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What is PPP?
Public Private Partnership (PPP) is a long-term contract between the public and private sectors to provide public infrastructure or services, where the private sector bears certain risks and management responsibilities, while the payments to the private sector are based on performance. In the implementation of such projects, the state transfers a number of state-provided services, property or control mechanisms to the private sector, and as a result, the state has a quality infrastructure in accordance with predetermined requirements, and the population receives quality services.
PPP models - in international practice, the types of PPP projects are based on the combination of parameters, such as the type of the asset involved (new or existing), the functions assigned to the private sector (design, construction / reconstruction, financing, maintenance and operation) and the payment (user payment, government payment or both). In general, more than 10 PPP models are used in practice. These include Build-Operate-Transfer, Build-Own-Operate-Transfer, Build-Own-Operate, Build-Transfer-Operate and etc.
Characteristics of the PPP model - Accounting for costs and revenues associated with an infrastructure facility, both during construction and during the period of planned operation, increases the efficiency of service delivery. Optimal risk sharing is the basic principle of any PPP scheme. Potential risks during in the implementation of the project are identified and are divided between the public and private sectors. In this case, the risks are directed to the side that is able to manage them more effectively. Another important element of the PPP model is the responsibility for performance. Thus, payments by the government to the private sector are made on the basis of work done or results obtained in accordance with predetermined requirements for quantity, quality and duration. At the same time, carrying out extensive research and analysis during the development of the project, as well as considerations such as value for money, public sector comparator, feasibility studies and etc. provides an opportunity for the selection of the most suitable projects and their successful implementation.
Advantages of PPP Public Sector perspective
- Attracting local and foreign investors to the implementation of infrastructure projects using alternative financing mechanisms;
- Optimization of investment expenditure allocated from the state budget;
- Country infrastructure renovation with the participation of the private sector;
- Improving the quality of public services;
- Benefiting from the experience, skills and modern approaches (innovation) of the investor; Investor perspective
- Long-term, repayable investment;
- Implementation of the project with the participation of the public sector (possibility of partial financing of the project from the state budget);
- Opportunity to get additional guarantees;
- Risk sharing with the public sector;
- Increased participation of the private sector in the economy and public governance.
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Currently, the PPP environment in Azerbaijan is regulated by the Law of the Republic of Azerbaijan dated March 15, 2016 “On the Implementation of Special Financing for Investment Projects in Connection with Construction and Infrastructure Facilities”. In connection with the application of the said law, “Rules on establishing terms of execution of investment projects by investors with respect to construction and infrastructure facilities based on "Build-Operate-Transfer" model, requirements to investors depending on the types of construction and infrastructure facilities, specifications and terms of agreements, and ways of determination of the value of goods and services to be produced through investment” was approved by Decree of the President of the Republic of Azerbaijan dated December 7, 2016, and “Methodology for calculating the amount of cooperation assistance and guarantee obligations of the contract concluded within the “Build-Operate-Transfer” model” was approved by the Decision No. Q-06 of the Board of the Ministry of Finance dated May 22, 2017. This legal framework envisages the implementation of PPP projects within the “Build-Operate-Transfer” (BOT) model.
In Azerbaijan, PPP projects can be implemented on the basis of the BOT model in the following areas:
bridges and tunnels;
- reservoirs, water treatment facilities, irrigation, drinking and household water, as well as sewerage systems, including main gas pipelines, underground gas reservoirs, city gas networks; press and conference centers, as well as educational, health, cultural and tourism facilities;
- commercial buildings, wholesale markets, factories and plants;
- sports centers, dormitories, recreation and amusement parks;
- industrial parks, high-tech parks, agro-parks, high-tech automated control systems and other systems in the field of information technology;
- warehouses for supply of agricultural products and other similar facilities;
- objects and heating systems operating on the basis of geothermal and heat generating capacity of waste, enterprises engaged in the production, transmission, distribution and sale of electricity;
- highways, roads, rail and rail systems, bus station complexes, stations, funiculars and lifting systems, logistics centers, underground and surface parking lots, metro lines and stations;
special economic zones, seaports and airports used for civilian purposes, complexes consisting of cargo, passenger and yacht ports.
The process of implementation of PPP projects in Azerbaijan in accordance with the "Build-Operate-Transfer" model
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Public-Private Partnership Development Centre Increasing the role of the private sector in economic development through public-private partnership (PPP) modalities is set as a priority target in strategic roadmaps and other conceptual papers on socio-economic development of Azerbaijan approved by the President of the Republic of Azerbaijan. Hence, the Public-Private Partnership development Centre has been established under the Small and Medium Business Development Agency of the Republic of Azerbaijan in order to ensure systemic approach in promoting and supporting PPP projects. Model Charter on Public - Private Partnership Development Centre was approved by the Decision of the Board of the Ministry of Economy of the Republic of Azerbaijan dated July 16, 2019.
Main areas of activity of the Public-Private Partnership development Centre are as following:
- making proposals on development of legislative base and institutional infrastructure of public-private partnerships
- preparation, implementation and coordination of programs and projects on public-private partnerships;
- ensuring and broadening the participation of SMEs in public-private partnership programs and projects;
- raising awareness and capacity building for all stakeholders in in publicprivate partnerships; -
analysing and screening of projects in accordance with the criteria of public-private partnership and taking relevant measures for their implementation/
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International Experience in the field of PPP
According to the international experience, in a number of countries, the PPP model is widely applied in the implementation of state (public) infrastructure projects. Among them are countries such as, the USA, United Kingdom, France, the Netherlands, Australia, South Korea, Turkey, Brazil, India, China, Mexico and others. According to the statistics of the World Bank, for the period 1990-2018 6135 PPP projects with a total worth of about $1.5 trillion were implemented in the developing countries. A significant part of Turkey's well-known major projects, including Istanbul's new airport, Eurasia Tunnel, Yavuz Sultan Selim Bridge, Osmangazi Bridge, a number of city hospitals and railway projects across the country, have been implemented using the PPP model. According to the World Bank's Private Equity Infrastructure Project Database, Istanbul Airport project ($35 billion investment) is considered to be a PPP project with the most private investment attracted. Other notable PPP projects include the Nord Stream Gas Pipeline project ($10 billion), which connects Russia's gas fields with the European Union's energy markets, France's largest fiber-optic project the THD Grand Est (€1 billion), construction and renovation of stadiums for the 2016 UEFA European Football Championship (for example: the construction of the Pierre Mauroy stadium in Lille for €618 million), the Blankenburg tunnel (€1 billion) and the Afsluitdijk Dam (€810 million) in the Netherlands, the 1915 Canakkale Bridge (€3.1 billion) and Bilkent Laboratory (€711 million euros) in Turkey and etc.
The chart below presents the PPP market in Europe in 2018.
According to the diagram, the highest number of PPP projects were implemented in France, while Turkey was leading in terms of total project value. The PPP model plays an important role in attracting local and foreign investors to the implementation of relevant infrastructure projects by reducing public investment expenditures and introducing alternative financing mechanisms. In a number of countries (Australia, Netherlands, Chile, etc.) PPP model is only applied to the projects included in the public investment program. Relevant support is being actively provided by the Asian Development Bank, the European Bank for Reconstruction and Development, the Sustainable Infrastructure Fund, the Islamic Development Bank, the International Finance Corporation and other international organizations in the creation of favorable PPP environment and development of PPP projects.
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