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An overview of Public Private Partnerships
Akintola Akintoye, Matthias Beck and Mohan Kumaraswamy
Introduction
In many developed and developing countries there has been a move toward an increased reliance on Public Private Partnerships (PPPs) for infrastructure development. This involves an engagement with, or participation of, private companies and the public sector in the financing and provision of infrastructure. In most countries these PPP arrangements have been aimed at overcoming broad public sector constraints in relation to either a lack of public capital; and/or a lack of public sector capacity, resources and specialised expertise to develop, manage and operate infrastructure assets.
In a number of countries PPPs are now commonly used to accelerate economic growth, development and infrastructure delivery and to achieve quality service delivery and good governance. The spectrum of nature and types of PPPs are vast, making a precise and complete definition of a PPP difficult. However, significant developments in the use of PPPs in many countries have made it increasingly important to understand these practices, as well as to unveil any underlying common principles and problems and to capture and develop a body of good practices, where such can be achieved.
Given the changing economic, social and political environment, coupled with globalisation and budgetary constraints, PPP has become unavoidable and indeed desirable in many countries worldwide. The desire to procure via PPP in many countries has been increased by the public sectorās recognition of the vital role of modern infrastructure in economic growth. This recognition can be seen as a partial reversal of earlier neo-liberal assumptions that markets would provided the required infrastructure developments if these were needed. Clearly, there is now a widespread acknowledgement of the need for the state to play a role in coordinating future infrastructure developments as well as in creating the legal and procedural frameworks within which infrastructure projects can be developed.
PPP is now accepted as an important avenue for funding major public sector infrastructure capital projects. PPPs are joint ventures in which business and government cooperate. Ideally this cooperation should allow each partner to apply their strengths to develop a project more quickly and more efficiently than government could accomplish on its own. Within this general goal, the practical implementation of PPP projects can take on several variants. In some instances, the private sector may be responsible for designing, financing, constructing, owning and/or operating the entire project. In such circumstances, the private sector would want to be assured that the PPP structure is designed to provide competitive rates of return commensurate with a financial rate of return that they could earn on alternative projects of comparable risk. Where the private sector makes a lesser contribution overall to PPP projects, with, for instance the public sector providing part of the financing or a large part of the project risk, these requirements for a market return can be relaxed.
This book provides an international perspective on PPP by drawing upon the existing and fast developing body of principles and practices from many countries. It is the first of its kind in that it brings together leading academics and PPP specialists in this area of development from across the world. A book of this nature enables readers to capture the level of maturity of PPP development in the countries that are included in its analysis, understand similarities and differences in their practices, as well as assess the regulatory framework and institutional infrastructure in place to support the implementation of PPP, together with challenges and opportunities faced in respect to future developments of PPP including the future role of government, financial institutions and other stakeholders in PPP development.
In essence, the book is based on multi-country best practices and a theoretical framework that draws on an international body of knowledge and theory. It focuses on applications in construction industry practice and other sectors/industries where PPP is taking root, such as in project finance and built asset management. It provides a global overview and draws on research, applications and case studies from international sources and regional perspectives. Finally, it seeks to suggest possible means for the future improvements of PPP policy by drawing, in part, on comparisons of PPP development and implementation within and across countries.
Concept and characteristics of Public Private Partnerships
PPP can be described as a contractual agreement of shared ownership between a public agency and a private company, whereby they pool resources and share risks and rewards, to create efficiency in the production and provision of public or private goods. It can be argued that it is difficult to have a unified definition of PPP, although existing definitions have common features or characteristics. Accordingly, Peters (1998) has identified five general defining features of partnerships which are frequently common to PPPs, namely:
- A partnership (in this case, PPP) involves two or more actors, at least one of which is public and another from the private business sector. Tarantello and Seymour (1998) suggest that partnerships between non-profit organisations and local governments should also be counted as PPPs.
- In the partnership, each participant is a principal, i.e., each of the participants is capable of bargaining on its own behalf, rather than having to refer back to other sources of authority. Grimsey and Graham (1997) noted that, in some instances, the public sector has to set up a special agency capable of entering into partnership before collaboration becomes possible.
- Another feature of partnerships is that they establish a long-term, and ideally stable relationship among actors. In a PPP there is a need for continuing relationship and the parameters that are negotiated among the members from the outset as part of the process in which such a partnership is created (Moore and Pierre, 1988).
- In the PPP partnership, each of the participants brings something to the partnership table. Therefore, for the partnership to be a genuine relationship, each will have to transfer some resources ā material or immaterial ā to the partnership.
- A partnership implies that there is some shared responsibility for outcomes or activities (Collin, 1998). This differs from other relationships between the public and the private sectors in which the public sector retains full responsibility after receiving the advice of organisations in the private sector. Partnerships often are separate organisational structures, rather than bargaining relationships that have been established among otherwise autonomous organisations. Grant (1996) argues that shared authority and responsibility, joint investment, sharing liability/risk-taking and mutual benefit stand at the core of a partnership.
As previously noted, PPP can take different forms. Accordingly, the UK government has identified around seven PPP models (HM, 2000), one of which is the Private Finance Initiative (PFI), which is a common form of PPP found in the UK. Generally speaking, within PPPs, the level of private sector involvement might range from a purely service provision, without recourse to public facilities, through a service provision based on public facilities usage, up to āpublic facilitiesā ownership. Gentry and Fernandez (1998) noted that the form of PPP adopted in a project often depends on such issues as: the degree of control desired by the government; the governmentās capacity to provide the desired services; the capacity of private parties to provide the services; the legal framework for monitoring and regulation; and the availability of financial resources from public and private sources. For example, South African PPP regulations prohibit an agreement between an institution and a private party, where the latter perform an institutional function without accepting significant risks (South Africa Government Gazette, 2000).
The variations in which PPPs occur across countries are numerous and so are the definitions of PPP. In some cases, city officials might describe a tax concession for which business promises to create jobs in the future as a partnership. In other instances, hiring a private contractor to manage a parking garage or to collect garbage might be labelled a PPP. A partnership might be as extensive as privatising facilities or services, or it might simply involve applying financing or management techniques from the private sector (McDonough, 1998). Historically speaking, the idea of bringing in private finance to funding public sector infrastructure originated in the 1970s with the early occurrences of PPP in Latin America and other regions (The World Bank and the International Finance Corporation, 1992). At the time, the terms āprivatisationā, PPPs, alternative service delivery (Ford and Zussman, 1997) and municipal service partnerships were used to mean the same thing. This breadth of application is reflected in Carroll and Steaneās (2000) definition of PPP as a very wide diversity of partnerships which arise as āagreed, co-operative ventures that involve at least one public and one private-sector institution as partnersā.
According to the UK government (HM, 2000), PPPs bring public and private sectors together in long-term partnerships for mutual benefit. This can include a wide range of different types of partnership, such as:
- the introduction of private sector ownership into state-owned businesses, using the full range of possible structures (whether by flotation, or the introduction of a strategic partner), with sales of either a majority or a minority stake;
- the Private Finance Initiative (PFI) and other arrangements, where the public sector contracts to purchase quality services on a long-term basis, so as to take advantage of private sector management skills given the incentive of having private finance at risk. This includes concessions and franchises, where a private sector partner takes on the responsibility for providing a public service, including maintaining, enhancing or constructing the necessary infrastructure;
- the franchising of government service provision into wider markets, and other partnership arrangements where private sector expertise and finance are used to exploit the commercial potential of government assets.
The National Council for Public Private Partnership of the USA (Norment, 2000) defines PPP along similar terms as its UK counterpart in terms of a ācontractual arrangement between a public sector agency and a for-profit private sector concern, whereby resources and risks are shared for the purpose of delivering a public service or development of public infrastructureā. The objective of PPP, accordingly, is to utilise the economies of the private sector to more effectively deliver the service or infrastructure. This can include everything from outsourcing of an Operation and Management contract to full privatisation (i.e. transfer of assets from the public to the private sector).
The Canadian Council for Public Private Partnerships (1998) defines a PPP as a cooperative venture between the public and private sectors, built on the expertise of each partner, that best meets clearly defined public needs through the appropriate allocation of resources, risks and rewards. The Council does not consider a contracting out arrangement as a true PPP.
The United Nations organisation PPPUE proposes a very broad definition. Here PPPs include informal dialogues between government officials and local community-based organisations, as well as long-term concession arrangements with private businesses, but not privatisation.1 This idea follows the presumption of the United Nations (1995), according to which co-management is seen as part of the definition of a true PPP in addition to shared ownership and equal responsibility.
Sindane (2000) differentiates PPP from contractual arrangements where a private party takes responsibility for all, or part, of a governmentās (departmentās) functions. Such contractual arrangements, accordingly, are different from the total selling off of state assets or the complete transfer of responsibility for relevant services. Spillers (2000) similarly suggests that PPP offers advantages over privatisation and concession schemes.
Type and nature of PPP projects and developments
In the mid-2000s, the Institute of International Project Financing (IIPF) produced a pioneering list of how PPP project finance had been used internationally (IIPF, 2005). According to IIPF, whether termed āinternational project financeā, āglobal project financeā or ātransitional project financeā, the financing technique of bringing together development, construction, operation, financing and investment capabilities from throughout the world to develop a project in a particular country was generally successful. The technique was being used throughout the world, in emerging and industrialised societies. Examples of facilities developed through PPP project financing included (IIPF, 2005):
- Energy generation. This is for construction of new energy infrastructure and presents an alternative to the traditional, non-market-based development of electricity resources and allows private generation of electricity through various models: privatisation of existing assets, encouragement of private development of new electrical production, and establishing the government-owned utility as a purchaser of power for transmission and distribution over existing facilities, or a combination of these.
- Pipelines developments. This allows large natural gas pipelines and oil refineries to be developed through this model rather than being financed either by the internal cash generation of oil companies or by governments.
- Mining development. Projects financed through PPPs are commonly used for mining operations in many developed and developing countries.
- Toll roads. The capital-intensive nature of these projects, in a time of intense competition for limited governmental resources, makes PPP project finance based on toll revenues particularly attractive. This is used in many Asian countries including Thailand, India and Malaysia.
- Waste disposal: PPP has become an attractive financing vehicle for household, industrial and hazardous waste disposal facilities.
- Telecommunications. According to IIPF, the information revolution has created enormous demand for telecommunications infrastructure in developed and developing countries.
Apart from multinational organisations, such as the IIPF, regional bodies such as the Northern Ireland Executive (2002) have also identified a series of projects as being suitable for PPP developments:
| Infrastructure | Accommodation | Technology |
|
| Water & wastewater | Schools and colleges | Vehicle fleets |
| Roads | Health accommodation | Equipment |
| Public transport | Student accommodation | Broad band network |
| Waste management | Office accommodation | Driver and Vehicle Testing Agency |
| Museums and libraries | Rates Agency |
| Leisure facilities | Council IT systems |
In terms of types of PPP, the World Bank has taken a holistic view, defining them as including all investment (public and private) in projects with private participation in public sector infrastructure provision. The World Bank, accordingly, identified four categories of PPPs (World Bank, 2005):
- Management and lease contracts. These are contracts where a private entity takes over the management of a state-owned enterprise for a fixed period while ownership and investment decisions remain with the state. In a management contract the government pays a private operator to manage the facility and assumes the operational risk. In a lease contract the government leases to the private operator who takes on the operational risks.
- Concessions. A private entity takes over the management of a state-owned enterprise for a given period during which it also assumes significant investment risk. Concession can have several functions, including: (i) rehabilitate, operate, ...
