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 water1. 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:
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 pounds2. According to the World Bank, risks of PPPs include3:
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.