What is a Public-Private Partnership (PPP)?


What is a Public-Private Partnership (PPP)?

Public-Private Partnership (PPP) Image


For many years, public-private partnerships (PPPs) have been indispensable in financing, building and operating landmark projects in modern cities. This seemingly modern concept, however, found its roots in 16th-century Italian city-states and the 18th-century Dutch Golden Age: the economic booms during these periods are associated with the way public institutions combined political interests with the private sector.

While the term is yet to find a widely-accepted definition, PPPs are described as a contract between private parties and government entities that enables the latter to implement public infrastructure or services through the expertise and resources of the former. Through these partnerships, national and municipal governments are able to create or improve infrastructures such as roads, airports and ports.

The PPP Knowledge Lab further describes PPPs as a long-term contract in which “the private party bears significant risk and management responsibility and remuneration is linked to performance.” Simply put, the private party must be willing to take on a significant portion of the risk, given that the amount it will receive for its participation will ultimately depend on their performance.

Another key element of these partnerships is its contractual term: typical projects last between 20 and 30 years, if not longer. Effective PPP contracts must be flexible enough to adjust to the project’s life cycle as technology, demographics, environment and politics change. According to Isabel Marques de Sá from the World Bank’s International Finance Corporation, “The art of a PPP resides in the allocation of risks of the project and in the definition of the framework, principles, and rules to deal with change, because it will occur.”

What are the types of Public-Private Partnerships (PPPs)?

There are numerous types of public-private partnerships existing today, and the right one will often depend on the needs, the available options and the project size.

In a traditional PPP, the public entity acts as a contracting officer and will have overall control of the project. The private component operates and maintains the project in an operation and maintenance PPP.

For design-build PPPs, the private partner designs and builds a facility, while the public partner funds and possesses the project and the assets generated. Design-build-operate PPPs, on the other hand, delegate the designing, building and operating of a project to the private partner, with the public partner as the owner. In a design-build-operate-transfer model, the private partner will design, build, and operate the facility for a certain period of time before transferring the ownership to the public partner. Build-transfer-operate PPPs have the private partner building and transferring the project to the public partner, which will then lease its operation to the private sector.

Under the build-own-operate-transfer PPP, the private partner will build, possess and operate the project before transferring ownership to the public partner. A build-own-operate model is more similar to privatization, as the private partner builds, owns and operates the facility while controlling its profits and losses.

What are the roles of Public-Private Partnerships (PPPs) in the delivery of public service?

The government alone cannot meet the estimated demand for investment in public services, even if there are available donor resources. Therein lies the value of PPPs: by harnessing private capital, governments can speed up the delivery of public infrastructure.

It goes without saying that PPPs play numerous roles in the government’s ability to deliver public services, such as the following:

  • Through the optimal allocation of risk management between the public and private sectors, PPPs promote greater efficiency in the use of resources as the private partner considers the long-term implications of the costs of design and construction quality.
  • With their capital exposed to long-term performance risk, the private party is also incentivized to design and build the asset within the specified time period and budget.
  • These partnerships follow a more stringent set of quality assurance in preparing the project, which can also generate an in-depth debate on project selection and a bigger focus on outcomes.

Given these roles, governments must look at PPPs as a tool to reform procurement and public service delivery rather than a means to leverage resources from the private sector. As these partnerships are expected to last for a long period of time, PPPs must be based on firm policy foundations, a long-term political commitment, and a sound and predictable legal and regulatory environment.

What are the benefits of Public-Private Partnerships (PPPs)?

It is not difficult to see the inherent benefits of PPPs for governments all over the world. For one, PPPs allow the development of new infrastructure services, which can be financed from private capital markets. This is particularly beneficial for countries with relatively large infrastructure needs but a severely limited fiscal capacity.

Furthermore, PPPs rely on the private sector’s strength in delivering large construction projects, allowing governments (and, by extension, its taxpayers) to gain certainty on the total cost of infrastructure projects due to the reduced risks of cost overruns. More than the reduction of costs, however, is the fact that PPPs enable governments to focus on delivering quality services to their constituents.

Can every sector benefit from Public-Private Partnerships (PPPs)?

Numerous sectors stand to benefit from PPPs, particularly in the fields of agribusiness, education, health, ICT, power, municipal, tourism, transport and water and sanitation. PPPs have been instrumental in the procurement of different kinds of public assets and services, thereby spurring development in these sectors. Indeed, there’s a potential to use PPPs in almost any sector: developing infrastructure in various sectors can foster economic development in different countries.

While it may seem ideal to initiate PPPs in every sector, one thing to note is that these projects are very specific. At the end of the day, PPPs depend on the particular economics, political economy, laws and the capacities and policies of a country’s institutions.

Given this, some countries tend to implement PPPs only within certain sectors to improve service delivery and to help the government prioritize other investments. Furthermore, legislations in several countries have defined certain sectors or services within sectors – core services – in which PPPs are not to be used. The rationale behind this is that these core services are to be provided solely and exclusively by the government.

How is it different from privatization?

Too often, however, public-private partnerships are made synonymous with privatization, despite having completely different definitions. As noted by Edward Farquharson, Clemencia Torres de Mästle, E. R. Yescombe and Javier Encinas, this confusion might stem from a broad use of the term, as privatization is mistakenly used to denote any form of private management.

In reality, PPPs involve a continuing role for the public sector as a partner in an ongoing relationship with the private sector, while privatization involves the transfer of a publicly owned asset to the private sector. Privatization implies that a facility or infrastructure has already been constructed, and is therefore not an option to create new ones. In a similar vein, transferring the management of existing facilities cannot be considered as privatization, as it does not involve a permanent transfer of these facilities to private partners.

Governments around the world, particularly those in developing countries, are in need of solutions to help them face their own development challenges. While public-private partnerships are far from being a one-size-fits-all solution, these are already vital in helping governments address their most pressing development needs.

Do you want to learn more about the benefits of PPPs? Contact ADEC Innovations today!