ISS Digital Innovation & Design Working Papers
Briefing Paper: Public-Private Partnerships (PPPs)
ISS Digital Innovation & Design Working Papers
Briefing Paper: Public-Private Partnerships (PPPs)
Briefing Paper: Public-Private Partnerships (PPPs) This paper provides an introductory briefing on the form and function of Public-Private Partnerships (PPPs).
1. Concept Public-Private Partnerships (PPPs) are a class of projects in which private sector expertise and finance are leveraged to enable and deliver a public asset or service. The model is used by governments to enhance the value for money and reduce the burden of risk on the public sector associated with major developments. The variety of PPP models makes them difficult to define. In headline terms, a PPP is… ¬ ¬ ¬ ¬
A collaboration between public and private sector entities, That is typically enshrined in the form of a Special Purpose Vehicle (SPV), Which coordinates investment and delivery of multiple public and private sector partners, And distributes risk and reward on a performance-based schedule.
The PPP is distinct from simple privatisation because accountability for delivery of the service is maintained by the public sector and distinct from procurement because of the depth of private sector involvement in the contract lifecycle. Critically, the PPP enables the application of project financing models to enable the delivery of public services and assets where conventional public procurement, simple commissioning, or corporate financing structures cannot. This allows the PPP to be used to enable projects under conditions of budgetary constraint. In addition to its status as an enabler, the case for PPPs relies on the assumption that private providers can deliver higher quality at lower cost than the public sector. Without this benefit, the higher cost of borrowing for the private sector can make the PPP an expensive solution.
2. Models Many models of Public-Private Partnerships (PPPs) exist, each differing in the way investment, ownership, accountability, operations, risks, and rewards are allocated to project partners. Commonly applied models are outlined below: ¬ ¬ ¬ ¬ ¬ ¬ ¬ ¬ ¬
Buy-Build-Operate (BBO): asset is transferred to the private sector under contract, upgraded and operated for a fixed period Build-Own-Operate (BOO): the private sector finances, builds, and owns the asset under terms set by the public sector for an indefinite period Build-Own-Operate-Transfer (BOOT): a fixed-term BOO in which the asset is eventually transferred to the public sector Build-Operate-Transfer (BOT): the private sector finances, builds, and operates the asset in a Concession contract, transferring the asset to the public sector after a fixed period Build-Lease-Operate-Transfer (BLOT): a franchise agreement in which the private sector finances, builds, and operates a leased facility for a designated period Design-Build-Finance-Operate (DBFO): a variant of BOO incorporating the design of the asset, typically culminating in transfer to the public sector after a fixed period of operation Finance Only: a financial services company funds a project directly or uses various mechanisms such as a long-term lease or bond issue Operation & Maintenance Contract (O&M): the private sector operates a publicly owned asset under contract for a specified term Design-Build (DB): the private sector designs and builds infrastructure to meet public sector performance specifications, typically on a fixed price, turnkey basis
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Operation License: the private sector is awarded a license to operate a public service for a specified term
The variety of PPP models continues to grow to fit the demands of new project contexts and objectives. In the post-2008 climate, the payback mechanism for the private investor has evolved, with a range of models for stabilising and regulating returns on investment. Examples include Tax Increment Financing (TIF), Capital Contribution, Inverted Bid Models, Non-Profit Distribution (NPD), and Government Syndication Guarantees. When designing or selecting an appropriate model, the project team must consider the project objectives, the political-legal-social context, the status of the local PPP market, the technical dimensions of the project, and the capabilities of interested parties.
3. Roles The majority of Public-Private Partnership (PPP) arrangements centre on the creation of a Special Purpose Vehicle (SPV) which ties the partners and acts to coordinate the resources and actors in service of the project. An illustration of the roles, relationships, and responsibilities in a typical PPP is provided below:
Within this setup, the following roles and responsibilities are particularly prominent: ¬ ¬ ¬ ¬ ¬ ¬
SPV – the coordinator – the central operator of the project Public Partner – the buyer – responsible for specification, public accountability, and reimbursement Private Partner – the service providers – responsible for design, build, operation, and maintenance of the asset Private Financiers – the capital – responsible for providing equity and debt finance Consultants – the experts – responsible for providing financial, technical, legal, and contextual advice PPP Regulator – the framework – responsible for the PPP framework in the host nation
Naturally, this overview is subject to context-specific variations. For example, PPPs may leverage the support of Project Development Facilities (PDFs) such as the International Finance Corporation backed Private Enterprise Partnership for the Middle East & North Africa (PEP-MENA) to fund the development of a PPP. Likewise, the PPP may draw on a specialised Project Finance Facility (PFF) such as the Private Infrastructure Investment Centre of Korea (PICKO) to finance projects.
ISS Digital Innovation & Design Working Papers
Briefing Paper: Public-Private Partnerships (PPPs)
The involvement of different PDFs and PFFs may have a strong influence on the structure of a PPP.
4. Considerations A deep library of good practice guidance has built up around Public-Private Partnerships (PPPs). The majority advocate a simple four-stage process of development: ¬ ¬ ¬ ¬
Preparation – centred on strategic planning, due diligence, and approvals Development – centred on detailed feasibility assessment, structuring, and specification Procurement – centred on partner identification and negotiation Implementation – centred on monitoring, management, and maintenance of activity
These process guides highlight a series of critical success factors for any PPP, they include: ¬ ¬ ¬ ¬ ¬ ¬ ¬
Adoption of and adherence to of strong governance structures Securing explicit agreement from all parties Leverage of capability and experience to guide the partnership Undertaking detailed risk assessment and resilience before contracting Pursuit of balance and fairness in contract negotiations Robust modelling of cost-revenue and project sustainability Wide stakeholder engagement and community involvement
Ultimately, emphasis is placed on a process of early collaborative planning, amongst compatible and capable partners, pursuing a shared vision with maximum flexibility and as few uncertainties as possible. Within this area of the literature, the risks to partners are a core concern. For the public sector, the principal risks include cost escalation due to poor specification and contract variation, paired with failure to generate value for money in the end outcome as a result of aggressive cost engineering by the private partner. In mature PPP markets such as the UK, the projects have been criticised for delivering low quality at an inflated cost. For the private sector, the principal risks are a failure to recover costs due to overestimation of potential revenues, paired with spiralling costs associated with commitments to unforeseen events or weakly specified features. In less mature markets, the risk of the PPP losing its mandate or guarantees can be a significant issue. The PPP concept is predicated on the shifting of risk to the private sector, as such writedowns and write-offs have been a feature of the PPP market. Ultimately, the success of any PPP rests on the strength of its stakeholder support, the quality of collaboration within the partnership, and the effectiveness (and resilience) of its financial model.
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INSTITUTE OF SYSTEMS SCIENCE National University of Singapore 25 Heng Mui Keng Terrace Singapore 119615 Tel: (65) 6516 2093 Email: isstraining@nus.edu.sg facebook.com/iss.nus twitter.com/issnus www.iss.nus.edu.sg