Last month I spoke at two public-private partnership (PPP)-themed events in the US. At both events I noticed confusion among delegates and speakers about what PPPs are and how they work. This problem of definition has dogged the international market for over ten years and in this article I will try to explain the key elements that distinguish PPPs from other types of contractual arrangements such as privatisations and concessions.
Born in the UK
In its broadest definition, PPP involves using the private sector to deliver, wholly or partly, services and/or infrastructure to the citizen on behalf of government. Doing so is not new. Before World War I, railroads, roads, schools, hospitals, ports, power and water projects were often provided by the private sector. It was only in the economically difficult inter-war period that public borrowing-financed government-funded infrastructure became the norm.
By the 1980s, however, traditional procurement was increasingly seeing large government-sponsored projects go hugely over time and budget. The “lowest bidder wins the contract” approach led to poor design and build coupled with wily contractors making money from change orders. Many governments were being squeezed and needed an alternative source of funding for projects.
Following a successful privatisation and outsourcing regime in the 1980s, the UK put all these issues together and looked to the project finance market for a solution. This led to the creation of the Private Finance Initiative (PFI) in 1992 to provide support for PPP-type arrangements.
Over the next 15 years, the UK revolutionised the delivery of its public services by using PPPs to finance more than 950 projects with around $100 billion of private capital. The UK’s success in using PPPs to deliver everything from roads, light rail, hospitals and schools to courts, police stations and street lighting encouraged other countries to look at PPPs.
Around 100 countries are now undertaking or seriously considering PPPs, including Canada, Mexico, Japan, France, Spain, Germany, Italy, Korea, Ireland, India, South Africa, Egypt, Australia and Greece, to name only a few.
Crossing the pond
Given its infrastructure challenges, the US is also starting to look at PPPs. But so far there is a lot of confusion about the process. There are many ways for government to work with the private sector and, in the US, these are all likely to be called PPPs. However, the existing international market has a certain understanding of what PPP is that may not exactly intersect with the way it is being discussed in America.
Let me clarify how PPP arrangements typically work. The public sector contracts with the private sector to deliver services (which probably, but not always, involve the construction of physical infrastructure) on its behalf for the long term, where the private sector’s capital is at risk and the payment of the private sector is linked to performance of the services to levels set by government.
At the end of the contractual period, the operation of the asset reverts to the public sector, which can either run it themselves or let it out under another contract.
PPPs versus privatisation
During my visits to the US last month, I heard a lot of use of the term “privatisation” to describe PPPs. This may be correct colloquially but it is misleading as privatisation is fundamentally different from PPPs.
With privatisation one takes a state-owned entity, such as a utility, and drops it into the private sector. The arrangement is permanent and government has very little control over the quality of the service delivery except, perhaps, for some regulatory control of pricing.
PPPs, by contrast, are not a permanent state of affairs. The private sector agrees to run PPP project for a set time (usually 25 to 30 years). After that, the project goes back to government control. So, unlike privatisation, PPPs give government more control and do not involve the permanent loss of a state asset. PPPs also tend to be used to deliver smaller projects (e.g. a school, a water plant), whereas privatisation is used for whole utilities or companies (e.g. the national telecoms company, the state concrete company).
PPPs versus concessions
I would also like to draw a distinction between concessions and PPPs since many of the PPPs being discussed and implemented in the US are actually concessions, not PPPs.
Concessions are a type of PPP but I think that many concession projects miss one of the core drivers for a real PPP, which is improving service quality for non-revenue generating assets.
In a concession, the government typically says to the private sector, “build us a road and we will let you collect tolls on it to repay your investment, cover your expenses and give you a profit”. As a result, this model tends to be used for bridges, roads, water, power and anything else that can generate revenue.
This system is very old and was used, for example, to build the Suez Canal in the 19th century. It is still popular in Continental European countries such as Spain, France and Italy, which is why construction companies from those countries (such as ACS and Cintra) are so active in the US roads market.
The problem with many simple concession models is that while they may be convenient for government (“we don’t have to build, pay for or manage these roads”) and good for the private sector (“we have a chance to make a lot of money”) they are not always good value for the citizen (“I have to pay higher tolls and the road isn’t properly maintained”).
The UK’s PFI programme addressed these concerns by making the provision of better public services the key objective of PPPs, especially for non-revenue generating services such as public education, where the private sector operator is typically remunerated with monthly payments from the government called unitary payments. If the private sector operator does not meet specified performance standards, penalty regimes often limit the flow of such payments.
With a privatisation and most concessions a citizen must deliver his or her complaints about the delivered service to the private sector operator/owner. If it is a PPP, the citizen takes the complaint to the government since the public sector is still responsible for the private sector operator’s service delivery.
The results can be striking. I recently spoke with one of the headmasters of the Glasgow schools PFI project which built or renovated around 30 schools in one of the poorest areas of Britain. He said that before the private sector took over the operation and maintenance of the school he spent 95 percent of his time on facilities management issues such as whether the lights are working, whether the meals have arrived, the roof is leaking, and so on. Today, he spends less than 5 percent of his time on these issues and can devote 95 percent of his time to being an educator – which is, after all, what the taxpayer had paid for him to do.
A properly constituted PPP, therefore, balances the needs of government, the private sector and the citizen to ensure that their interests are protected. This is something that is missing, I believe, from a lot of so-called PPP projects in the US and results in understandable anxiety on the part of politicians and taxpayers.
Having an informed debate
In conclusion, there are many different types of structures which can in the broadest sense be labelled “PPPs”. But doing so can cause the subject to become impenetrable in the minds of the public and US politicians. This can play into the hands of uninformed critics.
Critics say that PPPs result in the private sector delivering services that are worse than they would be under the public sector. This can’t be the case since the government sets the standard for the provision of those services.
They also argue that PPPs make government people unemployed. Under a PPP, people may move to a different employer but their pay and conditions can be protected. On the contrary, PPPs create jobs by enabling the public sector to build infrastructure that it would not otherwise have been able to provide.
Critics also object that PPPs are more expensive than conventional government procurement methods. All the evidence is to the contrary as cost savings over the whole life of the project more than overcome the higher initial financing.
These critics will hold sway if the level of debate isn’t informed and the public learns to clearly difference between privatisation, simple concessions, outsourcing and “real” PPPs. Different projects call for different solutions, so let’s ensure America makes informed decisions in the critical area of infrastructure and service delivery.
Stephen Harris is international development director at the Tribal Group in London. He is also the chairman of the UK Government PPP Export Advisory Group and has worked with more than 60 governments in developing their PPP agendas.