Public–private partnership

A public–private partnership (PPP, 3P, or P3) is a long-term arrangement between a government and private sector institutions. Typically, it involves private capital financing government projects and services up-front, and then drawing revenues from taxpayers and/or users for profit over the course of the PPP contract. Public–private partnerships have been implemented in multiple countries and are primarily used for infrastructure projects. Although they are not compulsory, PPPs have been employed for building, equipping, operating and maintaining schools, hospitals, transport systems, and water and sewerage systems.

Cooperation between private actors, corporations and governments has existed since the inception of sovereign states, notably for the purpose of tax collection and colonization. PPP advocates highlight the sharing of risk and the development of innovation, Evidence of PPP performance in terms of value for money and efficiency, for example, is mixed and often unavailable.

Definition

thumb|[[Gavin Newsom hosts a meeting for employers about public-private partnerships. (13 November 2019)]]

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.

According to David L. Weimer and Aidan R. 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 with private firms or non-profit organizations to provide services to citizens.

Debate on privatization

thumb|Protest in France against encroaching privatization and the introduction of profit-seeking practices in the public sector. (22 March 2018)

There is a semantic debate pertaining to whether public–private partnerships constitute privatization or not. Some argue that it isn't "privatization" because the government retains ownership of the facility and/or remains responsible for public service delivery. Others argue that they exist on a continuum of privatization, P3s being a more limited form of privatization than the outright sale of public assets, but more extensive than simply contracting out government services.

Because "privatization" has a negative connotation in some circles, supporters of P3s generally take the position that P3s do not constitute privatization, while P3 opponents argue that they do. The Canadian Union of Public Employees describes P3s as "privatization by stealth".

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 the Philadelphia and Lancaster Turnpike road in Pennsylvania, which was initiated in 1792, an early steamboat line between New York and New Jersey in 1808; many of the railroads, including the nation's 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.

The late 20th and early 21st century saw a clear trend toward governments across the globe making greater use of various PPP arrangements. 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. Initially, the private sector was unenthusiastic about PFI, and the public sector was opposed to its implementation. In 1993, the Chancellor of the Exchequer described its progress as "disappointingly slow". To help promote and implement the policy, Major created institutions staffed with people linked with the City of London, accountancy and consultancy firms who had a vested interest in the success of PFI.

thumb|During his first term in office, Tony Blair made public-private partnerships the norm for government procurement projects in the United Kingdom.

Around the same time, PPPs were being initiated haphazardly in various OECD countries. The first governments to implement them were ideologically neoliberal and short on revenues: they were thus politically and fiscally inclined to try out alternative forms of public procurement. These early PPP projects were usually pitched by wealthy and politically connected business magnates. This explains why each countries experimenting with PPPs started in different sectors.

In 1997, the new British government of Tony Blair's Labour Party expanded the PFI but sought to shift the emphasis to the achievement of "value for money", mainly through an appropriate allocation of risk. Blair created Partnerships UK (PUK), a new semi-independent organization to replace the previous pro-PPP government institutions. Its mandate was to promote and implement PFI. PUK was central in making PPPs the "new normal" for public infrastructure procurements in the country. Multiple countries subsequently created similar PPP units based on PUK's model.

Funding

A defining aspect of many infrastructure P3s is that most of the up-front financing is made through the private sector. The way this financing is done differs significantly by country. For P3s in the UK, bonds are used rather than bank loans. In Canada, P3 projects usually use loans that must be repaid within five years, and the projects are refinanced at a later date. and the more recent Highway 407 in Ontario. In other types (notably the PFI), capital investment is made by the private sector on the basis of a contract with the government to provide agreed-on services, and the cost of providing the services is borne wholly or in part by the government.

Special purpose vehicle

thumb|One year after the completion of the [[Mario cuomo bridge|Mario Cuomo Bridge PPP, dozens of bolts holding its steel girders together had already failed. A whistleblower claims that the SPV responsible for its construction had knowingly delivered many defective high-strength bolts, and taken measures to hide evidence of the defects.]]

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. The two former are typically equity holders in the project, who make decisions but are only repaid when the debts are paid, while the latter is the project's creditor (debt holder).

Financial partners

Public infrastructure is a relatively low-risk, high-reward investment, and combining it with complex arrangements and contracts that guarantee and secure the cash flows make PPP projects prime candidates for project financing. The equity investors in SPVs are usually institutional investors such as pension funds, life insurance companies, sovereign wealth and superannuation funds, and banks. Major P3 investors include AustralianSuper, OMERS and Dutch state-owned bank ABN AMRO, which funded the majority of P3 projects in Australia. Wall Street firms have increased their interest in PPP since the 2008 financial crisis.

Risks

Within public-private partnerships (PPPs), there are various risks associated. One risk common within PPPs is the lack of proper or accurate cost evaluation. Oftentimes the estimated costs of a project will not properly account for delays or unexpected events, leading to the costs to be larger than what was projected. Another risk within this area is with change of governance from differing political representatives could lead to projects being diminished or reduction of the allocated budget. This is common within PPPs as different political actors are likely to scrutinise their opponents based on their ideological positions.

Profits

Private monopolies created by PPPs can generate a rent-seeking behavior, which leads to spiraling costs for users and/or taxpayers in the operation phase of the project.

P3 justifications

Using PPPs have been justified in various ways over time. Advocates generally argue 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. On the other hand, critics suggest that PPPs are part of an ideological program that seeks to privatize public services for the profits of private entities.

In the European Union, 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 government's or the private corporation's balance sheet is not straightforward.

Project costs

thumb|A discredited 2001 report by [[PricewaterhouseCoopers predicted that building the Abbotsford Regional Hospital & Cancer Centre (pictured) through a PPP would lead to cost savings of 1% at best. This option was selected, and then the projected construction costs increased by 68% over the course of PPP contract negotiations that lasted two years.

Transaction costs: P3 contracts are much more complex and extensive than contracts made in traditional publicly financed projects. The negotiation of these contracts require the presence of lawyers on all sides of the table and can take months or even years to finalize. Barrie Mckenna reports that "transaction costs for lawyers and consultants [in P3s] add about 3 percent to the final bill."
Operating profits: Private companies that engage in P3s expect a return on investment after the completion of the project. By financing PPPs, they partner engages in low-risk speculation. Over the course of the contract, the private partner can charge the end-users and/or the government for more money than the cost of the initial investment.

Value for money

thumb|The Deputy Chairman, Planning Commission, Shri Montek Singh Ahluwalia delivering the Keynote Address at the inauguration of the conference on Public Private Partnership in transmission of electricity, in New Delhi. (2010)

In response to these negative findings about the costs and quality of P3 projects, proponents developed formal procedures for the assessment of PPPs which focused heavily on value for money. Heather Whiteside defines P3 "Value for money" as:<blockquote>

Not to be confused with lower overall project costs, value for money is a concept used to evaluate P3 private-partner bids against a hypothetical public sector comparator designed to approximate the costs of a fully public option (in terms of design, construction, financing, and operations). P3 value for money calculations consider a range of costs, the exact nature of which has changed over time and varies by jurisdiction. One thing that does remain consistent, however, is the favoring of "risk transfer" to the private partner, to the detriment of the public sector comparator.

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".

In the United Kingdom, many private finance initiative 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. A treasury select committee stated that 'PFI was no more efficient than other forms of borrowing and it was "illusory" that it shielded the taxpayer from risk'.

Transfer of risk

One of the main rationales for P3s is that they provide for a transfer of risk: the private partner assumes the risks in case of cost overruns or project failures. Methods for assessing value-for-money rely heavily on risk transfers to show the superiority of P3s. However, P3s do not inherently reduce risk, they simply reassign who is responsible, and the private sector assumes that risk at a cost for the taxpayer. If the value of the risk transfer is appraised too high, then the government is overpaying for P3 projects. 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.

thumb|The maintenance of the new National Physical Laboratory building was transferred back to the [[Department of Trade and Industry (United Kingdom)|British Department of Trade and Industry in 2004 after the private sector partners involved in the PFI contract made losses of over £100m.]]

Supporters of P3s claim that risk is successfully transferred from public to private sectors as a result of P3, and that the private sector is better at risk management. As an example of successful risk transfer, they cite the case of the National Physical Laboratory. This deal ultimately caused the collapse of the building contractor Laser (a joint venture between Serco and John Laing) when the cost of the complex scientific laboratory, which was ultimately built, was very much larger than estimated.

On the other hand, Allyson Pollock argues that in many PFI projects risks are not in fact transferred to the private sector and, based on the research findings of Pollock and others, George Monbiot argues that the calculation of risk in PFI projects is highly subjective, and is skewed to favor the private sector:

Following an incident in the Royal Infirmary of Edinburgh where surgeons were forced to continue a heart operation in the dark following a power cut caused by PFI operating company Consort, Dave Watson from Unison criticized the way the PFI contract operates:

Furthermore, assessments ignore the practices of risk transfers to contractors under traditional procurement methods. As for the idea that the private sector is inherently better at managing risk, there has been no comprehensive study comparing risk management by the public sector and by P3s. Auditor Generals of Quebec, Ontario and New Brunswick have publicly questioned P3 rationales based on a transfer of risk, the latter stating he was "unable to develop any substantive evidence supporting risk transfer decisions".

Accountability and transparency

One of the main criticisms of public–private partnerships is the lack of accountability and transparency associated with these projects. Part of the reason why evidence of PPP performance is often unavailable is that most financial details of P3s are under the veil of commercial confidentiality provisions, and unavailable to researchers and the public. Around the world, opponents of P3s have launched judicial procedures to access greater P3 project documentation than the limited "bottom line" sheets available on the project's websites. When they are successful, the documents they receive are often heavily redacted.

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%.

In the 2010s, as wastewater treatment plants across North America came of age and needed to be replaced, multiple cities decided to fund the renewal of their water infrastructure through a public–private partnership. and Regina, Saskatchewan, which held a referendum on the plant's funding model. The P3 option won out."

Transportation

thumb|200x200px|The main toll plaza of the [[Virginia State Route 267|Dulles Toll Road concession in Virginia, whose price is periodically increasing.]]

Another major sector for P3s is transportation. The P3 Transportation sector can be broadly split into five sectors: airports, ports, roads, railways and urban passenger transport (which includes bus, light rail and heavy rail systems).

Many P3s in the United States have been toll road concessions.

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. In theory, the agreements entails that the government provides purchasing power and outlines goals for an optimal health system. It then contracts a private enterprise to design, build, maintain, and/or manage the delivery of agreed-upon services over the term of the contract. Finally, the private sector receives payment for its services and assumes additional risk while benefitting from returns on its investments during the operational phase.

A criticism of P3s for Hospitals in Canada is that they result in an "internal bifurcation of authority". This occurs when the facility is operated and maintained by the private sector while the care services are delivered by the public sector. In those cases, the nursing staff cannot request their colleagues from the maintenance staff to clean something (urine, blood, etc.) or to hang workplace safety signs, even if they are standing next to each other, without the approval of the private managers.

Forestry sector

PPP options in the forest sector can include joint forest management projects between government agencies, various investors and NGOs. USAID promotes the use of P3s to assist the exploitation of certified timber and non-timber products in Third World countries by foreign companies. They claim forestry PPPs are an agent of nature conservation and the sustainable harvesting of commercialized forest products, notwithstanding the fact that it was competition from foreign companies that forced local producers to engage in unsustainable harvesting practices in the first place. Many forestry sector partnerships with NGOs are nothing more than greenwashing operations.

Institutional support

Aside from the support of national governments and financial firms, PPPs are promoted by the following institutions:

PPP units

Public–private partnership units are organizations responsible for promoting, facilitating, and assessing P3s in their territory. They can be government agencies, or semi-independent organizations created with full or part government support. Governments tend to create these units as a response to criticisms of the implementation of P3 projects in their country prior to the creation of the P3 unit. In 2009, 50% of OECD countries had created a centralized PPP unit, and many more of these institutions exist in other countries.

Accounting firms

The "big four" accounting firms of PricewaterhouseCoopers, Deloitte, Ernst & Young, and KPMG have been involved in the public–private partnership model from its inception. Advisors from these companies have been tapped to develop PPP policies and procedures in multiple countries. These companies then went on to evaluate those procedures, appraise individual projects, and act as a consultants for private and public partners in PPP contract negotiations. Accounting firms sometimes even have an equity stake in projects that they appraise the value for money. and thumb|Participants of People-First Public-Private Partnerships during the [[World Investment Forum 2018]] the World Bank works to promote public–private partnerships in countries where it operates. The United Nations' Sustainable Development Goal 17 target 17.17 is formulated as: "Encourage effective partnerships: Encourage and promote effective public, public–private and civil society partnerships, building on the experience and resourcing strategies of partnerships." The success of this target is measured by the amount in United States dollars committed to public–private partnerships for infrastructure worldwide.

Public-Private Partnerships (PPPs) are described by Tiziano Peccia and collaborators as important instruments for advancing the Sustainable Development Goals (SDGs) established by the United Nations (UN). Their research argues that PPPs facilitate cooperation between governments, private companies, scientific institutions, and civil society by mobilizing resources, innovation, and technical expertise for sustainable development. The authors also emphasize that effective implementation of the SDGs requires “capillary approaches”, connecting local initiatives with global governance structures through science diplomacy and decentralized international cooperation.

According to Peccia et al., the United Nations plays a central coordinating role in achieving the SDGs through multilevel cooperation among public institutions, the private sector, academia, and local communities. PPPs are presented as strategic tools capable of accelerating sustainable development by combining public legitimacy with private-sector innovation and investment capacity. The authors argue that the UN should also function as a facilitator linking grassroots initiatives and local scientific networks with international policy frameworks in order to strengthen inclusive and sustainable global governance.

However, Peccia et al. also underline the importance of monitoring Public-Private Partnerships to avoid risks such as “bluewashing” and “private washing”, where private actors may use association with the United Nations or the Sustainable Development Goals mainly for reputational benefit rather than genuine sustainable impact. They argue that transparent evaluation, accountability mechanisms, ethical oversight, and continuous monitoring are necessary to ensure that PPPs remain aligned with public interest, social inclusion, and the effective implementation of the SDGs.

United States foreign policy

The American government seeks to promote public–private partnerships around the globe to meet its various foreign policy goals. USAID promoted PPPs with Global Development Alliances and through the Development Credit Authority, which was merged into the Overseas Private Investment Corporation in 2019. The State department also promotes PPPs through its Office of Global Partnerships.

Delivery models

There are many types and delivery models of PPPs, the following is a non-exhaustive list of some of the designs:

;Operation and maintenance contract (O & M)

:A private economic agent, under a government contract, operates a publicly-owned asset for a specific period of time. Formal, ownership of the asset remains with the public entity. In terms of private-sector risk and involvement, this model is on the lower end of the spectrum for both involvement and risk.

;Build–finance (BF)

:The private actor builds the asset and finances the cost during the construction period, afterwards the responsibility is handed over to the public entity. In terms of private-sector risk and involvement, this model is again on the lower end of the spectrum for both measures.

;Build–own–operate (BOO)

:In a BOO project ownership of the project remains usually with the project company, such as a mobile phone network. Therefore, the private company gets the benefits of any residual value of the project. This framework is used when the physical life of the project coincides with the concession period. A BOO scheme involves large amounts of finance and long payback period. Some examples of BOO projects come from the water treatment plants.

;Build–lease–transfer (BLT)

:Under BLT, a private entity builds a complete project and leases it to the government. In this way the control over the project is transferred from the project owner to a lessee. In other words, the ownership remains by the shareholders but operation purposes are leased. After the expiry of the leasing the ownership of the asset and the operational responsibility is transferred to the government at a previously agreed price.

;Design–build–finance–maintain (DBFM)

:"The private sector designs, builds and finances an asset and provides hard facility management or maintenance services under a long-term agreement." The owner (usually the public sector) operates the facility. This model is in the middle of the spectrum for private sector risk and involvement. Usually, the public sector begins payments to the private sector for use of the asset post-construction. This is the most commonly used model in the EU according to the European Court of Auditors.

;Design–build–operate–transfer (DBOT)

:This funding option is common when the client has no knowledge of what the project entails. Hence they contracts the project to a company to design, build, operate, and then transfer it. Examples of such projects are refinery constructions.

;Design–construct–manage–finance (DCMF)

:A private entity is entrusted to design, construct, manage, and finance a facility, based on the specifications of the government. Project cash flows result from the government's payment for the rent of the facility. Some examples of the DCMF model are prisons or public hospitals.

;Concession

:A concession is a grant of rights, land or property by a government, local authority, corporation, individual or other legal entity. Public services such as water supply may be operated as a concession. In the case of a public service concession, a private company enters into an agreement with the government to have the exclusive right to operate, maintain and carry out investment in a public utility (such as a water privatization) for a given number of years.

Global public–private partnership

Global public–private partnership (GPPP) is a governance mechanism to foster public–private partnership (PPP) cooperation between an international intergovernmental organisation like the United Nations and private companies. Existing GPPPs strive, among other things, to increase affordable access to non-generic essential drugs and vaccines in developing countries, and to promote handwashing with soap to reduce diarrhoea.

Institutionalised public–private partnership

The European Commission issued an "interpretative communication" in 2008 regarding the establishment of institutionalised public–private partnerships (IPPP), whose formation generally involves simultaneously creating a new jointly owned public–private entity and the award of a public sector contract or concession whereby the new entity supplies goods or services to the public body or the general public. The Commission acknowledged that separating these two procedures, such that the selection of the private partner and the decision on whether to contract with the new entity were distinct processes, would not be practical, and therefore a "transparent and competitive procedure" through which the private partner was identified and the terms of their involvement in the institutionalised entity could be compliant with treaty obligations and public procurement law. The guidance also noted that, following the establishment of the IPPP entity, it would be free to bid for future public contracts in the same way as other businesses, but particular care would be needed to ensure that the award process remained transparent.

Market-led proposal

Market-led proposals (MLP) are P3s proposed by the private sector. MLP policies encourage private sector firms to make unsolicited P3 infrastructure project proposals to the government, instead of putting the onus on the state to propose each projects. During the 2010s, MLP policies were implemented in most Australian states and territories.

Public–private–community partnerships

Public–private partnerships with non-profits and private partners, sometimes called Public–private–community partnerships (PPCPs), are a modified version of the PPP model designed for the needs of Third world countries.

Social impact bonds (also called pay for success bonds) are "a public–private partnership which funds effective social services through a performance-based contract", according to Social Finance's definition. They operate over a fixed period of time, but they do not offer a fixed rate of return. Generally, repayment to investors is contingent upon a specified social outcome being achieved. A similar system, development impact bonds, is being implemented in developing countries.