The five key advantages of public –private partnerships

What is a PPP?

A public-private partnership (PPP) is a contract between a public body and a private organization. PPPs bring together the expertise and resources of the two sectors with the intention of providing services or infrastructure at a better value for money.  Usually, the public sector engages the private sector to construct facilities or to supply equipment.  The private agencies then own and operate the facilities or equipment, or engage separate bodies to deliver the public service.

Governments and private firms increasingly recognize the benefits of sharing resources for a common cause.  As a result, PPPs are evolving in both developed and emerging markets.

In the US, President Obama has announced a new class of municipal bonds to encourage further PPP arrangements.  And in fast-growth emerging markets, an infrastructure deficit is spurring greater focus on PPPs, with the World Bank estimating that an average of US$180b a year is contributed by the private sector.

EY Global Infrastructure Leader Bill Banks says that not only are PPPs changing, but their scope has broadened to encompass almost every aspect of government activity.  According to Banks, mature PPP markets such as the UK, the US, Australia and Canada are going through their third evolution.  At the same time, developing markets are speeding up their own PPP development by learning from examples in developed economies.

In the US, the average city works with private companies to carry out 23 of 65 basic municipal services, ranging from water provision to urban development and social services, according to the National Council for Public-Private Partnerships.

To meet increasing infrastructure demands while recovering from the global financial crisis, governments worldwide are turning to PPPs.  But not all projects are PPP-friendly, warns EY’s Banks. Companies on both sides of a partnership need to carry out careful diligence before signing on.

PPPs can have major benefits for both sides — public and private:

1. Access to finance

When governments are cash poor, PPPs can offer access to private capital.  Banks explains:  “It gives the government an opportunity to reallocate resources that would otherwise be devoted purely to building a school, for example.  The government can actually use that budget to focus on educational needs and outcomes — and to have more people looking at educational requirements — rather than on building maintenance.”

2. Access to technology, people and skills

For the public sector, one of the greatest advantages of a PPP is the access it provides to modern technology, management and skills from the private sector.  For the private sector, it is an opportunity for increased innovation.  “With a PPP, the private sector can own and operate the facility to deliver a service to the government,” says Banks.  “It can build in synergies and innovative ways of delivering the infrastructure required to meet the service outcomes.”

3. Transfer of risk

The balance between cost and risk for the public sector and risk and reward for the private sector is the nub of all PPP projects.  The public sector body avoids bearing any risk inherent in the ownership of physical assets, which is wholly borne by the private sector company.  The higher cost of private finance is offset by the transfer of risk out of the public sector.  Banks says that, in the education sector in particular, the PPP model has been popular for this reason.  “In any government, you typically find that the education department is the largest land owner with the largest number of buildings. With that, comes a lot of bureaucracy,” he explains.  This bureaucracy can use a great deal of government budget.  So if the operation and maintenance is transferred to the private sector, resources can be freed.

4. Investment opportunities

Without PPPs, few private companies would have the chance to work on major capital infrastructure projects, helping them to develop knowledge, experience and skills, which they can then constructively reapply back into the private sector.  When projects are well executed, the monetary rewards for companies involved in PPPs are significant and long-lasting.

5. Business development

When partnering with the public sector, companies can work with courts, prisons, schools or waste management services.  And if projects are well run and they achieve their stated aims, these partnerships can last for decades.

For further insight, please email editor@capitalinsights.info

Source:  EY Capital Insights Publications – 4 March 2015

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