The Debate: pros and cons of the PPP funding model

Are public-private partnership (PPP) agreements invariably the best solution for funding major infrastructure projects, or do the potential challenges outweigh the benefits?  

Abdul Mohsin Younes is CEO of Strategy and Corporate Governance at Dubai’s Roads and Transport Authority (RTA), and is responsible for developing and implementing PPP frameworks for the development of Dubai’s transport infrastructure. Here, he champions the value of PPPs in facilitating infrastructure projects – especially in emerging economies 

There has been a growing interest in PPPs worldwide in recent years and private-sector financing has become popular as a way of procuring public-sector infrastructure. One key argument in support of PPPs from the public-sector perspective is that they avoid limitations on public-sector budgets, which today are one of the major restraining factors for developing economies. They also provide considerable improvement to the level of service delivered to the public by introducing private-sector efficiencies as well as innovations in working methods and uptake of new technologies. PPPs free up the public sector to act as a regulator and thus concentrate on service  planning and performance monitoring.

Communities benefit from PPPs as they enable the public sector to provide much-needed infrastructure that might not otherwise be forthcoming due to budgetary constraints or lack of expertise

Abdul Mohsin Younes, CEO of Strategy and Corporate Governance at Dubai’s Roads and Transport Authority (RTA)

The second most important aspect of PPPs is private-sector participation in delivering public-sector services to the public. This raises the question of what motivates the private sector to take on public-sector responsibilities. The answer is an acceptable return, which takes into account the risks assumed by the private sector in delivering public services. Risk transfer is a key factor in the value-for-money argument in favour of PPPs: transferred risks are better managed by the private sector, so costs will be lower than if they are retained by the public sector.

One element that plays an important role in a PPP’s success is the allocation of the demand risk. In the current economic climate, where it is not easy to arrange for private-sector funding, it is appropriate that where necessary the demand risk is retained by the public sector. 
For a PPP to work, it is imperative that the expectations of both the public and the private sector converge to create desirable outcomes for both parties.

Of course PPPs come with their own set of challenges including, at times, longer and more expensive procurement processes, higher cost of private funding, commitment to long-term obligations on the part of the public sector and a shift in the public-sector role from undertaking all the operations to contract management and provider of last resort.

But communities benefit enormously from PPPs as they enable much-needed infrastructure that might not otherwise be forthcoming due to budgetary constraints or lack of expertise. Development of public-sector infrastructure leads to an enhancement in quality of life as well as increased economic activity.

Most examples of successful PPPs are in transportation. Accommodation-related infrastructure also features high. In order to develop infrastructure in accordance with the highest possible standards it is much better to structure transportation projects, where possible, through availability-based arrangements. This ensures that the public and private sectors each achieve their desired objectives: for the public sector that means being able to have high-quality asset-yielding superior services; for the private sector it means receiving an acceptable return without shouldering the demand risk.

Graeme Hodge is Professor of Law at Monash University, Australia. He has worked with the OECD, the European Commission, the United Nations and the Asian Development Bank on regulatory governance, public policy and PPPs. Here, he considers the challenges posed by public-private partnerships

This is the era of public-private partnership. PPPs have many strengths and demonstrate our desire to employ the best of both the public and private sectors. They symbolise the fact that political debates are now changing from public versus private, to public AND private. In other words, societies need both a strong government and a strong business sector – the question is how public and private efforts can be best combined for citizen benefit.

With infrastructure PPPs, there are many factors to watch out for. There are various different partnership families and hundreds of forms of partnership exist. The family of PPP long-term infrastructure contract arrangements is also huge, although most governments favour their own narrow definition of PPP. Contracts typically run over 20-50 years, they use private financing up front and are handled through one consortium, with new accountability and governing assumptions.

PPPs became popular through the UK’s private finance initiative (PFI) scheme, but one question is whether such schemes deliver better value for money (VfM) than traditional government procurement, and whether such arrangements in the end result in better governance for citizens. After experience with hundreds of projects, we understand that there are many examples of successful infrastructure delivery through PFI-type arrangements as well as many failures – so it is difficult to get accurate general lessons.

The reality is that international empirical evidence on PPP delivery is mixed. Privately funded infrastructure may not always have lower costs than traditional delivery methods. Judgements on how well these projects are governed are also mixed, with major concerns about excessive private investor returns and conflicts of interest between the public and private entities. Perhaps it is not surprising that many PPPs are not superior to traditional methods of building infrastructure – after all, big infrastructure projects are risky, and both traditional infrastructure provision and new private finance methods are imperfect.

After studying the global evidence, my overall reading is that PPPs are politically successful, but in some instances can be of debatable financial merit. The primary lesson from the global financial crisis was to approach the advice of financial experts with scepticism, especially when they themselves profit from a transaction. This lesson continues to be relevant today. Governments now need to be strong and make careful, well-informed and independent decisions.

PPPs are certainly a high-profile political brand, and may work well for governments who want new infrastructure delivered quickly. But while they can be a good business proposition, there is also no guarantee that PPPs as a policy will improve the wellbeing of citizens.