A public–private partnership is a cooperative arrangement between two or more public and private sectors, typically of a long-term nature. It involves an arrangement between a unit of government and a business that brings better services or improves the city’s capacity to operate effectively. Public–private partnerships are primarily used for infrastructure provision, such as the building and equipping of schools, hospitals, transport systems, and water and sewerage systems. PPPs have been highly controversial as funding tools, largely over concerns that public return on investment is lower than returns for the private funder. PPPs are closely related to concepts such as privatization and the contracting out of government services. The lack of a shared understanding of what a PPP is makes the process of evaluating whether PPPs have been successful complex. Evidence of PPP performance in terms of value for money and efficiency, for example, is mixed and often unavailable. Common themes of PPPs are the sharing of risk and the development of innovation.
There is no consensus about how to define a PPP. The term can cover hundreds of different types of long-term contracts with a wide range of risk allocations, funding arrangements, and transparency requirements. The advancement of PPPs, as a concept and a practice, is a product of the new public management of the late 20th century and globalization pressures. The term "public-private partnership" is prey to thinking in parts rather than the whole of the partnership, which makes it difficult to pin down a universally accepted definition of PPPs.
The Government of India defines a P3 as "a partnership between a public sector entity sponsoring authority and a private sector entity a legal entity in which 51% or more of equity is with the private partner/s for the creation and/or management of infrastructure for public purpose for a specified period of time concession period on commercial terms and in which the private partner has been procured through a transparent and open procurement system." According to Weimer and Vining, "A P3 typically involves a private entity financing, constructing, or managing a project in return for a promised stream of payments directly from government or indirectly from users over the projected life of the project or some other specified period of time".
A 2013 study published in State and Local Government Review found that definitions of public-private partnerships vary widely between municipalities: "Many public and private officials tout public-private partnerships for any number of activities, when in truth the relationship is contractual, a franchise, or the load shedding of some previously public service to a private or nonprofit entity." A more general term for such agreements is "shared service delivery", in which public-sector entities join together with private firms or non-profit organizations to provide services to citizens.
Governments have used such a mix of public and private endeavors throughout history. Muhammad Ali of Egypt utilized "concessions" in the early 1800s to obtain public works for minimal cost while the concessionaires companies made most of the profits from projects such as railroads and dams. Much of the early infrastructure of the United States was built by what can be considered public-private partnerships. This includes an early steamboat line between New York and New Jersey in 1808; many of the railroads, including the nations first railroad, chartered in New Jersey in 1815; and most of the modern electric grid. In Newfoundland, Robert Gillespie Reid contracted to operate the railways for fifty years from 1898, though originally they were to become his property at the end of the period. However, the late 20th and early 21st century saw a clear trend toward governments across the globe making greater use of various PPP arrangements. This trend seems to have reversed since the global financial crisis of 2008.
Pressure to change the standard model of public procurement arose initially from concerns about the level of public debt, which grew rapidly during the macroeconomic dislocation of the 1970s and 1980s. Governments sought to encourage private investment in infrastructure, initially on the basis of accounting fallacies arising from the fact that public accounts did not distinguish between recurrent and capital expenditures. In Japan since the 1980s, the third sector 第三セクター, daisan sekutā refers to joint corporations invested in by both public and private sectors.
In 1992, the Conservative government of John Major in the UK introduced the PFI, the first systematic program aimed at encouraging public-private partnerships. The 1992 program focused on reducing the public-sector borrowing requirement, although, as already noted, the effect on public accounts was largely illusory. The Labour government of Tony Blair, elected in 1997, expanded the PFI initiative but sought to shift the emphasis to the achievement of "value for money", mainly through an appropriate allocation of risk. However, it has since been found that many programs ran dramatically over budget and have not provided value for money for the taxpayer, with some projects costing more to cancel than to complete. An in-depth study conducted by the National Audit Office of the United Kingdom concluded that the private finance initiative model had proved to be more expensive and less efficient in supporting hospitals, schools, and other public infrastructure than public financing.
3. Economic theory
In economic theory, public–private partnerships have been studied through the lens of contract theory. The first theoretical study on PPPs was conducted by Oliver Hart. From an economic theory perspective, what distinguishes a PPP from traditional public procurement of infrastructure services is that in the case of PPPs, the building and operating stages are bundled. Hence, the private firm has strong incentives in the building stage to make investments with regard to the operating stage. These investments can be desirable but may also be undesirable e.g., when the investments not only reduce operating costs but also reduce service quality. Hence, there is a trade-off, and it depends on the particular situation whether a PPP or traditional procurement is preferable. Harts model has been extended in several directions. For instance, authors have studied various externalities between the building and operating stages, insurance when firms are risk-averse, and implications of PPPs for incentives to innovate and gather information.
Clarence N. Stone frames public–private partnerships as "governing coalitions". In Regime Politics Governing Atlanta 1946–1988, he specifically analyzes the "crosscurrents in coalition mobilization". Government coalitions are revealed as susceptible to a number of problems, primarily corruption and conflicts of interest. This slippery slope is generally created by a lack of sufficient oversight. Corruption and conflicts of interest, in this case, lead to costs of opportunism; other costs related to P3s are production and bargaining costs.
4. Funding models
In some types of public private partnership ppp, the cost of using the service is borne exclusively by the users of the service - for example, by hospital patients, students, or users of public utilities. In other types notably the PFI, capital investment is made by the private sector on the basis of a contract with government to provide agreed-on services, and the cost of providing the services 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 other cases, the government may support the project by providing revenue subsidies, including tax breaks or by guaranteed annual revenues for a fixed 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. Case-by-case project governance and funding and financing interventions are the main value generators for delivering public service. Because P3s are directly responsible for a variety of activities, they can evolve into monopolies motivated by rent-seeking behavior.
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 one or more equity investors. 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. A typical PPP example would be a hospital building financed and constructed by a private developer and then leased to the hospital authority. The private developer then acts as landlord, providing housekeeping and other non-medical services, while the hospital itself provides medical services.
There are many drivers for PPPs. One involves the claim that PPPs 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. Another common driver is that PPPs may be structured so that the public-sector body seeking to make a capital investment does not incur any borrowing; rather, the 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 sectors 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 sectors perspective, "on-balance sheet"; however, the public sector will regularly benefit from significantly deferred cash flows. This viewpoint has been contested through research that shows that a majority of PPP projects ultimately cost significantly more than traditional public ones. Generally, financing costs are higher for a PPP than for traditional publicly financed projects, because of the private sectors higher cost of capital. However, additional 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.
4.1. Funding models Profit sharing
Some public–private partnerships, when the development of new technologies is involved, include profit-sharing agreements. This generally involves splitting revenues between the inventor and the public once a technology is commercialized. Profit-sharing agreements may stand over a fixed period of time or in perpetuity.
5. Long-term infrastructure contracts
Infrastructure PPPs can be understood at five different levels: as a particular project or activity, as a form of project delivery, as a statement of government policy, as a tool of government, or as a wider cultural phenomenon. Different disciplines commonly emphasize different aspects of the PPP phenomena. Engineering and economics primarily take a utilitarian, functional focus emphasizing concerns such as project delivery and relative value for money compared to traditional ways of delivering large infrastructure projects. In contrast, public administrators and political scientists tend to view PPPs more as a policy brand and a potentially useful tool for governments to achieve their objectives.
6. Growth and decline
From 1990 to 2009, nearly 1.400 PPP deals were signed in the European Union, representing a capital value of approximately €260 billion. Since the onset of the financial crisis in 2008, estimates suggest that the number of PPP deals closed has fallen more than 40 percent.
Investments in public-sector infrastructure are seen as an important means of maintaining economic activity, was highlighted in a European Commission communication on PPPs. As a result of the significant role played by PPPs in the development of public-sector infrastructure, in addition to the complexity of such transactions, the European PPP Expertise Centre EPEC was established to support the public sectors capacity to implement PPPs and share timely solutions to problems common across Europe in PPPs.
U.S. city managers motivations for exploring public–private service delivery vary. According to a 2007 survey, two primary reasons were expressed: cost reduction 86.7% and external fiscal pressures, including tax restrictions 50.3%. No other motivations expressed exceeded 16%. In the 2012 survey, however, interest had shifted to the need for better processes 69%, relationship building 77%, better outcomes 81%, leveraging resources 84%, and belief that collaborative service delivery is "the right thing to do" 86%. Among those surveyed, the provision of public services through contracts with private firms peaked in 1977, at 18%, and has declined since. The most common form of shared service delivery now involves contracts between governments, growing from 17% in 2002 to 20% in 2007. "At the same time, approximately 22% of the local governments in the survey indicated that they had brought back in-house at least one service that they had previously provided through some alternative private arrangement."
The effectiveness of PPPs as cost-saving or innovation-producing ventures has been called into question by numerous studies. A common problem with PPP projects is that private investors obtained a rate of return that was higher than the governments bond rate, even though most or all of the income risk associated with the project was borne by the public sector. A UK Parliament report underlines that some private investors have made large returns from PPP deals, suggesting that departments are overpaying for transferring the risks of projects to the private sector, one of the Treasury’s stated benefits of PPP.
A 2008 report by PriceWaterhouseCoopers argued that the comparison between public and private borrowing rates is not fair because there are "constraints on public borrowing", which may imply that public borrowing is too high, and so PFI projects can be beneficial by not putting debt directly on government books. The fact that PPP debt is not recorded as debt and remains largely "off balance sheet" has become a major concern. Indeed, keeping the PPP project and its contingent liabilities "off balance sheet" means that the true cost of the project is hidden. According to the International Monetary Fund, economic ownership of the asset should determine whether to record PPP-related assets and liabilities in the governments or the private corporations balance sheet is not straightforward. According to a 2018 UN Report, "in terms of costs, private finance is more expensive than public finance, and public-private partnerships can also incur high design, management and transactional costs due to their complexity and the need for external advice". In addition, negotiations on issues other than traditional procurement can cause project delays of some years.
Contract management is a crucial factor in shared service delivery, and services that are more challenging to monitor or fully capture in contractual language often remain under municipal control. In the 2007 survey of U.S. city managers, the most difficult service was judged to be the operation and management of hospitals, and the least difficult the cleaning of streets and parking lots. The study revealed that communities often fail to sufficiently monitor collaborative agreements or other forms of service delivery: "For instance, in 2002, only 47.3% of managers involved with private firms as delivery partners reported that they evaluate that service delivery. By 2007, that was down to 45.4%. Performance monitoring is a general concern from these surveys and in the scholarly criticisms of these arrangements."
In Ontario, a 2012 review of 28 projects showed that the costs were on average 16% lower for traditional publicly procured projects than for PPPs. A number of Australian studies of early initiatives to promote private investment in infrastructure concluded that in most cases, the schemes being proposed were inferior to the standard model of public procurement based on competitively tendered construction of publicly owned assets. In 2009, the New Zealand Treasury, in response to inquiries by the new National Party government, released a report on PPP schemes that concluded that "there is little reliable empirical evidence about the costs and benefits of PPPs" and that there "are other ways of obtaining private sector finance", as well as that "the advantages of PPPs must be weighed against the contractual complexities and rigidities they entail".
One response to these negative findings was the development of formal procedures for the assessment of PPPs in which the focus was on value for money rather than reductions in debt. The underlying framework was one in which value for money is achieved by an appropriate allocation of risk. These assessment procedures were incorporated into the PFI and its Australian counterparts beginning in the late 1990s. A 2012 study showed that value-for-money frameworks were still inadequate as an effective method of evaluating PPP proposals.
Another model being discussed is the public–private–community partnership PPCP, in which both the government and private players work together for social welfare, eliminating the prime focus of private players on profit. This model is being applied more in developing nations such as India.
7.1. Effectiveness Privatization of water
After a wave of privatization of many water services in the 1990s, mostly in developing countries, experiences show that global water corporations have not brought the promised improvements in public water utilities. Instead of lower prices, large volumes of investment, and improvements in the connection of the poor to water and sanitation, water tariffs have increased out of reach of poor households. Water multinationals are withdrawing from developing countries, and the World Bank is reluctant to provide support.
The privatization of the water services of the city of Paris proved to be unwanted, and at the end of 2009 the city did not renew its contract with two of the French water corporations, Suez and Veolia. After a year of being controlled by the public, it is projected that the water tariff will be cut by between 5% and 10%.
8. Health services
For more than two decades, public–private partnerships have been used to finance health infrastructure. Governments may look to the PPP model to solve larger problems in health care delivery. While the provision of health is widely recognized as the responsibility of government, private capital and expertise can be viewed as sources to induce efficiency and innovation. However, some health-care-related PPPs have been shown to cost significantly more money to develop and maintain than those developed through traditional public procurement.
A health services PPP can be described as a long-term contract typically 15–30 years between a public-sector authority and one or more private-sector companies operating as a legal entity. The government provides purchasing power, outlines goals for an optimal health system, and contracts private enterprise to innovate, build, maintain, and/or manage the delivery of agreed-upon services over the term of the contract. The private sector receives payment for its services and assumes substantial financial, technical, and operational risk while benefitting from the upside potential of shared cost savings.
The private entity is made up of any combination of participants who have a vested interested in working together to provide core competencies in operations, technology, funding, and technical expertise. The opportunity for multi-sector market participants includes hospital providers and physician groups, technology companies, pharmaceutical and medical device companies, private health insurers, facilities managers, and construction firms. Funding sources could include banks, private equity firms, philanthropists, and pension fund managers.
The larger scope of health PPPs to manage and finance care delivery and infrastructure means a larger potential market for private organizations. Health spending in the United States accounts for approximately half of all health spending among OECD nations, but the biggest growth will be outside of the U.S. In 2010, PricewaterhouseCoopers projected that spending on health care among the Organisation for Economic Co-operation and Development OECD and BRIC nations of Brazil, Russia, India, and China would grow by 51% between 2010 and 2020, with China and India expected to increase the most. This amounts to a cumulative total of more than $71 trillion. Of this, $3.6 trillion is projected to be spent on health infrastructure, and $68.1 trillion will be spent on non-infrastructure health outlays over the next decade. Annually, spending on health infrastructure among the OECD and BRIC nations is projected to increase to $397 billion by 2020, up from $263 billion in 2010. The larger market for health PPPs is projected to be in non-infrastructure spending, estimated to be more than $7.5 trillion annually, up from $5 trillion in 2010.
9. Product development partnerships
Product development partnerships PDPs are a class of public–private partnerships that focus on pharmaceutical product development for diseases of the developing world. These include preventive medicines such as vaccines and microbicides, as well as treatments for otherwise neglected diseases. PDPs were first created in the 1990s to unite the public sectors commitment to international public goods for health with industrys intellectual property, expertise in product development, and marketing.
International PDPs work to accelerate the research and development of pharmaceutical products for underserved populations that are not profitable for private companies. They may also be involved in helping plan for access and availability of the products they develop to those in need in their target populations. Publicly financed, with intellectual property rights granted by pharmaceutical industry partners for specific markets, PDPs are less concerned with recouping development costs through the profitability of the products being developed. These not-for-profit organizations combine public- and private-sector interests, with a view toward resolving the specific incentive and financial barriers to increased industry involvement in the development of safe and effective pharmaceutical products.
Some of the work of the World Health Organization WHO may be considered global public–private partnerships GPPPs. The WHO is financed through the UN system by contributions from member states. In recent years, WHOs work has involved more collaboration with NGOs and the pharmaceutical industry, as well as with foundations such as the Bill and Melinda Gates Foundation and the Rockefeller Foundation. 15% of WHOs total revenue in 2012 was financed by private foundations.
10. Centralized units
The World Bank 2007 states that governments tend to create centralized PPP units as a response to weaknesses in the central governments ability to effectively manage PPP programs. Different governments suffer from different institutional failures in the PPP procurement process. Hence, these centralized PPP units need to address these different issues by shaping their functions to suit the individual governments needs. The function, location within government, and jurisdiction i.e., who controls it of dedicated PPP units may differ among countries, but generally they include:
Promoting PPPs within the private sector e.g., PPP market development.
Capacity building e.g., training of public-sector officials that are involved in PPP programs or interested in the PPP process.
Providing technical support to government organizations at the project identification, evaluation, procurement, or contract-management phase.
Approving or rejecting proposed PPP projects.
Policy guidance and advice on the content of national legislation. The guidance also includes defining which sectors are eligible for PPPs, as well as which PPP methods and schemes can be carried out.
A 2013 review of research into the value of centralized PPP units and not looking at the value of PPPs in general or any other type of PPP arrangement, as it was aimed at providing evidence needed to decide whether or not to set up a centralized PPP unit found:
PPP units differ by country and sector: Government failures, in regards to PPP units, vary by government. The requirements for PPPs also vary by country and sector, as do the risks involved for the country government. Hence, PPP units need to be tailored to solve these failures and properly assess risks and need to be located in the correct government departments, where they can command the most power. PPP units can play a number of important roles in the PPP process, but not all such units will play the same role, as their functions have been tailored to the individual countrys needs. In some cases, limits on their authority have curtailed their effectiveness.
No quantitative evidence: There is very little quantitative evidence of the value of centralized PPP coordination units vis-à-vis ministries or government agencies individually procuring PPP projects. Most of the studies conducted on PPP units focus on their role and carry out only brief descriptive analyses of their value.
Limited authority: The majority of the PPP units reviewed in the literature do not play a particularly important role in approving or rejecting PPP programs or projects. While their advice is used in the decision-making process by other government bodies, the majority do not actually have any executive power to make such decisions themselves. Hence, when they have more authority, their value is seen to be higher.
Implicit value: The lack of rigorous evidence does not prove that PPP units are not an important contributor to the success of a countrys PPP program. The literature review does show that while there is no quantitative data to this effect, there are widespread perceptions about the importance of a well-functioning PPP unit for the success of a countrys PPP program.
The author of the 2013 review found no literature that rigorously evaluates the usefulness of PPP units. The literature does show that PPP units should be individually tailored to different government functions, address different government failures, and be appropriately positioned to support the countrys PPP program. Where these conditions seem to have been met, there is a consensus that PPP units have played a positive role in national PPP programs.
11. Partnerships with non-profit organizations
Public–private partnerships with non-profits and private partners have seen a large increase over the years, in part because local and state governments rely heavily on the growing number of non-profits to provide many public services. 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.
With the rise in public–private partnerships, there is also a rise in the responsibility that non-profits tend to hold. With some governments relying on many more of these organizations to provide public services, it is proving difficult for the government to hold non-profits responsible. Too many projects and partnerships can also lead to a lack of accountability. A lack of defined accountability roles can also lead to some taking advantage of others, causing a distrustful partnership. 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 donts, a continuous commitment to negotiations in times of trouble, and even an outline for termination procedures if necessary.
When entering into a cross-sector partnership, problems may arise due to differences between the cultures of government, industry, and non-profits. Items like performance measures, goal measurements, government regulations, and the nature of funding can all be interpreted differently, causing blurred communication. Conflicts can also be related to territorialism or protectionism and a lack of commitment to working within the partnership. A business partnership model would not be accurate or appropriate for a P3.
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