Historically, infrastructure development in Pakistan has been carried out and financed by the public sector. In 1993, some changes were made in the government policy to encourage the participation of the private sector in infrastructure development. This policy was continued by successive governments.
Medium-term Development Framework 2005-2010 (MTDF) of the government also focused on enhanced private sector participation in infrastructure development through the Public Private Partnership (PPP) model. The government resolved in MTDF to establish a policy framework, and a support unit to facilitate and oversea the PPP projects.
In November 2007, the government issued a formal PPP Policy which, inter alia, provided for structured procedures for selection, review, and approval of the PPP projects, and establishment of the project development fund and the viability gap fund. This policy was revised by the government in January 2010.
In 2017, the Parliament enacted the Public Private Partnership Authority Act, 2017 (P3A Act), to provide a proper legal cover to the PPP regime at the federal level, and for the establishment of various statutory bodies to identify, approve, and regulate the PPP projects for infrastructure development. The provincial assemblies followed and enacted laws for creating enabling legal regimes regulating the PPP projects between provincial governments and the private sector participants.
Very extensive amendments were made in the P3A Act through the Public Private Partnership Authority (Amendment) Ordinance, 2020 (P3A Ordinance). The P3A Ordinance, being temporary legislation, lapsed in November 2020. However, a Bill to enact permanent legislation with almost identical amendments in the P3A Act as those made by the P3A Ordinance has been approved by the lower house of the Parliament, the National Assembly, and is awaiting approval of its upper house, the Senate. It is expected that this Bill will get the Senate’s approval in near future.
Below is a brief introduction of the P3A Act as amended through the P3A Ordinance:
Who are the key players in the federal PPP regime?
P3A or the Authority: Public Private Partnership Authority, or P3A, is the main administrative agency under the P3A Act. P3A is responsible, inter alia, to process the qualified projects and proposals for approval; to conduct appraisal and project risk analysis of the qualified projects; and to advise, facilitate, and support implementing agencies at all stages of the project cycle.
P3A Board: Public Private Partnership Board, or P3A Board, is the Board of Directors of P3A. The main functions of the P3A Board include approval of the project proposals for the qualified projects; approval of funding for the qualified projects; and approval of re-negotiations of the public private partnership agreements, where permissible.
P3WP: Public Private Partnership Working Party, or P3WP, is the forum created under the P3A Act which is responsible for approval of the project concept proposals and the project qualification proposals submitted by P3A.
Risk Management Unit: The Risk Management Unit, or RMU, is responsible for fiscal oversight and for evaluation of fiscal and contingent liability exposure for all qualified projects. All qualified projects also require clearance from RMU.
Implementing agencies: An implementing agency could be any organ of the Federal Government. An implementing agency is responsible, inter alia, to identify, conceptualize and develop projects; to undertake required feasibility studies; to submit proposals to P3A for approval; to conduct competitive bidding for awarding the approved projects to private sector participants; and to provide project support to private sector participants.
Private sector participant: A private sector participant could be a domestic or a foreign investor. The P3A Act does not prescribe any qualification for the private sector participants.
ECNEC: The Executive Committee of the National Economic Council, or ECNEC, is an independent forum outside the P3A Act. The qualified projects meeting specified thresholds require approval of ECNEC, in addition to any other approvals required under the P3A Act.
How is the Public Private Partnership defined?
The Public Private Partnership means a commercial transaction between an implementing agency and a private sector participant in terms of which such participant:
- Performs any of the implementing agency’s functions;
- assumes the use of public property for a project;
- assumes substantial financial, technical, and operational risks in connection with performance of functions of an implementing agency or the use of public property; or
- receives benefit for performing the functions of an implementing agency or from utilizing the public property, by way of consideration or service changes.
What type of projects may be executed through the PPP mode?
Any development project, provision of related services, or both may be executed through PPP mode. A development project means a project which would increase the availability of public infrastructure and service delivery and improve their reliability and quality.
Which projects require approval under the P3A Act?
While the P3A Act authorizes an implementing agency to execute any appropriate project through PPP mode, the various approvals under the P3A Act are required only in respect of the qualified projects.
A qualified project is a project which meets any of the following criteria:
- Requires support in the form of funding from any facility established by the government including viability gap fund;
- requires a sovereign guarantee;
- receives funding through project development fund; or
- meets other criteria laid down in the rules or regulations made under the P3A Act.
What is the process of selecting the private sector participant for a qualified project?
The selection of the private sector participant, or the private investor, for a qualified project, should be made by an implementing agency through a competitive bidding process. However, in certain exceptional circumstances, an implementing agency may be allowed to select the private sector participant and to award the qualified project to such private sector participant without competitive bidding.
Does the P3A Act prescribe any specific corporate structure for the qualified projects?
The private sector participant should incorporate a company as a special purpose vehicle to undertake and implement the qualified project. However, this requirement may be waived in certain circumstances.
What will be the governing law of the PPP agreements?
The P3A Act allows the parties to agree on foreign law to be the governing law of the relevant PPP agreement. However, if the governing law is not specified in the PPP agreement, it will be deemed to be governed and interpreted in accordance with the laws of Pakistan.
However, even in those cases where the governing law of the PPP agreements is a foreign law, the application of the laws of Pakistan especially the P3A Act may not be completely ruled out.
What will be the dispute resolution mechanism under the PPP Agreements?
The P3A Act prescribes a unique approach for the settlement of disputes between implementing agencies and private sector participants. It requires that any dispute between an implementing agency and a private sector participant shall be referred for settlement to P3A. If a party is not satisfied with the decision of P3A, it may approach a local court to seek an appropriate remedy.
P3A Act prohibits the parties from recourse to international arbitration, even if the relevant PPP agreement contains a foreign arbitration clause, without first exhausting remedies before the local courts.
Does the P3A Act allow creation of security over public assets for securing finance?
The private sector participant may create a lien, charge, or encumbrance over the movable and immovable public assets of the qualified project in favour of a lender provided the same is allowed under the relevant PPP agreement. The P3A Act authorizes implementing agencies to provide support and assistance to the private sector participants in the creation of security over public assets of the qualified projects.
Does the P3A Act require ongoing government support for a qualified project being executed by a private sector participant?
The P3A Act authorizes implementing agencies to provide project support for qualified projects. This may include administrative support for obtaining the required licenses and clearances; provision of basic utilities including power, gas, and water; acquisition of land and right of way; rehabilitation and resettlement of displaced persons; and any other required permits and approvals. Likewise, implementing agencies may also provide financial support to the qualified projects through subsidies, provision of funds, and issuance of guarantees including sovereign guarantees for political and other risks.
Does the P3A Act allow renegotiation of the PPP Agreements?
The P3A allows re-negotiation between the parties after the execution of the PPP agreements with the approval of P3A Board and is subject to certain restrictions and limitations.
The government has not yet issued the required rules and regulations under the P3A Act. There is still considerable confusion over the process which will be adopted by the government for awarding the qualified projects to the private sector participants. For instance, the P3A Act allows an implementing agency to apply and obtain approval in respect of a qualified proposal based on an unsolicited proposal received from a private sector participant. However, it is unclear whether, upon approval of the qualified project, it would be offered to such private sector participant and, if so, through which mechanism?
The local courts have set very high standards of transparency in respect of commercial transactions between the government and private sector entities. Even in cases where the law allows otherwise, the courts have remained reluctant to approve the practice of awarding public contracts through any process other than open competitive bidding.
The courts also insist on absolute compliance with applicable laws and legal procedures in similar transactions. Any deviation from the applicable legal procedure, even insignificant, may lead to the court declaring that the contract award process was non-transparent and the public contact void ab initio.
The courts depreciate the practice of allowing any additional benefits to the successful bidder that was not disclosed to all other interest parties during the bidding process. This prohibition extends to any amendments in concluded public contracts which would allow any additional benefits to the successful bidder that were not disclosed during the bidding process.
The courts have reserved for themselves wide powers to conduct judicial review of similar transactions. The courts frequently exercised these powers. Almost every significant commercial transaction between the government and a private sector entity in the recent past has undergone judicial scrutiny through the process of public interest litigation. Pakistan Steel Mills, Rental Power Projects, and Reko Diq are a few examples where the courts had set aside concluded contacts on transparency-related grounds.
The P3A Act is relatively new legislation and has not yet undergone judicial scrutiny. It contains certain provisions which a court may deem inconsistent with the principles of transparency and openness.
Therefore, it will be important for any private sector participant before undertaking any obligation to make sure that the relevant qualified project is award to it in strict compliance with the applicable legal procedure as well as the principles of transparency laid down by the courts.
The private sector participants, especially the foreign investors, should carefully consider the dispute resolution mechanism provided in the P3A Act, which not only appears to be unreasonable but, may also make redundant governing law and dispute resolution clauses of a PPP agreement.
Likewise, the private sector participants should also be vigilant about the potential misuse of certain other provisions of the P3A Act including the one which allows the government to recover any amount due from a private sector participant as the arrears of land revenue.
As per Global Infrastructure Hub / Oxford Economics’ estimate, that Pakistan will face a shortfall of around US$ 124 billion in infrastructure development between 2016 and 2040. P3A has recently estimated that Pakistan’s annual infrastructure development requirements are around US$ 20 billion whereas the government is only able to provide US$ 8 billion.
PPP can be an effective tool for infrastructure development. Many countries have successfully executed large infrastructure projects through the PPP model. The P3A Act clearly indicates that Pakistan is very keen to attract private investment for infrastructure development.
P3A has identified many large infrastructure projects for execution through the PPP model. While there are many attractive investment opportunities, the private sector participants should conduct a proper due diligence before entering this arena as there are many pitfalls.
Majeed & Partners, Advocates & Counsellors At Law is a Lahore-based law firm. We have a well-established government contracts practice. We regularly assist our clients in identifying risks in respect of their government business in Pakistan and help them in minimizing their exposure. We also assist them in formulating strategies on how to handle any court challenges (including public interest litigation) as well as represent and defend them before courts. If you require any legal assistance in respect of your government business in Pakistan, please feel free to Contact Us.