Definition and Characteristics of PPP
Public Private Partnership is a business
relationship between a private sector
company and a government agency for the
purpose of completing and/or running a
project that will serve the public. A broad
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definition of PPP is given by the World Bank
as "a long-term contract between a private
party and a government entity, for providing
a public asset or service, in which the private
party bears significant risk and management
responsibility, and remuneration is linked to
performance".
The interest of the public partner is to arrange
efficient, affordable, and sustainable delivery
of public goods. The private party performs
an implementing agency's functions on
behalf of the public agency, usually uses
public property for a project, and assumes
su bstanti al nanc ial, tec h nical an d
operational risks in connection with
performance of the implementing agency's
functions or use of the public property. In
return, the private party receives some
payment or fee for the services delivered
and/or profit on investment. The extent of
associated risks for the private partner in PPP
differentiates between PPP arrangements
and other public-private cooperation
mechanisms.
Types of PPP Arrangements
PPPs can be classified in terms of three broad
parameters viz., the type of asset involved,
what functions the private party is
responsible for, and how the private party is
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paid.
Assets: Many PPPs involve creating new
assets by engaging private companies in
financing, building, and managing new public
assets, from schools and hospitals to defense
facilities. PPPs can also be used to transfer
responsibility for upgrading and managing
existing assets to a private company. In either
case, a key feature of a PPP is that the assets
or services provided are specified in terms of
outputs rather than inputs—that is, defining
what is required, rather than how it is to be
done.
Functions: The functions for which the
private party is responsible vary and depend
on the type of asset and service involved.
Typical functions include:
· Design— developing the project from
initial concept and output requirements to
construction-ready design specifications.
· Build or Rehabilitate— requiring the
private party to construct the asset and install
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1
https://pppknowledgelab.org/guide/sections/3-what-is-a-ppp-defining-public-private-partnership
2
https://pppknowledgelab.org/guide/sections/6-ppp-contract-types-and-terminology
Amir Usman
Director General
SAI Pakistan
Audit of Public Private Partnerships Civil Works
all equipment. Where existing assets are
involved, the private party is responsible for
rehabilitating or extending the asset.
· Finance— building or rehabilitating
the asset, the private party is typically also
required to finance all or part of the necessary
capital expenditure.
· M a i n t a i n — m a i n t a i n i n g a n
infrastructure asset to a specified standard
over the life of the contract by the private
partner.
· O p e r a t e t h e o p e r a t i n g
responsibilities of the private party vary
widely, depending on the nature of the
underlying asset and associated service.
Payment Mechanism: The private party can
be paid by collecting fees from service users,
by the government, or by a combination of
the twowith the common, dening
characteristic that payment is contingent on
performance.
These characteristics can be combined in
various ways to create a wide range of PPP
contracts. These contracts can be thought of
as a continuum between public and private
provision of infrastructuretransferring
increasing responsibilities and risk to the
private sector.
SAIs Responsibility
In PPPs the public partner is responsible for
ensuring that the services are delivered
appropriately and that public assets, where
transferred temporarily to private partner,
are kept in good condition and are being
utilized in an appropriate manner for the
intended purposes only. Furthermore, the
sponsoring public agency is expected to
devise contracts in such a way that ensures
optimum cost to public with an adequate
benefit for the private partner keeping under
consideration the allocation of related risks in
a way that does not put the public partner in a
position of less advantage. Political,
technological and economic risks are also
needed to be studied in detail. This all bring a
complex responsibility on SAIs who, being
public auditors, are mandated to provide
assurance on the accountability of PPP
arrangements.
Auditor's Response to the Risks to be
Managed by the Public Partner
ISSAI 5240 provides a list of risks that are to
be managed by the state. Auditor's response
to some of the key risks is discussed in the
following.
1. Deciding about the partnership
objectives:
a. The public sector may not have right
human resource capacity to enable
proper risk management while securing
viable partnerships. Furthermore, public
managers may not always act in the
state's best interests due to conflicts of
interests, political pressures or
pressures from lobby groups. Auditor's
Response; examine the rationale of
decisions made and whether these
decisions are supported by adequate
data and analysis.
b. There may not be sufficient competition
for the project. If there is only one
potential partner, it is difficult for the
state get a deal that is good value for
money. Auditor's Response; assess that
whether the project need assessment
study warrants taking up the project
even in the absence of competition and
that whether all other alternatives have
been properly studied.
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2. Negotiating an appropriate
partnership
a. If the public sector makes large
contractual payments up front, they
may be effectively financing the partner.
If a large percentage of the contract
price is paid initially, the partner may
have less incentive to deliver quickly or
to a high standard. The state could also
lose its money if their requirements later
change. Auditor's Response; examine
that contractual payments are properly
linked to the achievement of milestones
and the standard of services delivered.
b. The public sector may choose an
unreliable partner with a poor track
record in delivering value for money in
the type of services required, or one
who may have been involved in
corruption. Audito r's Respo nse;
examine the procurement and appraisal
processes and its suitability to assess the
dependability and probity of potential
partners.
c. The guarantees and indemnities given
to the private sector partner may not be
fully priced into the agreement.
Auditor's Response; evaluate whether
the contract price fairly reflects the risks
borne by both parties (in particular any
guarantees orindemnities given by one
party to the other).
3. Monitoring the state's interests in
the partnership
a. The public sector partner may not
obtain sucientnancial, legal,
technical or other relevant expertise to
enable it to manage its relationship with
the private sector partner. It may
therefore fail to exercise the rights
attached to its shares in the partnership.
Auditor's Response; whether the range
of skills needed in monitoring and
managing the relationship has been
identified and arranged by the public
partner and how these skills are planned
to be retained during the relationship
period.
b. The public sector partner may not seek
sucient information to provide
assurance on how the partnership is
performing. The partnership company
may set up subsidiaries to perform some
of its functions, making it more difficult
for the public sector to monitor overall
performance. Auditor's Response;
examine whether adequate sources of
information, like partnership's strategy
for investments and operations,
accounts and details of contract
performance against business plans are
included in the partnership agreement.
The auditor should also examine details
like assets, liabilities and results of
subsidiaries are consolidated into the
accounts of the parent company with
enough business segment information
to present a true and fair view of the
partnership's performance.
c. The performance measurement targets
used by the public sector partner may
not be adequate enough to measure the
have perverse incentives. Example:
inducing managers to focus on the
accounting treatment of assets in order
to meet targets, rather than on the
actual performance of the partnership.
Auditor's Response; examine whether,
to evaluate the partnership, a portfolio
of performance measures, including
both financial and qualitative measures
(such as customer satisfaction) are
provided for in the agreement and that
there are provisions for access to
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information required for monitoring the
cash-flow of the partnership, in addition
to financial measures which may be
distorted by accounting policies.
Risks to be Managed by the Auditor
Based on ISSAI 5240, some key factors
contributing towards the risk that the auditor
may not be able to conduct an effective audit
and corresponding responses of the SAI are
discussed in the following.
1. Examining the process and the
results of a PPP
a. The SAI may lack the commercial
expertise needed to evaluate either how
well the public sector partner is
protecting the state's interests or
whether the public sector has taken
unreasonable risks. Response: The SAI
should identify its audit responsibilities
and how best to carry these out,
including securing access to any
specialist skills needed.
b. In many cases the SAI may not have
access rights to the partnership itself.
Even when the SAI does have such rights
the private sector may be reluctant to
provide information due to fears over
commercial confidentiality. Responses:
(i) The SAI will however have access to
the public sector partner and can
examine and report publicly on how well
t h e s t a t e h a s e x e r c i s e d i t s
responsibilities.
(ii) The SAI can inform Parliament of
restrictions to its access rights. This may
encourage the public sector to make
access rights for the SAI a condition of
future partnerships.
(iii) The SAI can contact the private
sector partners, to emphasize the SAI's
impartiality and explain that they are
interested in good practice as well as
what went wrong.
c. Either due to a lack of expertise or a
desire not to interfere with the
commercial freedom of the partnership,
the public sector may resist SAI efforts to
probe how effectively the public sector
partner is protecting the state's
interests, (e.g. by arguing that the SAI is
inimical to commercial risk taking).
Response: Besides stressing its mandate
for public oversight the SAI may
demonstrate that it supports well-
managed risk taking by the state by
focusing its examinations on identifying
good practice as well and contributing to
the development of constructive
guidance for decision takers.
d. Existing methodologies may not equip
the auditor to assess the performance of
new types of PPP. Benchmarking the
quality of services is difficult when there
are few comparable projects, and when
the public sector has not made the
partnership's objectives clear. This also
makes it hard to judge what would be a
reasonable return on investment for the
private sector partner. Responses:(i) Re-
examining long-term projects at regular
intervals. These reviews should consider
if the state's objectives are still being
met and whether all partners are
receiving a fair return for the risks they
bear (ii) Information for benchmarking
the partnership's performance could be
gathered from unsuccessful bidders or
comparable projects in other states.
2. Identifying worth while lessons
a. The SAI's examination may have too
narrow a focus – for example: It may be
tempted to focus only on what went
wrong. It may not take account of other
relevant examinations by auditing firms
or other public sector agencies – this
may lead to an undue burden on the
partnership company if they are audited
by several different public watchdogs.
Responses: (i) Lessons can be learned
from failure as well as success, but the
SAI should take care to place any failures
or shortcomings in context, recognising
in particular that, however well
identified and well managed they are,
the risks in novel forms of partnership
may materialize. (ii) The SAI should
disseminate any good practice it
discovers through conferences,
newsletters and informal contact with
other public sector bodies. (iii) The SAI
s h o u l d a s c e r t a i n w h a t o t h e r
investigations and research have been
carried out into similar arrangements at
home and abroad and make use of such
work. Example: investigations by other
audit offices and academic bodies.
b. The SAI may concentrate on technical
procurement issues and ignore the
wider economic and social effects of
PPPs, such as the risk of replacing a state
monopoly with a private monopoly.
Response: The SAI should examine
whether the partnership met its
economic and social objectives.
However, the SAI should ensure that
such studies do not question the merits
of a Government's policy.
3. F o l l o w u p o f a u d i t
recommendations
a. The state may not implement the SAI's
recommendations, leading to the same
problems recurring on later deals.
Response: Undertake follow up studies
of projects they have previously
repo r t ed on , o r rep o r t on ne w
partnerships in order to assess the
state's response to the SAI's findings.
They can then report to Parliament on
whether the state has improved its
operations.
SAI Pakistan’s Experience
The PPP Audit is a new concept for SAI
Pakistan. Only a few Field Audit Offices have
conducted audit of PPP Civil Works Projects.
Maximum number of such audits was
conducted by the Directorate General Audit
Works (Federal). This office conducted audit
of eight BOT based projects of the National
Highway Authority of Pakistan. Following
general observations regarding status of PPP
(Civil Works) audits in SAI Pakistan are made
based on the results of these audits.
1. Audit of PPP projects were not taken up
as s e p ara t e st u d ies i nvo l v ing a
comprehensive approach of assessing
economic and financial viability, Value for
Money (VFM) issues, political risks,
technological/economic risks and
aspects of contract management. Rather
these audits were conducted as part of
annual compliance audit. Therefore, the
focus of audits has mainly been on
compliance issues.
2. Audit methodology adopted is the same
as is used in compliance with authority
audits.
3. The audit team faced limitation on scope
of audit as record in the domain of the
private partner was not available.
4. Although these audits were carried out
as compliance audits, the auditors, in
some of the audits, examined the
appropriateness of the negotiated
a g r e e m e n t w i t h r e f e r e n c e t o
safeguarding public interests. In this
regard observations were raised in the
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following areas:
a. W h e t h e r t h e p r o j e c t s w e r e
awarded after proper feasibility
studies and third party evaluation of
assets and potential revenues.
b. Appropriateness of the agreements
with respect to feasibility studies
and future revenue projections.
c. Proper pricing of assets being
handed over to the concessionaire
and the adequacy of handing over
procedures.
d. Inclusion and implementation of
such clauses in the agreement as
were necessary for the public
partner to monitor the quality of
works and services and financials of
the partnership.
The foregoing suggests that audit of PPP
projects has not yet evolved as a specialized
audit activity. However, the auditors have
s h o w n a b i l i t y t o e x a m i n e t h e
appropriateness of the contracting process
and the contract agreement with reference
to safeguarding the public interests. A more
methodical approach towards PPP audits is
expected to improve audit quality in this
regard. Suggestions made in the following
section may serve as stepping stone in this
direction.
Institutional Interventions
Required by an SAI
1. Securing audit mandate for PPP
1. Keeping in view the reluctance of
public and private partner regarding
PPP audits an explicit legislative
mandate for carrying out audits of
PPP arrangements is required. In its
absence an SAI usually asserts its
ma n d a t e b y r e f e r r i n g t o t he
provisions that provide authority for
auditing wherever public resources
are employed. However, such implicit
references are being a source of
conflict with the PPP companies or
with their private partners at the
least.
2. A u t h o r i t y o f t h e o v e r s e e i n g
legislative bodies, like PACs, to give
recommendations/directions to the
private partners is also not explicitly
clear.
3. Designated auditee of public auditor
has generally been the public partner.
Private partners are generally averse
towards public audits as they
consider that their operations and
accounts are already under scrutiny
by the public partner and commercial
auditors, they are also not familiar
with the process of public auditing
and consider it as unnecessary
interference in their functions and
that public auditors are not sensitive
to the needs of project and their
focus on mere compliance with
authorities sometimes hinders
efficient project management.
4. SAI should approach legislature for
explicit mandate for PPP audits
including unrestricted access to all
aud it ab le rec or d required for
ensuring public interests.
2. Development of General Audit
Guidelines
5. G o v e r n m e n t s a r e g r a d u a l l y
becoming conscious of need of legal
and regulatory frameworks to enter
into PPP arrangements. As such,
these legislative and regulatory
frameworks are still in the stage of
evolution and will need some time to
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get fully mature. Moreover, there are
unlimited possibilities of PPP
arrangements depending upon the
output requirements, functions
assigned to the private partners and
mode of payments to them.
6. Development of t-for-all type of
audit programs is not possible even
for a single PPP type. However,
general guidelines can be developed
for the analysis of typical risks and
corresponding auditor's response on
the basis of which audit programs
can be developed for an individual
assignment.
3. Arrangements for continuous
learning and creation of institutional
memory
7. The discipline of PPP audits would
remain research intensive and
continuously evolving as long as the
PPP arrangements themselves keep
on evolving. Although an indicative
list of associated risks can be
prepared for the guidance of
auditors, each PPP audit assignment
is bound to have its own detailed risk
analysis in order to cover the risks to
public interests exhaustively.
8. SAIs need to make arrangements for
developing information repository
regarding PPP audit experiences and
focus on human development in this
regard. SAIs must also ensure that
the knowledge and skills are made
part of institutional memory
whenever outsourcing is opted.
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