Why are PPPs used?

The official reasons why PPPs are used are because they enable projects to be realised now which otherwise would not be affordable, and because they take advantage of the supposedly greater efficiency of the private sector in public service delivery. However the main reason they have seemed attractive to decision-makers is because they can sometimes move projects off the government balance sheet, thus enabling governments to “build now, pay later”.

The claim that PPPs enable projects to be realised now which otherwise would not be affordable, is extremely misleading as it implies that PPPs produce extra money out of thin air.

In fact no extra money is available, it is just borrowed from public budgets for around the next thirty years. PPPs do not mean that governments spend less public money overall; it is just paid later than in traditional public procurement.

Hiding government debts

Delaying payments for infrastructure has appeared very attractive to governments in countries with public debt problems such as Hungary and Portugal, however once the contracts kicked in and they had to start paying for the infrastructure, it proved to be a heavy burden. Both Hungary and Portugal and have announced moratoria on the use of new PPPs and reviews of ongoing projects, the latter as part of its commitments to the International Monetary Fund.

PPPs look attractive to decision-makers because they can sometimes move projects off the government balance sheet.

According to Eurostat rules, a project is a non-government investment if the private sector bears the construction risk and either the availability risk or the demand risk. Instead of up-front capital investments, PPPs use annual instalments from revenue budgets to pay for infrastructure, so governments do not need to directly take loans.

However governments do often need to provide loan guarantees for the private sector, which can also add to public debt commitments.

The claimed cost efficiency through private sector involvement

Another main reason for using PPPs is that the private sector is seen to be more effective at cutting costs in project implementation than the public sector, and thus the higher costs of private sector borrowing should be offset by the cost savings achieved.

The competitive tender and risk transfer should provide incentives for the private sector to make cost savings. As the private sector has long-term control of the facility, it has an interest in making sure that the construction is completed on time and on-budget and that the costs for the whole lifetime of the facility are adequately taken into account and reduced as much as possible.

‘Bundling’ the construction together with the operation of the facility is seen to provide cost reduction incentives that may not be present when construction is undertaken by a different party than the operation. See the section Efficiency through competition for a different perspective on these claims.