What is a PPP?

Public-private partnerships involve commercial contracts between public authorities (state or local) and private businesses in the design, construction, financing and operation of public infrastructure and services that have traditionally been delivered by the public sector, such as motorways, hospitals or schools.

There is no agreed definition of PPPs but they generally involve the following:

• Relatively long contract periods, on different aspects of a planned project: often around 25-30 years, and sometimes even longer.
• Financing comes in part from the private sector, but requires payments from the public sector and/or users over the lifetime of the project.
• The private partner participates in the design, completion, implementation, and funding of the project while the public partner concentrates primarily on defining the objectives and monitoring compliance with these objectives.
• An attempt to distribute risks between the public partner and the private partner according to the respective ability of the parties to assess, control and cope with them.

PPPs involve either a partnership between a public entity and a private entity based solely on a contract, or the establishment of a project company involving both the public and private sector within a distinct entity.

Payment details

In legal terms, PPPs fall somewhere between public works or services contracts and concessions. While public works and services are paid for through a fee from the public authority, concessions may also include the right to direct payment from users.

In PPPs, regular payment is made either by the public authority from its revenue budget, for example in hospital projects, or through direct payments by users, for example on toll highways, or by some combination of the two.

Sometimes payments are made by the public authority but are based on actual usage of the service, for example with ‘shadow tolls’ for highways. In other cases, payment is made by the public authority with the fees collected from users, for example fees for wastewater treatment.

Contractual details

The term PPP covers a wide range of contractual arrangements including:

• Design-Build-Operate (DBO)
• Design-Build-Operate-Transfer (DBOT)
• Lease-Develop-Operate (LDO)
• Build-Lease-Operate-Transfer (BLOT)
• Build-Own-Operate (BOO)
• Build-Operate-Transfer (BOT)
• Build-Own-Operate-Transfer (BOOT)

Risk sharing

An important feature of all PPPs is that some degree of risk is supposed to be transferred to the private sector, though it is questionable how much this in fact takes place. (Read more under Efficiency through risk transfer?.)

There are three main kinds of risk that arise in infrastructure projects:

1. Construction risks, mainly for physical infrastructure such as roads or railways: if the product is not delivered on time, runs up extra costs, or has technical defects. The risk is borne by the partner who pays for such unforeseen cases – usually the private partner.
2. Availability risk, mainly for services such as running prisons, hospitals or schools: if the private company cannot provide the service promised, or at the level promised. For example, it does not meet safety or other relevant quality standards. If the public sector is contractually allowed to withhold payments then the risk is borne by the private sector.
3. Demand risk, in cases where there are fewer than expected users of the service or infrastructure, for example on toll-roads, bridges or tunnels. If the public sector has agreed to pay a minimum fee irrespective of the demand, it is assumed to bear the demand risk.

PPPs in different regions

United Kingdom: a PPP pioneer having second thoughts

Although concessions have been in use for many years, PPPs in the form outlined above effectively began with the UK’s Private Finance Initiative (PFI), launched in 1992 in order to allow private capital to be invested in public infrastructure projects.

PFI involves the private company designing, building and operating infrastructure, with the costs paid by an annual fee from the public authority, rather than costs being paid directly by users.

By November 2011, more than 700 PFI projects had been signed in the UK, although the model is now being heavily criticised there and at the time of writing is undergoing a review by the Treasury.

Central and eastern Europe

PPPs in various forms have since been adopted by many countries, although the degree to which they are used varies widely.

In central and eastern Europe, PPPs have also been used since the early 1990s, but they have not become as widespread as their proponents had hoped - with the exception of Hungary, which launched around 100 PPP projects before its government became alarmed at the costs involved and reviewed its policy.

Middle East and North Africa

In spite of the questionable success of the PPP model, it is still being pushed around the world by those who stand to gain from it.

One of the concerns arising after the Arab Spring in the Middle East and North Africa region is that governments seeking to kick-start their economies and increase employment may be tempted by the 'build now, pay later' PPP model, and that they will be encouraged to do this by international institutions such as the World Bank, European Bank for Reconstruction and Development and European Investment Bank, all of whom have been heavily engaged in promoting PPPs.