What is the Public-Private Partnership (PPP)?
Public-Private Partnership or PPP is a model where the government and private investors, contractors, or companies come into a collaboration to undertake a public project works project, wherein the rewards are shared between both the parties in a pre-decided ratio depending upon the risks and responsibilities undertaken by each of them.
Most of the time, such partnerships are struck off for larger projects such as flyovers or toll roads, etc.. However, at times, such partnerships may also be an outcome for a non-profit purpose.
Types of Public-Private Partnership (PPP) Agreements
Even though there is no strict definition of public-private partnership PPP and the nature of collaboration varies from country to country, the World Bank has come up with a broad categorization system, depending upon the degree of risk-sharing between the partners. This broad categorization provides a sample set of various kinds of contracts that may fall under public-private partnership PPP.
#1 – Utility Restructuring, Corporatization, and Decentralization
The first types of public-private partnerships are the main aim of the government to improve the performance of the public service entity. It doesn’t involve the sale of any of the government’s stake, and the private partner is only involved in bringing efficiency to the operations of the service. For example, many airports in India have recently been handed over to private players for running the operations; however, the Airport Authority of India has not sold any stake to any private player.
#2 – Civil Works and Service Contracts
This agreement involves procurement of goods contracts that meet the standards set by the government authority or the repairs or services contracts for inspection and testing of public works projects and so on. It is more of bidding or tendering process in which several private players participate, and the best bid is awarded the contract. It is common for defense or healthcare industries, among others.
#3 – Management and Operating Agreements
These are mostly short term contracts (2-5 years) in which a private player is engaged in a fixed fee-based system to undertake certain tasks falling under the category of managing or operating a public project. It involves no asset transfer and is generally undertaken to try out private players before full privatizationPrivatizationPrivatization is a measure that transfers ownership and management of public sector industries (those under the control of the government) to the private sector. This can be accomplished through the outright sale of such enterprise's assets or by allowing private individuals to participate in such industry or enterprise by removing restrictions. is undertaken so as to analyses the difference in the performance and come to a conclusion of whether or not privatization is an answer to the situation that needs betterment.
#4 – Leases/ Affermage
- Under leasing, the financing is not under the control of the private player, but the operation and maintenance are. Financing is from the government and, therefore, through the tax revenues. It doesn’t allow a fixed fee for the private player like in the previous arrangement. The revenue generated when consumers consume the services are shared between the government and the private player, according to the ratio decided between them.
- As this leads to the private player bearing greater risks, they have greater autonomy. At times the government’s rent is fixed, so the risk of the collection increases for the private player because that is the source from which they pay back the government; therefore, the pricing is in the hands of the private player. Also, the agreement is for a longer-term (8-15 years)
Generally, Power and energy sector uses this form of Public-private partnership PPP
#5 – Concessions, Build-Operate-Transfer (BOT), Design-Build-Operate (DBO)
- These are long term in nature, and it gives the private player the freedom of investment or sourcing financing. Therefore, greater autonomy when compared to leasesAutonomy When Compared To LeasesLeasing 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.”. Ownership is still with the government, and therefore BOOT agreements are out of the scope here as they expand to Build own operate and Transfer.
- Such contracts are popular in the construction industry. In concessions, the revenue streamThe Revenue StreamRevenue 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. for the private player is tied up to the consumer, while in BOT, the revenue comes from the authority.
- In DBO, however, the financing is also in the hands of the authority; however, before the transfer, the private player needs to achieve a certain level of output to prove to the authority of feasibility of the project, and therefore the 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. is quite high.
#6 – Joint Ventures and Partial Divestiture of Public Assets Full Divestiture
In this, a new company is established. It could also be in the form of a partnership. Here all the players have the same set of responsibilities and the same set of risks to bear; however, the degree varies based upon the reward ratio. Each player has some level of ownership in the project and a profit-sharing ratio. At times the government keeps some degree of control with itself for the prevention of excessive-profiteering by the private players; however, there is a share in the ownership for all the players.
#7 – Full Divestiture
Here the last types of public-private partnership PPP end in a way because this leads to complete transfer of control and ownership to private players. There can be two ways of achieving this, either the government sells shares or the assets of the project at hand. However, in the transition period, the government may still operate the project till the time the private player comes to terms and get the hang of it.
Examples of Public-Private Partnership (PPP)
- A published case study of water utilities in Monogaz, 1977, Venezuela falls under the Management and Operating Agreements category. In which the management contract was undertaken for better billing and collection efforts to revive the cash inflow and lower the need for funds from the central government. Decentralization moved the power from the center to municipalities, which awarded contracts to private players. The format of Public-private partnership PPP was a management contract.
- Chilean water reforms in the late 1900s are another example of public-private partnership PPP. This sector involved problems of heavy subsidization and therefore required several reforms to make it a profitable yet sustainable sector. Over a period from 1977 to 2004, the reforms underwent a whole cycle of PPP arrangements involving decentralization and creation of several regional ownerships, followed by concessions and BOT agreements and then finally opening up the sector to private ownership leading to a full divestiture. These reforms were mainly driven by an appropriate pricing strategy at each phase, which attracted the right players at the right time.
Apart from these, there are several other examples such as the first private train of India ‘Tejas Express’, Mumbai and Delhi Metro, Dulles greenways, USA, Orange County’s State Route 91 Express Lanes, USA.
Advantages of Public-Private Partnership
- Increase in Efficiency – With private involvement, profit motive drives efficiency, and if the contract is for a short term, then competition is another factor as performance becomes a key in contract renewal
- Technology Sharing – When the private player comes in, it brings its innovative technology, which adds on to the technological advancement for the government authorities and keeps the infrastructure state of the art.
- Sustainability – Public-private partnership PPP is a good exit route for the heavily subsidized sectors. It helps in making the sectors self-sustaining, like in the case of the Chilean water sector.
Disadvantages of Public-Private Partnership
- Cronyism – Most of the government expenditure is aimed at improving the living standards of the people, and at times, profit is not the primary incentive. In case of untimely PPP or a PPP going wrong, the people might suffer because private players may not put the need of the people first
- Inflation – When it comes to full divestiture, the government loses control over pricing, which may lead to excessive hikes in prices and may cut out a huge segment of consumers from benefitting.
- Loss of Time and Effort – There have been failed cases of PPP wherein the governments were forced to nationalize private companiesPrivate CompaniesA privately held company refers to the separate legal entity registered with SEC having a limited number of outstanding share capital and shareowners. and intervene to stabilize the economies.
- Public-private partnership PPP has its advantages and disadvantages, and choosing the right model is of utmost importance for any project to succeed. At times the lack of autonomy for the private player may cause unnecessary delays, while at other instances, the excess freedom may make the projects unsustainable.
- Gradual phasing into privatization is advisable as it may bring up several different problems that need to be solved before a full divestiture because the need and state of different economies vary.
This article has been a guide to What is the Public-Private Partnership (PPP) & its Definition. Here we discuss the public-private partnership types and how PPP agreements work along with examples, advantages & disadvantages. You can learn more about from the following articles –