What is a Public-Private Partnership (P3)?
Public private partnerships (PPPs) are arrangements between government and private sector entities for the purpose of providing public infrastructure and services. Such partnerships are characterised by the sharing of investment, risk, responsibility and reward between the partners. The reasons for establishing such partnerships vary but generally involve the financing, design, construction, operation and maintenance of public infrastructure and services. The underlying logic for establishing partnerships is that both the public and the private sector have unique characteristics that provide them with advantages in specific aspects of service or project delivery.
The most successful partnership arrangements draw on the strengths of both the public and private sector to establish complementary relationships. The roles and responsibilities of the partners may vary from project to project. For example, in some projects, the private sector partner will have significant involvement in all aspects of service delivery, in others, only a minor role.
While the roles and responsibilities of the private and public sector partners may differ on individual servicing initiatives, the overall role and responsibilities of government do not change. Public private partnership is one of a number of ways of delivering public infrastructure and related services. It is not a substitute for strong and effective governance and decision making by government. In all cases, government remains responsible and accountable for delivering services and projects in a manner that protects and furthers the public interest.
Is PPP new?No. The private sector has always played a part in the delivery of public service, but over the last 15-20 years new models have emerged particularly in use of private finance for infrastructure. PPP models continue to evolve, lessons are learnt and there is an increasing number of new innovative models which offer greater choice and suitability to particular circumstances.
Where can I learn more about PPP?
There are a number of useful links on our web-links section to policy and PPP units, forums, databases etc. You can also look at our reports section where we attempt to highlight the most interesting and relevant recent reports and where we have a section specifically on PFI. If you are completely new to public private partnership why not contact us to discuss us providing some training e.g. an introduction to PPP seminar. If you have a specific query please contact us– we don’t have all the answers but we probably know somebody who does and gladly will point you in the right direction.
What are the advantages of PPP?
When correctly implemented, PPPs are said to produce reduced life-cycle costs, better risk allocation, faster implementation of public works and services, improved service quality and additional revenue streams.
It is generally accepted that PPPs have provided the following benefits
- Significantly increased proportion of large scale infrastructure projects delivered to time and budget
- A whole life cycle approach, transferring future risk and driving better design for long term gain
- Enhanced project evaluation and due diligences skills from independent funding parties to test the robustness of projects
- A change of focus by public sector bodies on outcomes rather than inputs, in particular with a concentration on value for money over the longer term as opposed to concentrating on short term capital expenditure
- Innovative ways of financing, which allow the public sector to spread its funding of capital expenditure and, in the case of revenue based PPP’s remove the burden on tax payers completely
- Potential use as an anti-cyclical method of stimulating the economy
What about social partnership?We believe there will increasingly be partnership, bringing together not just the public and private sectors but also the third sector including charities and social enterprises which already deliver important and significant services. We envisage a significant growth in Public Social Private Partnerships with significant potential to explore social enterprises being adopted.
What does it mean when a PPP offers “value for money”?The underlying rationale for PPPs is that they may offer value for money. Before entering into a PPP the public sector needs to demonstrate superior value-for-money to the public sector and community when compared to the public sector comparator (see below). Value for money is essentially a measure to find the most cost-effective solution (i.e. for the price being paid, the solution that most effectively meets the Government’s economic and social objectives).
What is a public sector comparator?Assessment of whether a PPP offers value of money is an essential part of a PPP process. This entails comparing the proposed PPP with the cost of the public sector undertaking the project. To ensure the analysis of the two alternatives is comparable there will need to be a proper accounting for quality of services, price, time frame, risk apportionment and certainty. This requires the preparation of a benchmark or public sector comparator (PSC). The PSC describes the option and assesses what it would cost the public sector to provide the outputs it is requesting from the private sector.
Can the PPP approach actually deliver additional value for money compared to other approaches?
Yes but not always! For a PPP approach to be approved value for money must be demonstrated. However there are limitations in the VFM assessment particularly how the PSC is constructed and important cost considerations are excluded. For example, should the public sector costs of managing procurement and projects be included? The VFM assessment is restricted as numerical calculations based on comparators only tell part of the story with only predicted costs rather than actual costs evaluated and factors such as quality are excluded.
Ultimately, only yardstick competition between procurement routes yields conclusive assessment of VFM. The public sector should start its PPP approach by thoroughly studying the key drivers of VFM in its projects. Thereafter, it should enact the necessary legislative and administrative framework that enables VFM to be maximised through the rigorous assessment of the PPP approach compared with traditional and other procurement options.
Several studies have concluded that PPP arrangements offer value for money, but suitable models must be used for appropriate projects. BY applying a broader range of models in the right circumstances, the public sector can improve overall VFM.
Is PPP just a way for moving debt off the Government’s balance sheet?The PPP approach does not foster a circumvention of public spending controls. Conditional upon a comprehensive risk transfer to the private sector, individual PPP projects may be classified as off balance sheet and the public sector may shift investment costs from capital expenditure to annual operational expenditure accordingly. The principal reasons for using PPP should be to benefit from increased efficiency, shorter implementation time, greater innovation and ultimately better value in the delivery of services brought about by increased competition. The ability to finance a project so that the debt is “off book” should not be the prime motivation for entering into a public private partnership in that the public sector/user of the service are still responsible for servicing the debt in one way or another. The emphasis should be on structuring creative and cost-effective ways of delivering services, not on creative accounting. Indeed it is becoming more difficult for projects to be off balance sheet, either by reason of the different risk transfers that the economic crisis has brought about or because of the evolution of international accounting rules.
Can the public sector transfer its risks?Identification and management of risk is complex and key to successful PPP. Risk can take many forms including those relating to construction, commissioning and operating risks. The essence of a public-private partnership arrangement is the sharing of risks. Central to any successful public-private partnership initiative is the identification of risk associated with each component of the project and the allocation of that risk factor to either public sector, the private or third sector or perhaps a sharing by all. Thus, the desired balance to ensure best value (for money) is based on an allocation of risk factors to the participants who are best able to manage those risks and thus minimise costs while improving performance.
What is the role of the public sector in a PPP?PPPs entail a sharing of responsibility between government and the private sector. For example, the private sector can contribute design, construction, operation, maintenance, finance and risk management skills while the government is responsible for strategic planning issues, regulation and (sometimes) payment on behalf of the service users. In a school project for example, the private sector may undertake responsibility for the design and construction meeting agreed specifications, finance the project and undertake the subsequent maintenance including catering, cleaning and other support services. However, responsibility for teaching and delivery of the curriculum remains with the public sector.
How much public sector investment is currently being undertaken under PPPs?
Over the past two decades more than 1400 PPP infrastructure deals were signed in the European Union, which represent an estimated capital value of approximately €260 billion. This is led by the UK which accounts for some two thirds of all European PPP projects, representing around 10% of the total number of projects undertaken in the UK. PFI has been extensively used and in the UK some 930 projects with a value of some £66bn have reached financial close.
For 2009 PPP transactions stood at EUR 15.8 billion, with for the first time the UK market representing less than 50%. These figures do not include joint ventures for service provision or many other types of PPP.
Is PFI the same as PPP?No and yes! The private finance initiative is often incorrectly considered to be the only form of PPP but in fact is one form of a very broad range of public private partnerships. The confusion arises as the terms are often used interchangeably and indeed PFI was re-branded as PPP to overcome negative views and controversy, principally for earlier PFI projects. To learn a little about some of the newer models of PPP please see our document “New models of PPP”.
What role do banks play?
The role of banks in the implementation of infrastructure PPPs is important. The obligation of private partner to secure the financing of the projects, in whole or in part, leads them inevitably to bank loans. Indicatively, the usual ratio of equity and bank loans for financing PPP projects ranges from 10-20 to 90-80.
The involvement of banks in PPP projects contributes to their prompt implementation, as banks will monitor private partners which have undertaken their implementation. This monitoring keeps the cost of the project low and helps to meet the deadlines set in the contract. Moreover, the monitoring continues throughout the contract (25 years for instance). In this way the quality of the offered services according to pre-determined output specifications is ensured. Private partners have to be consistent with their contractual obligations in order to get repaid by the public partner and pay off their bank loans.
Does private finance cost more?
Yes. Generally, we recommend that use of public finance is maximised wherever possible as it represents a cheaper form of finance. However, in the context of limited capital funds the advantages of the purchase now, pay later principle offered by use of private finance may offer a remedy for overcoming the initial need for additional capital funds. This should not be confused with enabling additional real resources for investment as it will need to be repaid, but rather would be a timing difference enabling progress at a premium in cost terms.
Simply, it is akin to the situation that if you cannot afford to buy a house with cash, you will consider a mortgage because, although it may be a more expensive way to fund the purchase, the alternative is that you would never own a house at all.
It is interesting to reflect that the increased cost for private finance is purely judged in cash terms and may be significantly different if calculated on an economic basis with opportunity costs included. Better equipment can improve healthcare and better school environment assist better educational achievement. What estimate can be put on health or lower educational achievement to the individual and to a national as whole if infrastructure modernisation is delayed? In the absence of lower cost capital, private finance appears to provide considerable value for money on this basis.
Does the PPP approach take away flexibility from the public sector?It is correct some forms of PPP projects commit the public sector financially for 25-30 years. This has been claimed to create a burden for future generations. However, investment in infrastructure, be it by conventional procurement, a leasing agreement or a PPP project will result in significant capital expenditure and future needs for operation and maintenance.
However, the PPP approach at least secures the construction as well as the operation and maintenance of public assets against short-term policy issues. In addition, the PPP approach removes uncertainties from the public budget in the sense that the total life-cycle costs are established already at tender stage. This is particularly important given that maintenance and other services can represent 30-50% of the total projects costs. Under traditional procurement these are not automatically covered monitored or disclosed, representing hidden costs (use of e.g. Prime Contracting can overcome)
Is PPP the same as privatisation?
PPP has been claimed by some to be privatisation by stealth of public services. However, only one form of public private partnership, known as Build-Own-Operate (BOO) can be described as coming close to privatisation. All other forms require an ongoing partnership between the private and public sectors. Even Build-Own-Operate involves a form of partnership in that the public sector can place conditions and regulations on the private partner.
One of the key reasons for considering public private partnership is the ability to introduce competition in the provision of public services, either between private firms or between the private and public sectors. Full privatisation merely transforms a public monopoly to a private monopoly such that the benefits of public private partnership are not realised.
By entering into a PPP does the public sector lose control over the provision of services?By entering into a public private partnership, the public sector does not give up its ability to implement its policies or regulate the provision of services. The public sector establishes the ground rules and has the ability to shape the public private partnership to reflect its own objectives, policies and regulations. It can be argued that the public sector actually has more control, in that it has well-defined contractual remedies in a public private partnership arrangement that it may not have with its own management and staff.
Does the quality of service decline under PPP?
The payments of the public sector to private or third sector are linked with the pre-determined output specifications for the provision of infrastructure and services of high quality. In each PPP contract, there is a number of parameters that determine the quality and performance of the project, so as to quantify whether the contractual obligations are fulfilled. Low quality services result in reduced payments by the public sector.
Value for money depends crucially on performance monitoring to provide incentives for improvement and to ensure that service delivery is in accordance with the output specification. However, the effectiveness of performance monitoring and output specification cannot be fully assessed until projects become operational. Adequate resource needs to be provided to monitor and measure the performance (which can be undertaken by a management contractor).
Is PPP procurement more complex, more time-consuming and thus more expensive in comparison to the traditional procurement method?
Yes: PPP procurement can be complex and lengthy and this is a key area which the public sector needs to address. Reducing complexity and timescales of procurement offer the advantages of not only expediting the project delivery but also reducing the costs of the procurement to the public and cost of bidding for the private sector, which should increase competition and hence VFM. Progress has been made by providing bidders with standardised contracts and adoption of new models which reduces procurement complexity but more can be done e.g. reimbursing unsuccessful bidders at defined bid stages and investing further in public sector procurement skills. Early commercial input from private sector partner can assist using newer models such as unbundelled PPP, integrator type models or joint venture type arrangements such as used in the local education partnerships for the Building Schools for the Future programme in England.
It is vital to get the balance right, between making the process as simple as possible whilst ensuring the process is thorough, transparent and fair. Poor procurement usually leads to a poorly defined project at the outset, resulting in either tender cancellation or in cost and time overruns during project implementation
Does the PPP approach undermine labour rights?No. The public sector retains the right and the responsibility to ensure that the value for money gains of PPP projects are not achieved at the expense of the terms and conditions of the workforce and can protect against “two-tier workforces” being created. However this is not to say that efficiencies cannot be sought and job guarantees are in place. Efficiency should be paramount to both public and private sector alike, seeking best value for the tax payer.
Do private financing models favour the construction of “White Elephants”?
It must be recognised that there have been well publicised failures e.g. new schools which have then closed due to dwindling pupil numbers and bankruptcy of major PFI providers. Ensuring the relevance and need for a project at the outset is critical and there may be scope for earlier involvement of the private sector and greater risk transfer to provide additional rigour in project development.
PPP does offer important filters. First, technical advisers will duly analyse the technical feasibility in the design phase; second, banks or rating agencies (also advised by their experts) will closely scrutinise the financial viability of the project; and finally, private sponsors will only invest in the project if the commercial viability can be ascertained.
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