This and the next few blog posts in this series will aim to provide some background and colour to Public Private Partnerships (PPPs). This post will describe what a PPP is, while later posts will cover why governments enter into PPPs, what the standard risk allocations are under PPPs, the success factors for both private and public participants, and finally a short demystification of the Public Sector Comparator. I also have some material from case studies of Hospital PPPs later on in the series.
What is a PPP?
The Canadian Council for Public Private Partnerships provides a good working definition of a PPP.
“PPP is a cooperative venture between the public and private sectors, built on the expertise of each partner that best meets clearly defined public needs through the appropriate allocation of risks resources and rewards.”
The definition is taken from the UNECE Introduction to Public-Private-Partnerships, which is one of many similar publications in recent years.
This definition sums up the essential elements. Firstly it is a partnership – not an adversarial arrangement. The State and the Investors and the contractors work together, each playing a part determined by their expertise and risk appetite, each receiving rewards or benefits commensurate with their role.
Types of PPP
PPPs come in two flavours – Social PPPs and Economic PPPs, and they have very different outcomes for the parties, share risk in a different way and allocate rewards differently.
In a Social PPP the customer is the State It pays a fee to a private entity to design, construct, maintain, operate and make available a facility. There may also be payments for services or facilities which vary with the demand for the services. Typically this structure is applied to hospitals, prisons and schools where there is no paying customer and the State has some obligation to provide services to its citizens. Economic PPPs, on the other hand, are an arrangement under which the State grants a concession to build, own and operate a facility to a private business, and the private business takes the market risk by selling the product of the facility to the public. The most common example of an Economic PPP is the toll road, although ports and other transport services can be delivered under similar arrangements.
PPPs are not projects – they are procurement mechanisms for government. As such they have three principle features. In the first instance, the PPP procures public infrastructure assets through private sector financing and ownership control. Secondly, there is normally a contribution by Government through land, capital works, risk sharing, revenue diversion or other supporting mechanisms, and finally, a PPP involves the engagement of the private sector for a specified period for the delivery of related services.
A PPP is not Free Money
In spite of the perception of many politicians, a PPP is not free money. Both Social and Economic PPPs have a cost to Government. Social PPPs create payment liabilities for Government these liabilities appear on the Government balance sheet, usually at about the same value as the capital cost of the asset. Economic PPPs are generally not liabilities for government, so in a sense they are a means to allow the provision of a service without government funding, but they have an economic impact by raising funds from users (such as motorists) and that mechanism has the same effect as a tax on the economy, diverting investment away from other activities and increasing the cost of doing business. They are an opportunity cost for a government, because tax revenue is foregone from what appear to be willing payers, and diverted to the economic PPP.
The main reason a government would choose a PPP for the procurement of essential infrastructure is not that is comes at no cost, but rather that the total benefit to the state is greater than the benefit which would accrue under some other delivery mechanism.
Later discussions in this series will describe the Public Sector Comparator and its role in determining the delivery mechanism, and the allocation of risk, which is a key concept in PPPs.