If you have ever worked in project finance, you have probably heard of a Public-Private Partnership, or PPP. What is this so-called partnership, and how does it work to deliver infrastructure to the public?
Even if you have not worked in infrastructure finance, you have also likely heard of the ‘infrastructure gap’, or the limited supply of funding for infrastructure projects. I personally think a bigger issue is the lack of bankable infrastructure projects – but that is a personal view and certainly, limited funding is an issue. PPPs aim to address this by allowing private investment in what would typically be public infrastructure such as public transport, hospitals, prisons and even government buildings. Often the core services will still be provided for or organised by government, such as border police and officers, teachers or doctors and nurses.
The following illustration from New Zealand Social Infrastructure Fund Limited (“NZSIF”, a vehicle allowing New Zealanders to invest in PPPs) shows how a PPP works, with a public sector client and a private entity who finances, designs, builds, maintains and operates the infrastructure. Debt providers can range from investment banks to DFIs.
PPPs, if done correctly, enable government to supply additional infrastructure at a lower initial cost, by signing contracting agreements with the private parties. PPPs have a history of being delivered on time and on budget, while the long-term operating life of the infrastructure assets can allow government to sign long term operating and maintenance agreements with the private sector. This enables the private parties to earn their return over a longer time period, which should theoretically reduce the cost. PPPs aim to increase service delivery by allowing the private party to take on risk and management responsibility, often with the private party’s revenue stream being linked to performance. Sometimes in a PPP, government or the public party will share part of the revenue with the private party to align incentives, all in a bid to develop large public infrastructure utilising private funding.
To optimise a PPP, a PPP should be long enough for the private party to take on long term maintenance and want to minimise these costs. This will typically ensure that the design and construction phase is done to the best of the private party’s abilities. This should minimise extensive and unbudgeted maintenance costs. At the end of a PPP, the infrastructure asset is typically handed over to government at no cost, however, it often needs to be in the condition in which it was built.
Some of the main types of PPPSs are as follows (thanks to https://www.swg.com/can/insight/ppp-resources/types-of-ppp-contracts/):
PPP projects are generally financed using project finance, of which there are numerous articles on this blog. It should be noted that project finance models are very complex, and PPP models are no different.
A PPP financial model looks to address the following key factors:
A PPP is about offering better services to the public through the use of private capital and know-how. There are numerous challenges, and numerous success stories globally. From parks to education, transportation to IT, PPPs do offer the hope of private capital funding projects that will benefit the public at large.
Good luck and happy financial modelling!