What is Public–Private Partnership (PPP)

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What is PublicPrivate Partnership (PPP)?

Publicprivate partnership (PPP) describes a governmentservice or private business venture which is funded and operatedthrough a partnership of government and one or more privatesector companies.

PPP involves a contract between a public sector authority and aprivate party, in which the private party provides a public service orproject and assumes substantial financial, technical and operationalrisk 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 strength of acontract with government to provide agreed services and the cost ofproviding the service is borne wholly or in part by the government.


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What is PublicPrivate Partnership (PPP)?

Government contributions to a PPP may also be in kind (notably thetransfer of existing assets).

In projects that are aimed at creating public goods like in theinfrastructure sector, the government may provide a capital subsidy

in the form of a one-time grant, so as to make it more attractive tothe private investors.

In some other cases, the government may support the project byproviding revenue subsidies, including tax breaks or by providingguaranteed annual revenues for a fixed period.

Long term cooperation and risk sharing between the partners areimportant features of PPP.

PPP try to establish risk sharing in the sense that private firmsshould take responsibility for the success of the project.


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What are the Reasons for the Participation ofPrivate Sector in Public Projects?

There are three main reasons for the participation of private firmsin so far exclusively state run infrastructure projects:

1. A lack of public funds that causes infrastructure bottlenecks and acreeping erosion of assets;

2. (Asserted) gains in efficiency because of the participation ofprivate firms;

3. Ageneral attitude to reduce the volume of the public sectors tasks(outsourcing to the private sector).


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What are the Types of PublicPrivate Partnership?

Different tasks included in PPP contracts may distinguishbetween at least three types of PPP(financing-, operation- orfranchise-types of PPP). (Deutscher Stdte- und Gemeindebund2002):

1) Financing models only transfer the financing of a project toprivate investors; design, construction and operation of theinfrastructure still belong to the responsibility of the state.

One has to query for the specific advantages of this type ofPPP, because the government normally is able to refund at

most favorable conditions and other efficiency gains ofprivate engagement cannot be realized because there is nosuch engagement in other tasks.


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2) Further benefits are related to operation models, commonlyknown as BOT-models (Build-Operate-Transfer). Privatefirms are responsible for financing, construction andoperation of an infrastructure project. The contractualagreement shows elements of rental and leasing contractsor mixed forms of contracts. In the case of the BOT-modelthe ownership of the infrastructure will be transferred tothe state at the end of the running period. Otherwise werefer to a BOO-model (Build-Own-Operate), where privatefirms become owners of the infrastructure without timelimitation.

In any case, the government will stay politically responsiblefor the infrastructure. Private partners are normally notallowed to set up infrastructure charges; they will get anoperators compensation from the authorities whichpossibly refund their expenditure by general infrastructurecharges.


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3) Franchise models will allow the private operators to levyinfrastructure charges directly on the infrastructure users.

The right to charge the user directly means that the privateoperator has to bear the utilization risk on the other hand,

whereas this risk is shifted to the public sector in the case ofthe BOT-model.

Both for the operation and the franchise type planning anddesign of the project can be done by private firms (e.g. themodel type DBFO Design-Build-Finance).


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Which is the Best type for Transportation?

When considering the economic implications of thethree types of PPP mentioned, operation andfranchise models seem to be attractive alternatives tothe public provision of transportation infrastructure.

Therefore, we will discuss risk and efficiencycharacteristics of PPP with reference to thesesolutions and with some implicit emphasis on the

road infrastructure in the following.


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Potential PPP-RelatedBenefits, Concerns and Controversies


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Potential PPP-RelatedBenefits, Concerns and Controversies


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References

Deutscher Stdte- und Gemeindebund (2002): Public-Private-Partnership Neue Wege in Stdten und Gemeinden, DStGB-Dokumentation Nr. 28, Berlin

Pollitt, Michael (2000): The Declining Role of the State inInfrastructure Investments in the UK, in: Tsuji, Masatsugu / Berg,Sanford / Pollitt, Michael: Private Initiatives in Infrastructure.Priorities, Incentives, and Performance, p. 142-175

Weingart Brown, Janice, et al.Public-Private Partnerships forHighway Infrastructure: Capitalizing on International Experience,

Federal Highway Administration (FHWA) Report FHWA-PL-09-010. Washington, D.C.: FHWA, 2009,http://international.fhwa.dot.gov/pubs/pl09010/index.cfm.

Williams, Trefor P. (2003): Moving to Public-Private Partnerships:Learning form Experience around the World, IBM Endowment for

The Business of Government, Arlington
http://international.fhwa.dot.gov/pubs/pl09010/index.cfmhttp://international.fhwa.dot.gov/pubs/pl09010/index.cfmhttp://international.fhwa.dot.gov/pubs/pl09010/index.cfm

What is Public–Private Partnership (PPP)

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