Defined Terms   Business Plan   Invitation Letter   Attachment    SWOT Analysis 

Public Private Partnership or PPP means a government service or private business venture which is funded and operated through a partnership of government and one or more private sector companies usually an unincorporated SPV which builds and maintains the asset usually during a concession period around 30 years from practical completion.

Partnerships between the public sector and the private sector are agreed for the purposes of designing, planning, financing, constructing and/or operating projects which would be regarded traditionally as falling within the responsibility of the public sector.  Infrastructural projects such as roads and bridges are prime examples. 

The consortium is usually made up of a building contractor, a maintenance company and a syndicate of banks and/or bond holders.  An unincorporated SPV signs the contract with government and with subcontractors to build the facility and then maintain it.  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.

Key features of PPPs include:

  • private sector contributes design, construction, operation, maintenance, finance and risk management skills while the government is responsible for strategic planning and industry structure, obtaining permits, some customer interface issues, regulation, community service obligations and (sometimes) payment on behalf of the service users

  • private sector invests in infrastructure and provides related services to the government

  • the government retains responsibility for the delivery of core services, and

  • arrangements between the government and the private sector are governed by long-term contract. It specifies the services the private sector has to deliver and to what standards. Payment depends on the private partner meeting these standards.

Prime benefits of PPPs include:

Increasing efficiency in the execution of projects
There is evidence that often, road maintenance workforces directly employed by government departments (known as force accounts) are less efficient than competitive private sector contractors. In Brazil, a 1992 World Bank study showed that routine road maintenance costs by contract were 25% lower than by force account, and in Colombia, they were 50% lower. The chart below shows efficiency gains (cost reduction of maintenance operations) obtained in Australia from different forms of maintenance outsourcing compared to performance of the road Agency (RTA).


 Enhancing implementation capacity
By giving more flexibility in the mobilization of resources both in nature and planning, contracting out allows the delivery of more and more responsive services. Particularly in countries facing pressure to reduce the size of the public sector, the issue is critical. In Peru, a rural roads program relied on community-based micro-enterprises to deliver routine maintenance services under performance-based contracts. The program addressed the difficulties of ensuring central-government maintenance of a myriad of scattered rural roads and the failure of traditional municipal force account works. The system has excelled in improving reliability of access of rural roads while generating employment opportunities and acting as a catalyst for other local development initiatives.  On heavily trafficked roads were congestion and safety can be critical, private sector involvement can deliver more diversified services optimized to respond to road users' needs and expectations. Innovative systems and services for traffic management or stand-by services for accidents are more efficiently provided by the private sector.

Reducing risk for the public sector
 Transfer of part of the project risks to private partners is one of the key incentives generated by public private partnerships and directly results in a better control by the public sector of the overall project cost, delivery time frame and quality of outputs.

Mobilizing financial resources
 Private financing in infrastructure is often quoted as a "new" source of financing. There should be no confusion however between the financial source of investment that could come from the private sector in the form of debt or (to a lesser extent) equity and the source of revenue that will eventually pay back the investment and must come from the taxpayer or the beneficiaries of the road. There are no "free lunches".
However, private financing for road construction or rehabilitation allows to mobilize the resources and execute the relevant investments more rapidly because of the incentive the private sector has to maximize the return on the investment.

Freeing scarce public funds for other uses
 PPPs financed by the private sectors allow the spreading of the project cost for the public over a longer period of time, in line with the expected benefits (savings on vehicle operating cost, on travel time, on accidents). Public funds are thus freed up for investments in sectors were private investment is impossible or inappropriate (social services).  On public financed projects, an initial investment is made by the public sector and recovered by the community in form of the project benefits. On private financed projects the cost for the community is incurred trough payments to the private sector over the entire project operation phase, either through regular payments from the Government or through collection of tolls from the road users.

Examples of PPPs in Australia include:

  • Airport Link, Sydney - went into receivership because patronage forecasts were not achieved
  • Cross City Tunnel, Sydney - went into receivership because patronage forecasts were not achieved
  • Eastern Distributor, Sydney
  • Lane Cove Tunnel, Sydney
  • Sydney Harbour Tunnel, Sydney
  • M2 Hills Motorway, Sydney
  • M4 Western Motorway, Sydney
  • M5 South Western Motorway, Sydney
  • Westlink M7, Sydney
  • CityLink, Melbourne
  • EastLink, Melbourne
  • Newcastle Mater Hospital Redeveloment, Newcastle, NSW
  • Southern Cross Station, Melbourne
  • Long Bay Goal

Summary of "Public Private Partnerships: An Introduction"