What is PPPs?

A public-private partnership is a contracted agreement between the government and a private sector partner. The government retains ownership of the facility, while the private partner does almost everything else, including building, fixing, maintaining or managing it.

The rights over this facility or system mostly remain with the government, but the private entity has some negotiating room when it comes to project completion. Both share in the profits generated from the completed project, and PPP contracts can last for decades.

Key characteristics of public-private partnership

PPPs are a continually evolving process as partners look to refine the collaborative relationship. With that in mind, the framework that supports the arrangement should have some key principles, such as:

• Risk sharing and allocation. Optimal risk sharing and allocation are for the party best able to manage them.
• Sufficient public interest. The arrangement between all actors means that there was sufficient public interest in the form of consultation with end-users, at the very least.
• Performance payments. This requires good human capital development and a financing framework that supports payments to private partners linked to performance.
• Capacity to deliver. The private partner has the capacity to manage all of the commercial processes and needs by consulting with their other private partners.
• Transparency. Public and corporate governance that includes high quality of service and performance keeps the process credible and transparent.
• Competition. Competition is necessary to break down barriers of entry for certain private partners. It also applies enough commercial pressure during the initial part of the process to maintain high standards.

Types of PPPs

There are two main types of P3 categories: contractual and institutional.

Contractual PPPs

This is where the private partner services the public infrastructure needs under the control of the public partner. The private entity is responsible for all aspects of the infrastructure object, such as maintenance and operation. It charges the users for the service, and the contract it signs with the public entity is regulated by a single administrative contract or several in a series.

Leasing contracts, also known as affermage, are one example of contractual P3 arrangements where the asset has already been built and the need for infrastructure investment is unnecessary. These usually last between 10 and 20 years.

Delegate management contracts are where the public partner directly pays the private partner for service. One example is treating public water supply. This is akin to an outsourcing relationship and lasts anywhere from 3 to 10 years.

Institutionalized PPPs

These types of partnerships are like joint ventures, where the asset is held by both private and public partners. Both parties are responsible for delivering a work product or service, or the private partner owns shares in a public company. Here, the public partner controls the infrastructure asset while the private partner operates it. One common example is long-term security monitoring for a site.

PPPs are regularly implemented in three main sectors:

• Social services. This includes providing facilities and services to schools and health organizations as well as urban regeneration projects.
• Public transportation. This is the creation of mass transit systems, airports and roads.
• Environmental and waste disposal. Examples are bulk water treatment, sewage systems and solid waste management services.

In several regions, including Sub-Saharan Africa and South America, PPPs, also called independent power projects (IPPs), are used for power generation and distribution.

Benefits and challenges of public-private partnerships

Establishing public-private partnership contracts comes with immense benefits as well as life-impacting challenges.

• Provide better infrastructure solutions. This is particularly true in developing communities and countries. These partnerships help citizens not only get access to much-needed services but can also facilitate economic growth. Areas with better infrastructure attract more businesses, which creates more jobs.
• Faster project completion. When it comes to construction, P3 tends to reduce project delays, and building cycles are faster. Private companies have more experience when it comes to managing projects and measuring performance because these tie directly to their profits.
• Greater ROI. PPPs can generate better ROI in a couple of ways. Private-sector technology and innovation improve the operational efficiency of a project. There’s also the possibility of incentives for delivering projects that are on time and within budget.
• Better risk appraisal and cost containment. Early feasibility studies provide full risk appraisal. There’s nothing more expensive than trying to work within unrealistic expectations that could have been researched beforehand. Additionally, once projects go ahead under the control of the private partner, its experience improves cost containment.
• Reduced government budget deficits. With improved efficiency comes reduced budget deficits.

Challenges associated with P3s are:

• Inconsistent profits. Profits may not be consistent partially because the risks involved in complex projects eats away at profits.
• Less competition. The field for certain projects may be so limited that the reduced competition makes it less cost-effective to partner.
• Compensation requirements. Private partners expect to be properly compensated for accepting the risks associated with the project. Sometimes, government may not be able to fulfill that requirement fully or in a timely fashion. This can affect the private partner’s ability to handle its obligations.
• Inaccurate costing. In areas where the government is not an expert and the private partner is, the government can be put at a disadvantage when assessing cost proposals.

6 Keys to successful P3 projects

Effectiveness, efficiency and equity are just a few of the metrics project managers use to measure partnership success. However, getting to the point of making it a success means:

1. Having credit support ready. When public entities are cash poor, private partners need access to private capital, which allows the government to reallocate the resources to other requirements that are just as important.
2. Opening avenues of communication. Silos can create bottlenecks. Open communication between sectors allows each side to express their needs and access potential solutions.
3. Educating the public about PPPs. Get public buy-in by speaking about the potential for improved future infrastructure.
4. Creating clear accountability processes. Each partner holds itself and each other responsible for its roles and responsibilities. Accountability also includes being transparent about planning, execution and maintenance steps.
5. Establishing decision-making hierarchy. Both partners agree on the chain of decision-making as well as alternate avenues. This avoids frustration, confusion and delays.
6. Loosened bureaucracy. There’s room for some leverage between partners because they aren’t facing restrictive external forces that can hamper project completion or unduly influence major decisions.