What are Public Private Partnerships?

Rene Hillig
Public Private Partnerships are a procurement model that is often used to assist project delivery in two typical scenarios.

In one scenario Public Private Partnerships (PPP) are employed by countries with fiscal shortcomings or budgetary pressures who cannot otherwise meet the demand gap for services or their infrastructure needs. In the other, it is embraced as a method for tapping into private sector know-how to enable the efficient delivery of infrastructure projects or to generate innovative change.

There are arguments for and against the application of the PPP model, primarily revolving around a value for money perspective...

There are arguments for and against the application of the PPP model, primarily revolving around a value for money perspective, however, any verdict must take into account the scenario driving the decision to implement it in the first instance. For example, some criticism related to the profiteering by the private sector discounts the reasoning behind the agreed balance of pain or gain by the contracted parties. It is right that a party taking on significant risks is rewarded for the effective management and negotiation through a challenging project, however, there is an obligation on those put in charge of public finances to ensure value for money. As such, lessons should always be learned to ensure the most appropriate and efficient balance of risks at the formative stage of the PPP process.

This highlights the need for a structured, transparent and recorded process of setting up the PPP which Faithful+Gould have a strong track record and relevant experience in.

What are the positive and negative factors of the model?

Research has highlighted that the top benefits to be had from the PPP procurement model are:

  • Efficient risk transfer or sharing leading to an overall improved risk profile

  • Improved potential for value for money

  • Improved quality of services

  • Improved resource allocation

  • Innovative and cost effective solutions

  • It taps into private sector expertise

  • Sharing of expenditure necessary for project delivery

For a major multi-billion new European road transport corridor, the risk analysis exercise provided by Faithful+Gould in collaboration with Atkins and prominent audit firm was used as the basis for pursuing a PPP route. We highlighted, through an in-depth analysis, that the PPP model not only significantly reduced the public sector’s exposure to financial risk but that the overall risk profile was significantly reduced by circa €750m as well as highlighted by the table below:

Procurement RoutePublic Sector Held Risk AllowancePrivate Sector Held Risk AllowanceCombined Risk Exposure
PPP €424m €1,320m €1,744m
Non-PPP €2,043m €471m €2,514m

The key negatives often cited on the other hand are:

  • Barriers to entry from a financial perspective or in terms of invite (high participation costs or excessive restrictions on participation)

  • Lengthy negotiations to contract

  • Potential grey areas in the assessment criteria set by the public sector as political driven goals are rarely consistent

  • Size of PPP projects often means collaboration between multiple partners, necessary to limit individual liability and to ensure appropriate skills, however this introduces risk surrounding the team’s experience of working together.

What are the key factors that determine the success of the PPP model?

Obviously exploiting the positives and looking to mitigate the negatives listed in this article form a key part in enabling PPP success however the top critical success factors often cited are:

  • A favourable legal framework

  • A strong private consortium

  • A well organised public agency

  • Appropriate risk allocation and sharing

  • Clearly defined roles and responsibilities of all parties

  • Shared authority between the public and private sector – it needs a joined up partnering ethos

  • Strive for clarity within contract documents

  • Transparency of the procurement process

What are the typical PPP risks and who is best to assume responsibility?

Ultimately, any agreement entered into needs to detail ownership of risks however at the point of negotiations, all parties should strive to achieve the best risk profile possible to safeguard overall value and ensuring the appropriate ability to manage or mitigate risks. A public sector trying to pass all risks to the private sector through a PPP model will potentially drive away interest or lead to higher tender returns. Worse still, it may result in inappropriate risks being the responsibility of a private entity unable to manage it effectively ultimately leading to their default or failure. As a PPP project is rarely short term, such failure will have far reaching consequences. This will likely subsequently introduce additional costs to replace them in a manner that is unlikely to be efficient. This then ends up leaving the public purse worse off and may even result in the failure to achieve promised benefits of the project which in itself carries serious political consequences.

A public sector trying to pass all risks to the private sector through a PPP model will potentially drive away interest or lead to higher tender returns.

The risk sharing or allocation process therefore demands a rigorous and structured approach be it through a series of workshops or other forums that enable an open discussion for risk identification and the careful consideration of its management or allocation.

Typical risks that should be retained by the public sector are:

  • Changes to the regulatory framework

  • Government stability

  • Nationalisation/expropriationPolitical interference

  • Public opposition

  • Site availability

  • Tax regulation changes

On the other hand, typical risks to be retained by the private sector are:

  • Design elements

  • Environment

  • Environment, Health and Safety aspects

  • Finance costs

  • Financial markets or access to capital

  • Geological conditions

  • Material availability

  • New engineering techniques

  • Operation and maintenance costs

  • Organisation structural risk

  • Schedule

  • Weather

  • Workmanship

Finally, some risks will need to be shared. These will need to be specifically defined however typically include:

  • Construction approvals and permits

  • Corruption or bribery

  • Decision making turnarounds

  • Force majeure

  • Inflation

  • Interest rates

  • Lack of contractual clarity

  • Public demand for the outcome e.g. usage

  • Residual asset risks

  • Risks surrounding the potential lack of PPP experience

  • Scope variation

How can we help?

Faithful+Gould provided specialist consultancy advice to a prestige financial institution for a major European transportation project in collaboration with Atkins and a prominent audit firm who provided technical and financing expertise to the process. We focussed on assessing financing options such as toll collections and usage charges etc, critically assessing the PPP procurement route against traditional, demonstrating risk allocation scenarios, developing suitable and right-sizing work packages that would attract private funding, establishing risk allowances applicable to different procurement routes.

These works that were carried out over a series of interviews and workshops are emphasised in this article; that PPP demands front end focus on setting up the right risk profile in an open, transparent and auditable process. Faithful+Gould has this knowledge and is experienced in the successful delivery of this critical need.

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