A public–private partnership (PPP or 3P or P3) is a government service or private business venture that is funded and operated through a partnership of government and one or more private sector companies.
PPP involves a contract between a public sector authority and a private party, in which the private party provides a public service or project and assumes substantial financial, technical and operational risk in the project.
In some types of PPP, the cost of using the service is borne exclusively by the users of the service and not by the taxpayer. In other types (notably the private finance initiative), capital investment is made by the private sector on the basis of a contract with government to provide agreed services and the cost of providing the service is borne wholly or in part by the government.
Government contributions to a PPP may also be in kind (notably the transfer of existing assets). In projects that are aimed at creating public goods like in the infrastructure sector, the government may provide a capital subsidy in the form of a one-time grant, so as to make the project economically viable.
In some other cases, the government may support the project by providing revenue subsidies, including tax breaks or by guaranteed annual revenues for a fixed time period. In all cases, the partnerships include a transfer of significant risks to the private sector, generally in an integrated and holistic way, minimizing interfaces for the public entity. An optimal risk allocation is the main value generator for this model of delivering public service.
There are usually two fundamental drivers for PPPs:
First, PPPs are claimed to enable the public sector to harness the expertise and efficiencies that the private sector can bring to the delivery of certain facilities and services traditionally procured and delivered by the public sector.
Second, a PPP is structured so that the public sector body seeking to make a capital investment does not incur any borrowing. Rather, the PPP borrowing is incurred by the private sector vehicle implementing the project.
On PPP projects where the cost of using the service is intended to be borne exclusively by the end user, the PPP is, from the public sector’s perspective, an “off-balance sheet” method of financing the delivery of new or refurbished public sector assets. On PPP projects where the public sector intends to compensate the private sector through availability payments once the facility is established or renewed, the financing is, from the public sector’s perspective, “on-balance sheet”; however, the public sector will regularly benefit from significantly deferred cash flows.
Generally, financing costs will be higher for a PPP than for a traditional public financing, because of the private sector higher cost of capital. However, extra financing costs can be offset by private sector efficiency, savings resulting from a holistic approach to delivering the project or service, and from the better risk allocation in the long run.
Typically, a private sector consortium forms a special company called a “special purpose vehicle” (SPV) to develop, build, maintain and operate the asset for the contracted period. In cases where the government has invested in the project, it is typically (but not always) allotted an equity share in the SPV.
The consortium is usually made up of a building contractor, a maintenance company and equity investor(s). It is the SPV that signs the contract with the government and with subcontractors to build the facility and then maintain it. In the infrastructure sector, complex arrangements and contracts that guarantee and secure the cash flows make PPP projects prime candidates for project financing.
Examples of PPPs
A typical PPP example in Nigeria is the Lekki-Epe expressway. The SPV for the project is the Lekki Concession Company (LCC). LCC constructs the road by seeking private funding, collects toll over an agreed period of time to recoup its investment and then returns the road to the government. This arrangement has had its issues and Government bought off the investment of the SPV but signed a collection and maintenance agreement with the SPV.
Another example is the Muritala Muhammed Airport (MM2) Local wing in Lagos concessioned to Bi-Courtney Aviation. Under this arrangement, the SPV builds the airport terminal and maintains it over an agreed period of time with airport taxes coming to it as well parking rights to recoup its investment.
PPP may be a solution to our health sector issues. The hospital building can be constructed furnished (equipment etc.) by a private developer and then leased to the Ministry of health. The private developer then acts as landlord, providing housekeeping, maintenance and other non-medical services while the hospital itself provides medical services. The developer collects all medical fees and charges. This way the likelihood of facilities deteriorating is reduced or eliminated.
Challenges and Barriers
- Flexibility between the two partners as well as the contract and staff involved throughout the process. If one party feels they are losing some of the control they may work on adopting more rules and regulations throughout the process instead of working together to be flexible and mediate an issue.
- Timeline: Non-profits are working on a long-term timeline. Many of their goals can only be achieved with long-term commitment; this is where their focus will lie. For-profit organizations are more short-term oriented because of short-term goals focusing primarily on profitability. Finally, government agencies’ timeline depends a lot on election timelines and therefore can change regularly.
- Focus of the project: Partners may not have the same focus when entering into a partnership even though they think they might.
- Funding priorities: When parties can’t agree on where funding should go this can sometimes lead to losses in time, resources, and the overall funding for the project. Funding priorities for government bodies looks typically at where the public’s funds were spent in relation to the contract made. This then typically is looked at as in how many hours of participations, forms filled out, meals served, etc. Neighborhood organizations or small and local non-profits saw a broad source of funding during the early years but there has been a shift in funding more recently reducing the overall funding and seeing more of it go to larger agencies focusing on large grants.
- Accountability: With the rise in public private partnerships there is also a rise in the responsibility that the non-profits tend to hold. With the government relying on many more of these organizations to provide the public services they cannot it is also proving difficult for the government to hold these non-profits responsible. When responsibilities are not set to the letter this can cause some in managerial positions to take the back seat, seeing their counterparts taking the initiative to get tasks done. This leaves an unbalance of work and sometimes those with the most stills are not doing the job. This can also be brought on by undermanagement causing more problems such as a lack of focus for the projects, mismanaged funding, and miscommunication.Too many projects and partnerships can also lead to a lack of accountability. When there are too many tasks they seem to all fall short of the hoped perfection. Some partners may be taking over roles of others because accountability has not been well defined. This can also lead to some taking advantage of others when they note the any weakness. This can cause a distrustful partnership.
- Communication or understanding: One of the largest issues that can be discussed, communication can be a huge downfall and can contribute to many of the other risks within partnerships. It can be said that when entering into a cross-sector partnership it is difficult to understand and collaborate due to the diversity and differing languages spoken amongst the sectors. Items like performance measures, goal measurements, government regulations, and the nature of funding can all be interpreted differently thus causing blurred lines of communication.
- Autonomy within the partnership: While working together is important it is still a strength to be able to work on parts of the project alone, take initiative when needed, and keep some individualism throughout the process. This is beginning to happen more with the privatization of public-private partnerships where the private organization may own the partnership itself and the government then keeps full responsibility for it. This keeps parts of the partnership separate for focus.
- Conflicts: can arise from any of the above topics but even outside issues or forces may bring a partnership to a halt. Even though these partnerships are entered into with the best of intentions even the most trivial issues can snowball into greater conflict halting a partnership dead in its tracks. Having no understanding and communication between parties can cause conflicts with use of language, stereotyping, negative assumptions, and prejudice about the other organization. These conflicts can be related to territorialism or protectionism, and a lack of commitment to working within the partnership.
- Possible solutions Partnerships might not be natural for business and managers do not want to depend on others but it is possible with careful solutions:
- Creating an ongoing narrative about partnerships and how will these be developed, maintained, terminated. This is especially prevalent to the local and state governments who rely heavily on the non-profits for the public services. A business partnership model would not be accurate or appropriate for a P3. Many partnerships can be terminated early due to issues with trust and cooperation during the contract implementation process. These issues can be avoided when the organization has initial guidelines for dos and don’ts.
- Creating a formal control mechanism for the partnership.
- Ensure that there is a continuous commitment with negotiations in any time of trouble and even an outline for termination procedures if necessary.
- conflict resolution, outreach and organizational development are items that managers can work on and even assign specialists to each task. Creating a timeline to be followed throughout the partnership assists in mutual understanding and communication as well. Assigning specialists to work with skills in communication, conflict resolution, negotiation and policy analysis cross-sector partnerships have also been able to flourish
In the last 30 years there hasn’t been any infrastructural development in the country (no new airports, refineries, functional power plants, etc.) which is responsible for the current decay in the country’s services (bad roads – no maintenance or expansion plans, low or no power supply, fuel queues etc.).
Is PPP the way out if government seems incapable of maintaining existing facilities and also lacking the will to develop new ones? Should pension funds be channeled in this direction with PFAs forming SPVs?