What is a PPP?
Public Private Partnerships – Leveraging private sector investment and capital to deliver public infrastructure
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.
Types of PPPs
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/):
Build – Operate – Transfer (BOT)
The private party receives a concession from the public sector to finance and construct an infrastructure asset. The private party will also operate the infrastructure asset, but will not own the asset.
An example of a BOT may be a port of entry, where due to its strategical nature the government wishes to retain ownership of the asset but is willing to outsource the financing, construction and operation of the asset. The asset is ‘Transferred’ to government at no cost and the private party does not own the asset at any point in time during construction or operations.
Build – Own – Operate (BOO)
The private party receives a concession from the public sector to finance and construct an infrastructure asset. The private party will also operate and own the infrastructure asset during the concession period, and sometimes retain ownership. The private company, therefore, retains any residual value of the asset.
Build – Own – Operate – Transfer (BOOT)
Similar to a BOT, but the private party owns the infrastructure asset during the concession period. The infrastructure asset is transferred to the public party after the concession period.
The PPP Financial Model
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:
- Is the public sector getting value for money – should they be relying on the private sector or would they get better value for money by doing the project themselves?
- What is the economic and commercial feasibility of the project? Can the government rely on the private sector party to operate and maintain the infrastructure asset?
- How does the new project compare in cost to similar operating infrastructure assets or projects?
- Can the public afford to use the asset since it is being built for their benefit?
- What is the initial cost and ongoing life-cycle cost for the public sector?
So, What's it All About
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!