An Overview of Public-Private Partnerships (PPPs)
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An Overview of Public-Private Partnerships (PPPs)

  Mohammed Nayal | Partner

  3rd March, 2019

Worldwide Problems with Public Infrastructure

According to the World Bank, over 1 billion people around the globe live without electricity, 4.5 billion people do not have adequate access to managed sanitation, and over 2 billion people do not have access to safely managed drinking water(1). Developing a sustainable and reliable infrastructure to meet the aspirations of billions remains a difficult challenge to solve, especially since infrastructure projects are capital intensive and require relatively large upfront investments. To make matters worse, the financial crisis has curtailed the ability of many governments to raise the capital needed for large infrastructure projects.

An Overview of Public-Private Partnerships

This is where Public-Private Partnerships, or PPPs as they are commonly referred to, can help. PPPs are ventures set up between a public entity and a private entity to bridge an “infrastructure” gap. This is pursued when the involvement of a private partner can improve the experience offered by the public sector at a profit to the private partner. PPPs can be created to help bridge the infrastructure gap in different areas such as transportation (rails, airports, and roads), utilities (power and water), telecommunications, hospitals and stadiums. A typical example is the following:

Assume that the government of Astoria (a fictional country) wants to build a railroad between its two major cities of Asto and Ria. Unfortunately, the government of Astoria is running a deficit and borrowing additional money from the global financial market is impossible. Therefore, Astoria decides to go to the private sector. A Request for Proposal (RFP) is released and several companies bid for the project. Astoria negotiates with these companies and finally agrees with Rail Co. on a Build-Operate-Transfer (BOT) type of PPP. This can be a complex agreement but the general outline can be summarized as follows:

  • Rail Co. will build the railroad and stations (hence the Build in the BOT). Certain concessions will be given during this time such as free access to land and reduced taxes.
  • Rail Co. will operate this railroad for a period of 10 years subject to certain criteria and regulation from the government (this is the O in the BOT). Here also, Rail Co. can receive certain concessions from the government such as reduced taxes. In turn, the government can be entitled to a share of the revenues or profits. .
  • After 10 years, Rail Co. will transfer ownership and operation back to the government of Astoria (this is the T in the BOT agreement).

If this agreement is structured correctly and the execution is done properly, both parties can gain. Rail Co. gets access to a profitable venture while the government (and therefore the citizens) of Astoria gain a high quality functioning railroad.

The Growing Popularity of PPPs

While the main reason for governments to turn to PPPs was to reduce upfront costs, it soon became clear that successful PPPs also resulted in better infrastructure projects and improved government services. This has allowed governments to focus more on policy, planning, and regulation without having to worry about operations and implementation. With successful PPPs, the public sector can gain access to expertise and resources that they do not have. This can lead to improved efficiency and increased effectiveness in operations. On the other hand, the private sector can gain access to large scale projects while gaining additional experience in the public infrastructure sector. But most important of all is the potential benefits to the overall community. Effective PPPs can provide the community with wider service offerings, enhanced quality levels and moderate prices.

Risks of PPPs

Public-Private Partnerships (PPPs) between government and businesses can accomplish what neither side can do alone, but only if they are done properly. As with any large-scale project, PPPs can be fraught with many dangers that decision makers must be aware of. For example, not all PPPs make economic sense. In the late 1990s, the recently elected Labour government in the UK developed a PPP with private companies with the goal of modernizing the 100 year old London tube system. In 2007, the PPP failed and its liabilities were underwritten by the government leaving taxpayers with losses estimated in the billions of pounds(2). According to the World Bank, risks of PPPs include(3):

  • Development, bidding and ongoing costs can be much higher than expected.
  • Some projects are politically or socially challenging and can be viewed by the public as an unwelcome bid to privatize government services.
  • While government employees may go the extra mile even when salaries are low, the private sector is different and will only do what it has agreed to do. Therefore, governments must ensure that the PPP agreement includes clear performance expectations.

The Final Verdict

PPPs are a mixed bag. Some projects have failed spectacularly and left the public with a large bill while others have given citizens access to better services at lower prices. It is hard to judge the effectiveness of PPPs just by looking at the overall success or failure of projects worldwide because PPPs are complex and many factors should be taken into consideration. What is clear though is that Public-Private Partnerships between government and businesses, when done correctly, can accomplish what neither side can do alone and can lead to wide-reaching benefits for the community.