Public-Private Partnership

Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Public-Private Partnership?

Public-Private Partnership (PPP) is a long-term agreement between a government agency and a private entity to offer a public service or asset. It helps generate increased efficiency in delivering public services like energy, transportation, education, and healthcare. Also, the public-private partnership examples like Natcom (Haiti) assist discern the definition and significance of PPP rules and types. 

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PPPs can also permit improved risk and authority distribution between private and public organizations. Moreover, a detailed analysis of long-term expansion goals and splitting risks is crucial to attaining a flourishing PPP.

Key Takeaways

  • The public-private partnership definition denotes a medium or long-term contractual relationship between the public and private sector to offer quality public utilities. 
  • Its benefits include enhanced financing for infrastructure, increased private sector efficacy, motivated public sector refinement, and decreased risk for the public sector. 
  • There are seven distinct PPP models depicting the lowest to the highest degree of private sector participation. 
  • The real-life PPP examples include solid waste management by the West Bank and Gaza, Arlanda Express (Sweden), the West gate tunnel project (Australia), and Natcom (Haiti). 

Public-Private Partnership Explained 

The public-private partnership can be an instrument to provide better quality infrastructure facilities to more individuals. Moreover, it acknowledges the perception of shared perks between private and public divisions corresponding to each other in discharging particular tasks. 

Governments experiencing poor infrastructure or failure collaborate with the privately held companyPrivately Held CompanyA privately held company refers to the separate legal entity registered with SEC having a limited number of outstanding share capital and shareowners. read more to usher revenue streamsRevenue StreamsRevenue streams refer to the different sources through which the company generates profit, such as selling the products, catering the services or offering a combination of goods and services to the clients.read more and promote advanced and good results. Moreover, the World Bank Group assists confirm well-planned and financially sustainable PPPs, benefitting from a steady regulatory framework and efficient management. 

Public private partnership rules authorize the governance to gain from the competence of the private enterprise and avoid any financial riskFinancial RiskFinancial risk refers to the risk of losing funds and assets with the possibility of not being able to pay off the debt taken from creditors, banks and financial institutions. A firm may face this due to incompetent business decisions and practices, eventually leading to bankruptcy.read more. Rather, it can emphasize regulations, plans, and organization by assigning regular activities. As a result, its global utilization to construct, plan, and bring architecture has notably augmented in recent decades. 

Please note that the private sectorPrivate SectorThe private sector is a section of the national economy that the government does not own. The business conducted under this sector is carried out by companies or entrepreneurs who focus on profit maximization and customer satisfaction.read more duties might involve project planning, funding, functioning, building, preservation, and operation. So, this paradigm has certainly proven successful in establishing civic and industrial infrastructureInfrastructureInfrastructure refers to fundamental physical and technological frameworks that a region or industry establishes for its economy to function properly.read more

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Models Of Public-Private Partnership 

In other words, here are six types of public-private partnership portraying least to most degree of private sector involvement:

1. Utility Restructuring Corporatization

Please note that these arrangements focus on public utility betterment. Moreover, they do not imply selling government shares, and the private sector is solely accountable for coherence in commercial activities. 

2. Civil Works and Service Contracts

Utilities often originate goods and services via private-sector third parties. To clarify, this incorporates buying stationery and spare parts or obtaining public works like deploying cables or pipes. Also, utilities can outsourceOutsourceOutsourcing refers to contracting out specific business processes to a third-party or specialized service provider, i.e., an individual or company.read more a certain service, including client service. 

3. Management And Operating Contracts

These are normally short-term contracts (2-5 years) wherein the contractor governs various activities. Furthermore, they are conventionally found in the water and (somewhat) energy sector. Also, the contractor is usually compensated with fixed charges to cover the costs and employees. 

4. Leases And Affermage Contracts

Mainly, these are public-private department arrangements where the private entity does not fund the investmentInvestmentInvestments are typically assets bought at present with the expectation of higher returns in the future. Its consumption is foregone now for benefits that investors can reap from it later.read more but handles and sustains the utility. Moreover, the medium-length deals (8-15 years long) pass the collection risk to a contractor in leaseLeaseLeasing is an arrangement in which the asset's right is transferred to another person without transferring the ownership. In simple terms, it means giving the asset on hire or rent. The person who gives the asset is “Lessor,” the person who takes the asset on rent is “Lessee.”read more.

5. Concessions, BOT and DBO

The results-focused build-operate-transfer (BOT) and Design-Build-Operate (DBO) projects commonly implicate significant layout and development and long-term assignments for greenfield (new build) or projects with necessary renovation and expansion (brownfield). Moreover, concessions cover the whole infrastructure system comprising the concessionaire’s acquisition of current assetsCurrent AssetsCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc.read more and the production and management of new assets. 

6. Joint Ventures or Partial Divestiture

Please note that the extent of share ownership varies as per the regime’s decision to maintain the utility’s management control or get the scheme off the annual reportAnnual ReportAn annual report is a document that a corporation publishes for its internal and external stakeholders to describe the company's performance, financial information, and disclosures related to its operations. Over time, these reports have become legal and regulatory requirements.read more. Especially if the jointly owned company retains assets, the public sector may (at least primarily) regulate the organization for diplomatic reasons. 

7. Privatization Or Full Divestiture

PrivatizationPrivatizationPrivatization refers to transferring ownership, operation, and control of a government or public entity to a non-government or private enterprise.read more indicates the transferal of complete or nearly complete government interests in the sector or utility asset to the private sector. As compared to concession, it is mostly regarded as a more ultimate type of private sector participation in the utility. 

Examples 

Without further ado, let’s go through the public-private partnership examples

Example#1

Check out some real-life examples of Public-Private Partnerships, namely,  

  1. Solid waste management (West Bank and Gaza)
  2. National telecom Societe Anonyme (Natcom) – Haiti
  3. Public street lighting – India
  4. West gate tunnel project – Australia
  5. Boston logan international airport terminal A – US 
  6. Arlanda Express – Sweden

Example#2

Switzerland recently launched a new public-private partnership titled the Sustainable Development Goals Impact Finance Initiative. Moreover, it is aimed to raise a maximum of $1.09 billion (1 billion Swiss Francs) for environmental and social schemes in developing nations. 

The initiative is among the many “blended finance” reserves to be launched in new months to assist investment amplification in poorer nations.

Moreover, the prime target of the current COP26 climate convention will hopefully lure private investorsPrivate InvestorsPrivate investors are people or firms who possess expertise, knowledge, and an interest in investing. read more to schemes in developing markets advancing the UN sustainable development goals (SDGs). 

Advantages Of Public-Private Partnership 

That is to say, the following are the merits of different types of public-private partnership:

  1. PPPs permit the project cost expansion for the public over a prolonged period, aligned with the anticipated merits. 
  2. It certainly allows for increased private sector efficacy through better work organization and arrangement, maximization of lifecycle expenditures, and risk management
  3. PPP motivates public sector improvement with more accountability and transparency, better management, and acquisition skills. 
  4. Above all, project risks are partially shared between private and public entities, reducing a single party’s burden. 
  5. It refines the service level uniquely for projects necessitating road user costs (like tolls). 

Frequently Asked Questions (FAQs)

What Is an Example of Public-Private Partnership?


To understand the public-private partnership definition, its most typical example is India’s public street lighting project. Additionally, the International Finance Corporation (IFC) aided Bhubaneswar in finding a private-sector energy service company (ESCO) to refine the street lighting arrangement. 

Why Public-Private Partnership Is Important, and What Are Its Benefits?


The importance of public private partnership rules lies in the equivalent distribution of risks and responsibilities between private and public entities.
 
Moreover, its benefits include, 
1. Availability of people, skills, and technology
2. Accessibility to finance
3. Opportunities for investment, and
4. Equal degree of risk transferral

What Is Public-Private Partnership in Education? 

Public-private partnership in education signifies the long-term lawful relations between the private entity and the government for the total or partial issuance of education solutions and infrastructure. Furthermore, it encourages creativity in learning and boosts the efficacy, potential, and security of physical educational structures. 

This article has been a guide to public-private partnership & its definition. Here we describe public-private partnership types, rules, advantages, and examples. You can learn more about from the following articles –