Governments enter into public-private partnerships (PPPs) to increase the availability, quality, and resilience of infrastructure and public services, while sharing the risk involved in providing them with the private sector.
Well-structured and managed PPPs can help achieve these objectives in several ways.
- Mobilizing additional funding for infrastructure
- Improving planning, coordination and project selection
- Providing better value for money
- Ensuring transparency
- Reducing construction time and costs
- Improving service delivery
- Ensuring regular maintenance
1. Mobilizing additional funding for infrastructure
Governments often turn to PPPs because they recognize that more investment in infrastructure is needed, but cannot afford to undertake projects through traditional public procurement.
Although this is one of the most common motivations for using PPPs, it is also among the most debated. The extent to which PPPs genuinely enable governments to increase spending in infrastructure depends on the nature of the project, and of a government’s particular constraints. Generally speaking:
- some PPPs create additional funds for infrastructure, by introducing user charges, collecting revenues more effectively, or finding alternative revenue sources—these options are also open to governments outside of the framework of a PPP, but can be harder to implement given managerial or political constraints; and
- others are ultimately paid for partly or entirely from the public purse, through availability or other payments.
Note that while a direct reduction in financial obligations of the government depends on the project structure, the fiscal risks associated with providing infrastructure are always reduced in PPPs through the transfer of some of project risks to the private sector. The financial obligations that remain with government create contingent liabilities (potential liabilities in the future) that need to be accounted and planned, for in the present.
2. Improve planning, coordination and project selection
PPPs can help improve infrastructure project selection, by harnessing the analysis and ideas of private sector investors, whose financial returns depend on getting cost and revenue forecasts right.
During tender, private investors and lenders undertake their own project analysis based on their experience and strong, profit-driven incentive to carefully assess benefits and costs. The tender process itself acts as an effective filter for non-viable projects.
3. Providing better value for money
PPPs can also achieve better value for money—whether through reduced costs or improved quality. This value can be achieved through several mechanisms, often called value drivers. These include:
- lowering whole-of-life costs by bundling responsibility for construction and maintenance;
- ensuring adequate funding for maintenance;
- providing opportunity and incentives for innovation and efficiency by the private sector party; and
- ensuring accountability through performance-linked remuneration.
The impact of these value drivers depends on the appropriate allocation of risk between the public and private parties to the contract.
4. Ensuring transparency
Lack of good governance increases costs and reduces quality by:
- making potential investors and lenders worry (increasing the cost of financing);
- reducing competitive pressure on bidders (by increasing costs and reducing quality and expediency of solutions proposed); and
- increasing the likelihood of rent-seeking, bribery, and other forms of corruption (adding cost and delay to project implementation and reducing quality of performance).
PPPs provide an opportunity to incorporate good corporate governance practices into every aspect of project design, tender and implementation, and to provide transparent, fair treatment and open competition.
- the use of financial and fiduciary management, in particular ring fencing revenue and subsidy flows from the government;
- improved public access to information about the project and the procurement process, for example through a dedicated project website to attract bidders and improve competition;
- through enhanced project procurement processes to increase competition, transparency and control; and
- through the over-riding monitoring function of the lenders, who stand to lose money if, for example, corrupt practices are encountered in the project.
5. Reducing construction time and cost
A common rationale for involving the private sector in infrastructure provision is that the private sector is more efficient and effective at managing the construction phase of the project cycle. Studies in the PPP programs of the UK and Australia shed light on this.
- In the United Kingdom, the National Audit Office surveyed the proportion of PPP projects coming in over budget or late, and compared this with previous assessments of the performance of publicly-procured projects. PPPs outperformed public projects, particularly on cost by imposing greater discipline through incentives created through the contract.
- In Australia, two studies (Duffield, and Infrastructure Partnerships Australia) disaggregated the project development process and found that PPP projects have lower project cost over-runs than traditionally procured public projects. However, when comparing the timing of project delivery, the studies found that both PPPs and traditionally-procured projects took longer than expected.
6. Improving service delivery
There have been relatively few studies on the impact of private sector participation on infrastructure delivery. What evidence there is suggests that private sector participation can improve service delivery and management compared with publically-run infrastructure services. Examples of this evidence include:
- A 2009 study by the World Bank (by Gassner et al) analyzed the effect of private sector participation through concessions and the full privatization in over 1,200 water and electricity utilities in 71 countries. It found significant efficiency gains when private sector participation was introduced—including reduced water losses, increased staff efficiency, increased coverage and daily hours of service.
- A 2009 study by Marin of private participation in urban water utilities analyzed 65 large water PPPs and similar contracts (including management contracts) in, also finding that introducing a private operator consistently improved operational efficiency and service quality.
7. Ensuring regular maintenance
Infrastructure assets are often poorly maintained due to poor planning or deferred maintenance. Political incentives often prejudice infrastructure expenditure towards new assets over maintaining existing assets.
Regular maintenance maintains service standard and minimizes lifecycle costs by not allowing the asset to degrade to the point that costly rehabilitation is needed. Evidence of this includes:
- The World Bank's Africa infrastructure diagnostic study estimates that preventative maintenance for the roads sector in Africa could save $2.6 billion a year in capital expenditures rehabilitation.
- A review of road maintenance by the South African National Roads Agency indicates that delaying road maintenance for three years leads to increased costs of six times the original costs of preventative maintenance. If road maintenance is delayed for five years, costs rise to 18 times the preventive cost.
By bundling construction (or rehabilitation) and on-going maintenance into a single contract, PPPs incentivize the private operator to build to standards that minimize the need for and cost of future maintenance. The contract also creates strong incentives to carry out adequate maintenance:
- when the operator’s revenues depend on user-fees, they have the incentive to attracts users with well-maintained assets; and
- under government-pays PPP, payment depends on the availability of the asset and the operators ability to meet specified service quality levels.
PPP limitations and the importance of public sector capacity
Achieving these benefits and ensuring they translate into lower infrastructure costs for taxpayers and users, depends on the government structuring, procuring, and implementing PPPs effectively. This can be difficult where low public sector capacity means that governments lack the resources and skill to structure and manage PPPs well.
It is important to emphasize that there are problems that PPPs cannot solve, or that PPPs may exacerbate. For example:
- PPPs may appear to relieve funding problems more than is actually the case, as the government’s fiscal commitments to PPPs can be unclear. This can lead to governments accepting higher fiscal commitments and risk under PPPs than would be consistent with prudent public financial management.
- While PPPs can contribute to better project analysis and adoption of innovative ideas and practices, responsibility for planning and project selection still remains primarily with the public sector, and the unclear fiscal costs and contractual inflexibility of PPPs can make these tasks more difficult.
- The advantages of private sector efficiency in managing infrastructure, and improved incentives to carry out regular maintenance, also depend on effective PPP contracting and procurement by the government.
These limitations mean that PPPs cannot be seen as a panacea to solve infrastructure performance problems. Sound public decision-making resulting from adequate capacity and governance are necessary prerequisites for successful PPPs or public investment projects.