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PPP How to reduce the payment to the private partner

Reducing payments to the private partner

Let’s say right away that this is extremely difficult to do.


First, cost savings for the private partner must still be found. This requires an effective system for monitoring public-private partnership projects.

But when structuring a transaction, the private partner, its sponsors and lenders pay a lot of attention to the procedure for providing information; if they were willing, they would not give anything at all. That is why the laws on PPP, including the Republic of Uzbekistan, prescribe the obligation to share information with the state partner.

Sometimes there is a paradoxical situation — suppliers of services or equipment under the project are ready to save money, but such initiative has to be agreed with the management of the special project company and its shareholders and in some cases even with the creditors.

And you and I have many examples where PPP agreements do not clearly spell out the rights of the state partner or other bodies to obtain information, unless the private partner himself wishes to provide it.

Secondly, even if such savings are discovered, the private partner is not ready to immediately hand over or share it with the public partner.
The explanation is very simple: show me a clause in the PPP agreement, according to which I am obliged to do so?

Where is the savings in a social PPP project?


Option 1: Efficient management of existing contract terms
Let’s imagine that a PPP project needs a capital grant.
And this is pre-specified in the documents signed by all parties — the private partner, the public partner and the bank.
Quite frankly, the legislation does not contain the term «capital grant», in this term we all mean its economic essence — co-financing of capital costs or, in other words, budget participation in construction (reconstruction)/operation costs.

It is the budget participation in construction (reconstruction), as a rule, is called a capital grant, and at the same time this payment cannot cover 100% of capital costs of the project.

In accordance with the Russian practice the completed work in respect of each object of immovable property d njv xbckt included in the PPP object is documented by an act of acceptance of completed work in form KS-2, a certificate of cost of completed work and costs in form KS-3 or a log of completed work in form KS-6a.
After completion of works an act of acceptance of completed works in the form of KS-14 between the private partner and its contractors shall be executed.
And the state partner (either itself or by hiring professionals) in cases specified in the agreement on PPP/concession agreement will verify the volume of investments of the private partner by checking the reliability of these acts.

And here, after verification, the question may arise of reducing the value of the PPP object, and, accordingly, reducing the unitary payment for the duration of the contract.

The question of the participation of the state partner in the selection of private partners of contractors, equipment manufacturers, etc. will be considered at a later date — it is too big a topic…

Option 2. Optimizing the use of assets
A giant hospital/school was built. The fanfares sounded and the ribbon was cut.
Four years later, we realized that we had made a mistake: there are too many beds and they are not used. And the private partner says: «I don’t know anything, pay as you always do!
And the state partner decides to lease the empty space. For what?
Or is it conservation?
Let’s discuss at our APMG PPP International training course for certified PPP specialists.

Option 3. Revise the soft service set.

What are «soft» services in our language? It’s anything that doesn’t involve a building.

For example, in health care it is food service, retail, cafeteria, pharmacy, vending machines, reception, laundry, transportation services (including patient transportation services), security, parking, waste management, instrument sterilization, etc.

Similar approach in education: security, cleaning, school meals, etc., etc.

And the state partner in five years realizes that he is greatly overpaying for all these services.
So he decides to outsource. And the private partner is against it…

And the agreement should spell out a procedure for benchmarking — a periodic comparison of the cost of the relevant services with the market.
But it can also turn out that the private partner offers quality services, say, for all hospital laundry, much cheaper than each of the city’s laundries.

And then what’s a public partner to do, eh?

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