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PPP 101 – An Introduction to Public Private Partnerships
In March this year the Government announced the first National Infrastructure Plan (NIP). The NIP aims to fix the infrastructure problems that are holding New Zealand back and to target projects that will help build a higher-performing economy so that New Zealand can achieve higher levels of economic growth in the years ahead.

In order to bridge the growing gap between the cost of the infrastructure needed and the resources available and to ensure that the infrastructure is delivered as efficiently and cost-effectively as possible, the Government has signalled its intention to use public private partnerships (PPPs) where they represent value for money to taxpayers.

What are PPPs?

"Private sector expertise and experience has always been utilised in public sector procurement but, where in traditional procurement private companies built and then walked away, PPP seeks to ensure that the private sector takes responsibility for the quality of design and construction it undertakes, and for long term maintenance on an asset, so that value-for-money is achieved."
HM Treasury (UK) July 2003

The term “public-private partnership” has been in general use since the 1990s and covers a range of different structures where the private sector delivers a public project or service.

Concession-based transport and utilities projects have existed in EU member countries for many years, particularly in France, Italy and Spain, with revenues derived from payments by end-users, e.g. road tolls.

The UK’s Private Finance Initiative (“PFI”) expanded this concept to a broader range of public infrastructure such as schools and hospitals and combined it with the introduction of services being paid for by the public sector rather than the end-users.

PPPs are whole-of-life contracts for the financing, construction and operation of infrastructure facilities. PPPs can take many forms, but the minimum characteristics of a PPP are:
  • The public agency concentrates on defining the specific outputs or services required to be delivered.
  • The public agency enters into a contract with a private company or consortium to provide finance and arrange design, construction and ongoing operation of a facility to deliver the outputs or services.
  • The contract is typically for 20-30 years, or a substantial part of the life of the facility.
  • At the end of the contract, control of the facility is usually returned to the government or a local authority.
  • The private sector service provider is responsible not just for asset delivery but for overall project management and implementation and successful operation for several years thereafter.
  • The private sector returns are linked to delivery of the service outcomes and performance of the asset over the contract life.
The timing of payments by the public sector to the private sector for the assets and services delivered is therefore dramatically different, as illustrated below.


Advantages and Disadvantages of using PPPs

PPP procurement is only one of several options for procuring infrastructure. The principal reason for using PPPs is that, where the project is suitable, they can deliver better value for money than the alternatives. All arguments for and against PPPs must be considered within the context of that overriding objective.

Key advantages for using PPP procurement:
  • Make projects affordable
  • Maximise the use of private sector skills
  • The private sector takes life cycle cost risk
  • Risks are allocated to the party best able to manage or absorb each particular risk
  • Deliver budgetary certainty
  • Force the public sector to focus on outputs and benefits from the start
  • The quality of service has to be maintained for the life of the PPP
  • The public sector only pays when services are delivered
  • Encourage the development of specialist skills, such as life cycle costing
  • Allow the injection of private sector capital
  • Transactions can be off balance sheet
Key challenges in using PPP procurement:
  • Does sufficient private sector expertise exist to warrant the PPP approach?
  • Does the public sector have sufficient capacity and skills to adopt the PPP approach?
  • It is not always possible to transfer life cycle cost risk
  • Do not achieve absolute risk transfer
  • Imply a loss of management control by the public sector
  • Procurement can be lengthy and costly
  • The private sector has a higher cost of finance
  • Long-term and relatively inflexible structures

Political Acceptability

Given the difficulty in estimating financial outcomes over such long periods, there is a risk that the private sector party will either go bankrupt or make very large profits. Both outcomes can create political problems for the government, causing it to intervene.

Sources

  • NZ Treasury Policy Perspectives Paper 06/02. March 2006 “Financing Infrastructure Projects:Public Private Partnerships (PPPs)”
  • Davies P. and Eustice K. 2005 “Delivering the PPP promise: A review of PPP issues and activity.” PricewaterhouseCoopers.
  • HM Treasury 2003 “PFI: meeting the investment challenge.”
  • Office of the Auditor-General 2006 “Achieving Public Sector Outcomes with Private Sector Partners” Wellington, New Zealand.

Next issue: PPP 201

  • Identifying Suitable Projects
  • PPP in the health sector - some examples from the NHS

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Peter Vause is a Director of RDT Pacific