do so (Amann and et. al., 2014). In return it provides resources and permission to them
for making it a successful venture or project. In this report it is stated as how a public private
partnership will be formed for a proposed road extension project between two major cities. This
is being done for ensuring that project is completed in a set period of time as well as the issues is
sorted out. Various merits and demerits will be stated while a proper examination of different
formats in which PPP can be developed will be conducted.
TASK
Principles of Public-Private Partnership with Merits and Demerits
These are the ventures which are developed for managing higher capital value, that have
massive range of activities and are required to run for a long period of time. They are the ones
which are used for completing non-conventional construction projects that will assist in running
operations in long period of time. These schemes can be executed while using various types of
formats. Basically, PPP provides the public sector client approach to finance, design,
construction and operations expertise of private individuals. They are highly attractive to the
governments as they do not have to pay for the facilities, designing, constructing immediately.
The private entity conducts every task and once the project is completed, public sector pays them
as per the actual service charge (Ambe and Badenhorst-Weiss, 2012). In the given scenario, a
road has to be extended as to reduce the traffic jams on it in between two major cities. Also the
plan states that the speed of vehicles has to be increased by 15 minutes by 2025.
1

(Source: Farming First, 2010)
There are certain principles and benefits that will be followed. PPP is also useful for the
private entities who are engaged in the process as this provides them with a regular income
stream. They are tasked with maintenance and operations of the building which allows them in
making profits. There are times when a large sum of amount that is required to complete a
project is not present in public sector and that is why this PPP model is used. In most of the
western countries, this is the model that has replaced the old fashioned model of government
constructing each facility. It is considered to be the best way to improve business and private
entities participation in the economy. There are certain principles that have to be developed and
followed before developing PPP. They are as following:
 Creating a shared vision
 Understanding and analysis of prime partners and parties
 Providing clarity to all the parties regarding risk and rewards.
 Development of a clear and rational decision making process
 Establishing a consistent and co-ordinates form of leadership
 Negotiation with a fair deal structure
 Keeping benefits of all stakeholders as a priority.
2
Illustration 1: Public and Private Partnership.

These are the specified principles that are required to be implemented while a public
private agreement is being formed. There are certain merits and demerits of this activity that has
to be analysed too:
MERITS DEMERITS
 Risk Transfer
 Output based specification
 Long term nature of projects
 The specifications are output based
 Performance can be measured and
incentives can be given to parties.
 Brings in expertise of private sector
 Competition brings in best out of the
market.
 Enhances cost efficiencies
 Time consumption is reduced
 Reduces the burden on public treasury
 The response time is improved to
market forces
 There is Broad support to these projects
 The cost calculations are also
improved.
 There is poor value for money that will
be spent as quality can be entrusted.
 The transaction cost is higher due to
added margin of private player.
 There are higher capital cost as private
entities charge more than the actual
cost.
 There is insecurity from both side
though there is an agreement. But it can
be cancelled on non-fulfilment.
 The rigidities are comparatively higher
in these ventures due to government
interferences.
 The staff of public sector companies are
insecure to these projects as they fear
about their own jobs.
These are some of the principles with merits and demerits that are there when a Public-
Private venture is created.
Examining the Formats of PPP that can be used in the scenario
A public private venture is developed on the basis of needs and requirements. They
always follow up a structure or a format to ensure that a good relationship is developed between
the two parties. Basically, all the PPP schemes are stated to be sequence of major activities that
will take place when the agreement will be enforced (Caldwell and Howard, 2014). There are
various types of formats that are followed by government and private entities for forming a good
3

contract and a relationship between them. The formats of PPP are stated below which will be
suitable for the proposed project of extending road in between two cities to reduce traffic: Build-Transfer (BT): This is the form of PPP that is not really considered to be a true
public private partnership plan. In it the private entity develops an assets and hands it
over to the public sector client on completing. After the handover, it will be used in a
traditional manner. For example, a private entity will build a building and give it to the
public sector organisation for its own use. In it any future risk will have to be managed by
the later party. The procurement of building will be done using traditional routes.
Basically, the funding is done by the government while private entity only develops the
project. Build-Lease-Transfer (BLT): This is a scheme in which private entity builds a facility or
an equipment and immediately after its completion, it leases it out to public company.
After leasing out, the later organisation has to safe guard and maintain the facility while
playing a lease holder role (Chen, 2012). These type of scheme run in private sector
where they provide facilities and items on lease and earn money for the time period for
which that building is occupied. Build-Transfer-Operate (BTO): This is a scheme where, a private entity designs and
builds facilities or equipment and immediately after its completion, the ownership of the
developed item is passed to government. But the private individual keeps on running and
maintaining the facility for its counterpart. Build-Operate-Transfer (BOT): This format is also called as Design-Build-Operate-
Maintain (DBOM). In this method the private entity has same role as it played in build
and transfer format. The whole sole difference that exist is that, though the public
company is funding the project but even after completion, the private player will have top
maintain and operate the facilities. While ownership of facility is passed on to
government. Build-Own-Operate-Transfer (BOOT): This scheme is where private sector funds the
projects, designs it and develops it. After the completion, it keeps on operating and
maintaining the facility for the public sector client (Githui, 2012). The ownership of
project passes to the government at the end of PPP agreement.
4

 Design-Build-Finance-Operate (DBFO): This is also known as Design-Build-Finance-
Maintain (DBFM). The private sector funds, designs, develops the facility. After
completing the project, it maintains and operates it for the public entity. The basic
difference between this and BOOT scheme is that it focuses on the delivery of facility
instead of maintenance. This is the best format that can be used for building up roads or
Highways projects as it allows in creating a value that cannot be transferred.
 Build-Own-Operate (BOO): As stated in the above formats. The private sector, designs,
funds as well as develops facility. It also operates and maintains it for the public sector
client. But the difference in this format and others is that, here the ownership is not
transferred and it remains with the private entity.
There are certain philosophies that have to be followed by the ministry for implementing
the PPP venture in an effective way (Glas, Hofmann and Eßig, 2013). For current scenario, a PFI
scheme will be used. It is a private finance initiative program where a consortium of private
entities is made. It includes funders, investors, construction contractors, facilities managers and
other type of specialist. It is also important to check the viability of PFI which will be mentioned
ahead in the report.
Viability of Private Finance Initiative and Public Private Partnership as a Procurement Route
The private financing initiative were the original form of PPP which was developed by
the governments and the public sector top bring in more funding as well as expertise. This format
is the best way to design, develop or refurbish, finance as well as maintain the facilities that were
developed by the entities. PFI schemes are the one which are a complete consortium of various
players who are offering better service delivery to the public entities. These groups form various
contracts with the government as to provide services such as building roads, schools, hospitals,
etc.
The office of government has defined PFI as, “A contract where a public sector company
comes in an agreement with a private entity to deliver quality services with defined outputs.
These are a long term project that has to maintain or construct infrastructure as to take advantage
of expertise that exist in private entities (Johnston and Girth, 2012). Basically, it is a relationship
that defines risk that is shared by both entities while developing a project”.
To check viability of Private finance initiative as a right format for PPP, it is important to
know about its characteristics. They are as follows:
5

 In this scheme a service is purchased instead of capital assets.
 These are the programmes that run for long run and typically have a provision period of
25 to 35 years.
 Various infrastructure is developed by private sector. The PFI contract will state about
the services that will be required. Basically, it dictates about the terms and conditions for
a complete package that will be needed to be fulfilled by individual. The private sector
will finance, design and construct the facilities as per the guidelines.
 Public sector is basically buying a service instead of an asset, and until unless the
ownership is transferred by the private entity the agreed scheme can’t be completed.
 The private sector consortium is free to use whatever techniques or tools as to fulfil all
the requirements of public sector. This might lead to issues in design, quality and
performance of whole task.
 The private sector takes on all the risk that is associated with the activity as to fulfil the
requirements of public sector client but it expects to be paid in full. There are certain
margins which it hopes to earn when he completes the project.
The PFI agreement allows public sector in gaining better quality of services while the
burden of finance is reduced. In present scenario, the road that will be extended has to be
completed by 2021. The whole contract will be formed for 20 years where the private entity is
required to maintain and operate the road. Also, it has to ensure that by 2025 the road has
sufficient space and resources to reduce accidents by 60%. Risk that is associated is high and has
to be shared in between public as well as private consortium.
PFI programs allows in converting capital investment into revenue expenditure. This has
made it one of the most preferred concept that is used by government from past few years. But
the private companies face a higher risk in these type of programs as they have to finance,
manage, develop and maintain the same until its ownership is not transferred to government
(Kerzner, 2013). The main aim of using this process for the current scenario is that it will allow
both parties in ensuring that they do not have to face challenges posed by the
traditional/historical method. The procurement of service was slow and the outcome was lower
than expectation. The whole process of procurement was very slow in the beginning and had to
be managed by the provision. But introduction of PFI will aid in ensuring that each task is
completed in a set period of time. The usage of private finance initiative will allow government
6

bodies in getting qualitative services from private sector. The bifurcation of services allowed
both parties in fulfilling their task in an effective manner. So after going through each point it is
understood as this is the best procurement route that can be used for purchasing services. This
will allow in managing long term plans and rules that are needed for developing and maintaining
the quality of services.
Critical Analysis of Alternative Procurement Routes
There are different well defined procurement routes that are used for designing, building,
maintaining and operating facilities. For constructing a road, it is important to ensure that each
and very procurement route is tested as well as analysed (Larson and Gray, 2013). There are
different companies who are engaged in completing a task and completing a project. In the
current scenario, a road between two major cities has to be extended. There are different routes
that are defined by the level of risk that has to be accommodated and accomplished. There are
four different basic routes which are alternatives to a specified situation:
 Traditional (Also known as design-bid-build): This is the route that is characterised by
the client's employment of an architect as its principle agent. The customer will also
appoint a team of advisors who will assist in preparation of contract document. Basically,
there is whole process that is followed by the parties. The characteristics of this
procurement route are stated to be:
◦ The designing process is completed before the contractor is appointed which leads to
poor quality of building. As contractor own expertise is not included.
◦ The process is completely reliant on the competitive tendering which is used to
appoint contractor. As to complete construction in a lowest price. Sample template
latest
◦ The contractor does not have any participation in designing process and he does not
take any responsibility for the faults.
◦ Reasonable cost is cut and certainty is there.
◦ The customer appoints consultants as to observe the process and ensure that there are
no variances that are left in the system.
 Design built: These are the routes that are defined by the development of tender
documents. They basically state about the requirements on the part of clients and do not
state about fully developed design solution (Lee, Li and Xie, 2013). Design and build
7

contracts are the ones that take form of functional brief. They are put into an advanced
concept designing stage that states about all the functions and areas that are required to be
completed in a set period of time. There are certain points that describe about the
suitability of this concept:
◦ The customers who want cost certainty
◦ Those who want their projects to complete in speedy manner
◦ This is for simple building project and not for complex.
◦ The main point is that, this is for those who are inexperienced and do not desire a
close involvement in the system.
 Construction Management: It is characterised by the appointment of construction
manager for counsel customer for a fee. After the consumer has understood the
requirements and his own desires, he enters into a contract independently with various
specialist contractors rather than appointing a prime contractor (Oruezabala and Rico,
2012). The customer is able to stay close to the process of designing, planning, managing
and building this way. There are certain criteria which states about the suitability of this
method with others:
◦ The client needs to be experienced.
◦ Cost certainty do not need to be a priority.
◦ There is need of completing projects on fast track mode.
◦ The structure that has to be built needs to be complex.
◦ Requirement of buildability.
 Management Contracting: The customer in this route appoint a contractor in the early
phase to get an advice on designing, programming and buildability. The work is
commenced as soon as the customer is satisfied with the designs and process. The
construction manager is a part of core team and he contributes good construction
knowledge as well as management expertise (Meng, 2012). The differences that exist in
design in build route are reduced in this process and also the approach towards the
development of project is improved. The contractor is able to easily determine the
requirements of clients’ needs and accordingly he able to develop designs and plans.
After the whole planning is completed, sub-contractors are appointed as to complete
various task that are there in the project. Basically, separately specialist will be hired to
8

ensure that each stage is tackled in a desired manner. This allows in ensuring a cost
certainty as well as the client gets output as per the requirements.
These are the procurement routes that stated about their characteristics and suitability.
None of them clears the criteria set for the road extension project that will be taking place in
between two cities. The Private Finance Initiative is the best mode of procurement that can be
used by government for ensuring that all the work is completed in a set period of time while also,
a proper maintenance and operations are there for a set duration (Nojavan and et. al., 2015).
Though, the cost is little higher for public sector but it does not have to pay for it now and when
it will start paying the contractor, it will have enough interest earned on the provision amount.
CONCLUSION
The public private partnership ventures have evolved from being a small term
participation to a long range consortium. Today, these are established for developing different
type of facilities. This mode of partnership allow government in boosting private
entrepreneurship as well as improving quality of services that are purchased. There are several
benefits that are mentioned in the report with certain shortcomings. Also the formats that are
used for establishing PPP are stated. A viability of the chosen private finance initiative is also
considered. With a critical analysis of various procurement routes.
9