Addressing the infrastructure investment gap is key to boosting the competitiveness of the productive sector and improving citizens' quality of life. This requires not only new construction projects but also the proper management of public services and investment schemes that are compatible with the country's fiscal sustainability. In this context, public-private partnership (PPP) contracts are a fundamental tool for achieving these objectives, making it worthwhile to review the key characteristics of this model, its scope, and the considerations to be taken into account during implementation.
1. What are PPPs? The PPP Reference Guide developed by the World Bank and other multilateral organizations defines Public-Private Partnerships (PPPs) as “a long-term contract between a private company and a government entity for the provision of a public asset or service, under which the private company assumes significant risks and management responsibilities. The private sector's payment is linked to the performance of the infrastructure service provided.”
In a Public-Private Partnership (PPP), the approach differs from the traditional procurement model. Instead of a contractor simply building, billing, and delivering a project to the government, the concessionaire invests in the project's development. They do so with the expectation that effective service management will allow them to recover their investment. This transition shifts the focus from a construction-centered model to one centered around service provision.
2. Are Public-Private Partnerships (PPPs) only for developing countries? A common misconception is that the PPP model is exclusively used in nations with challenging fiscal situations. This is not accurate. The primary goal of PPPs is not to address what the government cannot afford, but to ensure value for money (VfM) in both infrastructure construction and service delivery. Achieving VfM does not necessarily mean settling for the lowest price; rather, it involves a careful balance of financial and non-financial factors, such as quality, achievement of objectives, life-cycle costs, and risk transfer to the private sector.
Numerous examples of successful PPP programs can be found in wealthier countries. For instance, the Virginia Department of Transportation has its “PPP Transportation Act 1995,” Saudi Arabia has implemented the “Private Sector Participation Act,” and the government of New South Wales in Australia has a successful asset recycling program known as the “Restart NSW Fund Act 2011.” Additional leading countries in the realm of PPPs include Canada and the United Kingdom.
3. Who participates in PPPs? Public-Private Partnership (PPP) models involve the collaboration of multiple parties. The public sector always retains the legal ownership of the infrastructure asset and defines the objectives that the private partner must achieve through the PPP contract. Concessionaires contribute equity, typically between 20% and 30% of the total investment, and bring their expertise to the table. They are responsible for making critical decisions regarding infrastructure management throughout the contract’s duration, including selecting the construction and/or operating companies to subcontract for fulfilling their obligations.
On the other hand, financiers, such as banks and pension funds, provide the remaining resources with the aim of earning a return on their investment. They participate only after the project has been thoroughly prepared and structured.
4. What does the preparation and structuring of a PPP entail? For a Public-Private Partnership (PPP) project to succeed, a detailed and iterative process is required, involving engineering, financial evaluation, fiscal impact analysis, legal considerations, and socio-environmental studies.
The engineering aspect focuses on selecting the optimal solution and defining the technical requirements, including performance indicators to be integrated into the business model, although this does not encompass the final design. All these elements must also consider their social and environmental impacts.
The financial component evaluates if the project's cash flow is sufficient to fulfill contractual obligations, repay lenders, and offers an expected (though not guaranteed) return for shareholders. This assessment considers the project's risk profile as well as the payment capacity of users and/or the public sector.
Once the business model is established, it must be formalized in bidding documents and a draft PPP contract. This entire process demands the highest level of expertise and technical rigor from the public sector to implement a robust PPP program effectively.
5. Is PPP always better? There is no inherently superior model. The crucial question is which model is most suitable for each specific project. To evaluate the potential efficiency of the Public-Private Partnership (PPP) model, we should conduct a value-for-money analysis that compares financial costs to the value of risks transferred to the private sector. This same approach should also be applied when assessing traditional procurement to prevent regulatory bias that may arise from requiring justification solely for selecting the PPP model.
6. What changes can be made during the contract's life? All Public-Private Partnership (PPP) contracts are subject to adjustments during their term, whether due to the parties' performance or to force majeure events. However, it is crucial for both the project's institution and the oversight bodies to ensure that these changes do not significantly alter risk allocation, as this could have a substantial fiscal impact. If contractual modifications over time undermine the expected value for money, then implementing PPPs would be pointless. It is unacceptable for these issues to go unchecked, especially when the consequences affect users and public finances.
7. What to do when the PPP contract is about to expire? To ensure service continuity as efficiently as possible, it is essential to determine the strategy well in advance. Possible alternatives include:
i) the government taking over management;
ii) extending the contract for the current concessionaire;
iii) issuing a tender for a new Public-Private Partnership (PPP) focused solely on maintenance; or
iv) issuing a tender for a new PPP that repurposes the asset and generates new investments and/or additional resources for the public sector.
Public-private partnerships (PPPs) are a crucial model for infrastructure development in our nations. Their success relies on transparency, political maturity, and, most importantly, a solid understanding of the technical rigor necessary for their implementation and oversight.
Federico Villalobos Carballo, MBA