PPP ARRANGEMENTS

(a) The PPP arrangements are explained below:

(i) Operate and Maintain (O&M)
Under this arrangement, the operator is engaged by the contracting entity (or grantor) to offer a specific service or task such as debt collection, facility management, and so on for an agreed fee or commission. Most often, these contracts mostly involve the private operator being paid a fixed fee by the awarding authority for performing specific tasks. The remuneration does not depend on the collection of tariffs, and the private operator does not typically take on the risk of asset condition. This arrangement has these main features:

• The facility is owned entirely by the contracting entity or grantor.
• All capital requirements of running the facility are borne by the contracting entity.
• Risk of asset condition rests entirely with the grantor.
• Duration of the contract ranges between 1 year to at most 5 years.
• Residual asset remains that of the grantor.
• Risk and responsibility for delivery of the service largely remain with the public sector entity.
  These arrangements can be similar to those referred to as “outsourcing” or “contracting-out.” These arrangements may or may not involve the use of infrastructure or public facilities. An example in Ghana is the arrangement between the Government of Ghana and AquaPure Solutions Limited in 2006, in which the latter was engaged to operate the urban water systems (Ghana Water Company) for five years for a determined fee.

(ii) Build-Operate Transfer (BOT)
In BOT, the operator finances and acquires the asset for the provision of public service, operates it for an agreed duration to recoup its investment, and eventually transfers ownership to the contracting entity. The features of BOT are:

• The operator invests its capital to build the asset.
• Risk associated with the condition of the asset is shared between the contracting entity and the operator.
• It takes a longer duration of between 25-30 years for recoupment to occur.
• Residual interest is transferred to the contracting entity upon the expiration of the agreement.
  A variation of BOT is Build-Own-Lease-Transfer (BOLT), where the private operator is allowed to lease instead of operating it personally for the agreed period and transfer residual assets to the government.
  An example of BOT is the contract between Kwame Nkrumah University and Private Hostel Developers such as Horizon Hostels, Workers Fund, and so on, which permits the private operators to build hostels on the University lands for the students, take the hostel facility user fees for 25 to 30 years, and finally transfer the residual assets to the University.

(iii) Build Transfer and Operate (BTO)
This is similar to BOT except that the transfer of assets precedes the operation of the facility. This arrangement is common in road construction and security installations. For example, the government enters into a contract with private operators to construct dual carriage asphalt roads from Kumasi to Tamale at their cost and toll the road for 30 years at an approved fee. However, the operators will hand over the road to the government, and the government, in turn, grants them the right to toll the road to recoup their money.

(iv) Rehabilitate, Operate and Transfer (ROT)
Rehabilitate, Operate and Transfer (ROT) is a contractual arrangement whereby an existing facility of the contracting entity is handed over to the private sector to refurbish, operate, and maintain for a franchise period, at the expiry of which the residual facility is returned to the government. ROT allows the private operator to refurbish, operate, and maintain an existing facility. In this arrangement, the following features can be identified:

• Ownership is in the contracting entity.
• Capital invested by the operator.
• Risk rests with the grantor and/or operator.
• Duration of the agreement is between 25-30 years.
• Residual interest in the asset is for the grantor.
  Other variants of ROT include Rehabilitate Own and Operate (ROO) and Lease Renovate Operate and Transfer (LROT). An example of ROT is the Bawku Tomato Factory revamp contract where a private operator is contracted to rehabilitate the Nkrumah’s Factory, operate, and transfer the residual asset to the government at the expiration of the term of the contract.

(v) Service Concession
In a concession agreement, the entity transfers the right to provide services to the public through the use of an asset to the private party. In service concession, the asset may be either provided by the grantor, operator, or both. The operator, in turn, assumes an obligation to provide such services, normally in accordance with performance requirements set by the entity.
Compared to service or management contracts, concession agreements have a much longer term, often so that the operator can earn an acceptable rate of return on its investment. Secondly, the operator is not allowed under the management contract to invest its capital into the operation of the entity but under service concession, the agreement requires the operator to inject a certain amount periodically into the entity.

(b) Explain five types of risk associated with a PPP arrangement that allocation between the parties.
In a PPP arrangement, project risks are generally allocated between the public sector entity and the private sector entity. These risks commonly include the following:

Construction risk
This encompasses the many issues that may be encountered during the construction phase of a project, such as cost overruns, building defects, construction delays, planning regulations, structural integrity with existing infrastructure, technical deficiencies, health risks, and work accidents.

Availability risk
This is the risk that the infrastructure or public facility will not provide sufficient services, for example, because of insufficient management or not meeting the required quality standards. For example, suppose the Ministry of Tourism contracts with a private operator to offer accommodation services for one million persons expected during the year. What happens if the private operator fails to meet the one-million accommodation target?

Demand risk
This risk relates to variability in the amount of service required or consumed by users of the infrastructure or public facility. Users can be the public sector entity itself, third-party users such as citizens, or both. For example, Kwame Nkrumah University enters into a BOT arrangement with WF Hostel to build hostels on the University land and receive the hostel facility user fees for 25 years. In this contract, the demand risk associated is that the hostel is constructed, but the students are not interested in living in the hostels. The issue is about how to share this risk between Kwame Nkrumah University and the WF Hostels.

Operational and maintenance risk
This risk encompasses a broad range of risks that exist after the infrastructure or public facility becomes operational. Examples include price increases or shortages of materials, increases in labor costs, damage as a result of natural disasters, costs related to deferring maintenance, and obsolescence. Demand and availability risk may also be considered specific components of operational and maintenance risk.

Residual value risk
This risk relates to the possible difference between the market price of the infrastructure or public facility at the end of the PPP arrangement and the original market price expectation. In the above example of student hostels, the hostels after the 25-year period may be expected to have a residual value of GH₵5 million, but if the operator fails to maintain the hostels properly in the last 10 years, the residual value at the time of transfer might be just GH₵1 million. Who bears the loss of GH₵4 million?