Public Private Partnership (PPP) is a long-term contractual agreement between a government agency and a private sector entity to develop public service facilities and infrastructure assets. The core objective of the PPP project delivery model is to use less public money and raise private capital through a mutual reward and risk-sharing agreement with a private entity or a consortium of private sector entities. The participation of the private sector in public-private partnership projects ensures the inflow of private investment, technology, expertise, and better quality.

1. Identifying potential PPP projects and inviting private parties for implementation
2. Project development and due diligence
3. Procurement and project construction
4. Contract management
5. Dispute resolution

PPP - Definition

No formal definition exists for PPP. The different national governments may define the term differently. However, it is understood as any medium or long-term association between the government or government-affiliated entities and private sector entities. This partnership between public and private entities is based on sharing risks and rewards.

The private sector may invest its resources, including private capital, expertise, and skills in return for financial gain. Similarly, the public sector may make regulatory and policy changes to deliver desired outcomes of building a public infrastructure asset. Optimal structuring connects private sector profitability to long-term performance, resulting in robust and appealing cash flows for investors in exchange for improved value for money for taxpayers.

Why PPP?

The PPP method allows optimal risk allocation among the project participants. It also minimizes the overall costs, makes the process less bureaucratic, and achieves project development goals. For the risk it takes, the private sector receives a reasonable rate of return on its investment through the revenue stream once the project starts operation.

It often involves the private entity taking over the design, construction, and operation of the built infrastructure facilities. Earlier, such projects were exclusively reserved for public sector enterprises. However, constraints in financing options and other liabilities on the public treasury have paved the way for private-sector companies to participate in the ventures.

The essential principle of PPP infrastructure projects is the concept of task division and project risk sharing by efficient cooperation and coordination in terms of project planning, project finance, and a clear contractual agreement for construction, operation, and ownership of the facility. The private sector participation comes with its own profit-making objectives, and public partners take responsibility for the respective general-interest objectives while keeping public funding out of the PPP transactions.

Main objectives that the project has to achieve

A PPP is not an option for addressing the problem of inadequate infrastructure services, but it could be a suitable project implementation or procurement method for a preferred alternative solution. However, in general, public-private partnership projects can satisfy both infrastructure and utility service needs as well as government policy objectives.

How well the proposed project meets these objectives for infrastructure investment is a fundamental concern. For this, the implementing agency responsible for executing PPP projects should assess the preliminary needs first. In most cases, a PPP project generally fulfills the following objectives:

• A PPP would be a suitable project implementation/procurement choice without risking a huge amount of public money.
• A P3 project can help governments achieve some of their key objectives without funding from the public treasury by allowing private sector participation.

The objectives may vary as per the level of stakes held by the concerned parties involved in PPP transactions. It is also crucial to consider the government's stake in the proposed project. The government's stake depends upon the nature of public infrastructure services being built in the PPP model, their strategic significance, impacts on other critical sectors of economic development, public safety and security, and the use of a particular natural resource.

How do Public-Private Partnerships work?

A local government may be in severe debt because of which it might not be able to undertake a capital-intensive public infrastructure project. However, having a private sector partner here may solve the issue. The private partner may be interested in supporting its development in exchange for long-term operating revenue.

Contract periods for public-private partnership projects are 20 to 30 years or longer. Financing is partly provided by the private sector, with payments from the public sector and/or customers expected throughout the project. The private party is charged with the project planning, designs, implementation, and raising finances for the project. At the same time, the public partner defines and supervises project compliance and ensures regulatory approvals are met.

Risks are distributed between public and private parties via a negotiation process, preferably but only sometimes based on each party's ability to evaluate, control, and cope with them. The revenue can either be through a fee or user payment, as in the case of highway projects, where users directly pay the toll to use the roads and bridges.

DBFMO (Design-Build-Finance-Maintain-Operate) is the most common form of PPP used worldwide. Here, the private sector partner is responsible for all phases of the project from design to construction, including post-construction phases like operation and maintenance of the built infrastructure, but the most important phase is raising the fund through private investment.

PPP contract types

The PPP contract or P3 project contracts have a broad range of project delivery methods. Each model in the range is distinct in nature and depends upon the degree of participation, operation, and maintenance by the private participant. The different project delivery models in PPP contracts also clearly define the ownership, scope of work, time period, and transfer of assets. The following are some of the prominent contractual arrangements within the PPP model:

• Build-and-transfer (BT)
• Build-lease-and-transfer (BLT)
• Build-operate-and-transfer (BOT)
• Build-own-and-operate (BOO)
• Build-transfer-and-operate (BTO)
• Contract-add-and-operate (CAO)
• Develop-operate-and-transfer (DOT)
• Rehabilitate-operate-and-transfer (ROT)
• Rehabilitate-own-and-operate (ROO)

The involvement of the private and public partners in different PPP contracts

Stages in PPP project development and implementation

1. Identifying potential PPP projects and inviting private parties for implementation

The preparatory activities for P3 projects include identifying suitable projects based on the specific needs and goals of the government. In many countries, there exist an established procedure to identify and prepare a portfolio of potential PPP projects.

Once a potential PPP project is identified and approved by the concerned public agency, its information is disclosed on the website of the official government organization acting as the implementing agency. This is followed by RFP (Request for Proposal) from private sector entities. Since government invites such proposals, these are called solicited proposals. This is in contrast to unsolicited proposals, where a private organization or a consortium of private companies submit a project proposal to the government.

Here are the different phases that are followed at this stage.

• Project identification and preliminary internal stakeholder consultation
• In-house preparatory arrangements
• Scoping of the project and its structure
• Identifying the major planning and implementation issues
• Institutional due diligence
• Establishment of a project management structure
• Setting up a mechanism for stakeholder consultation and information disclosure
• Terms of reference
• Appointment
• Government approval (by a special body established for PPPs)

2. Project development and due diligence

All PPP projects require a comprehensive project planning and feasibility study. This study is based on rigorous market research that includes the most recent data and information from several sources.

This analysis helps the project developers to define the service requirements for the project. At this stage, socio-economical cost estimation is performed to find out the exact public and private benefits the project will bring. The results from the feasibility study are also crucial for political decision-making.

Here are the different phases that are followed at this stage.

• Project planning and feasibility
• Risk analysis and risk management matrix
• Financing
• Value for money
• Government support
• Responsibilities of Government and liabilities of the government
• Regulatory arrangements
• Service and output specifications
• Terms of contract
• Government approval (Special body, concerned ministries, central bank, etc.)

3. Procurement and project construction

In many countries, procurement and project construction in PPP projects are often included in a special legal framework. In other countries where there are no specified legal instruments for PPP projects, a general public procurement process is followed. However, to make the process of PPP more conducive and hassle-free for the private sector, governments worldwide often follow a set of guidelines common to all PPP projects. These guidelines often focus on good governance to make PPP projects more transparent and efficient.

• The interest of the private sector
• Pre-qualification of bidders
• RFP - finalization of service and output specifications
• Final tender
• Bid evaluation and selection
• Government approval (Special body, cabinet, etc.)
• The contract award, negotiation, and signing; financial close; and construction

4. Contract management

Contract administration is a crucial aspect of PPP program/project administration. To ensure the timely completion and successful operation of a project, a robust contract management process is needed right from the beginning. An effective contract management process not only makes the roles and responsibilities of each party clear but also enables a prompt response to any deviation in project implementation terms that are agreed in the contract agreement. This helps in eradicating disputes between the PPP project participants.

Contract management is based on three key factors: contract administration, service delivery management, and relationship management.

• Establishment of a monitoring process and a team
• Monitoring of operation and service delivery
• Management of financial matters

5. Dispute resolution

Dispute resolution is another important mechanism that defines the success of a PPP project. When the private parties are confident of having a fair dispute resolution mechanism included in the contract agreement, they are more likely to participate in PPP projects. The related governing laws can also be included in the legal system of the sponsor country.

• Establishment of a process and a dispute resolution team
• Government approval (when needed by defined bodies)

Financing of PPP projects

All PPP projects are financed on a project-to-project basis. The investor who invests in project finance looks to the cash flow ability of the project after it starts operation. The capital required for funding the project may come from equity, debt, or special government grants.

This financing model offers low financial risk for investors and allows more room for debt. Another major advantage is the limited liability of the project sponsors, as their personal assets are not at stake against repayment. That is why an SPV (Special Purpose Vehicle) is created, which becomes the project company, and project sponsors transfer the assets to this SPV.

Also read: What is Project Financing & How Does It Work?

Benefits of the PPP model

Public-Private Partnerships have six major benefits to governments:

• PPPs allow investment expenses to be amortized over the asset's lifetime. As a result, infrastructure projects can be accelerated by years compared to the conventional pay-as-you-go financing of infrastructure projects.
• PPPs have a proven track record of delivering on time and within budget.
• PPPs transfer essential risks to the private sector and incentivize them as a result.
• PPPs can reduce the burden of infrastructure costs on public entities by lowering construction costs and opening alternative investment options.
• Since customer satisfaction metrics can be incorporated into the contract, PPPs encourage a significant focus on customer service.
• PPPs enable the private sector to concentrate on outcome-based public benefit.

Understanding the private sector's requirements in PPP

For a project to be viable in the private sector, it must satisfy specific criteria. The industry frequently uses the term "bankability" to refer to the viability of a PPP project. However, the phrase may have varied meanings to various partners in a PPP. In general, however, it refers to whether the project is financially viable, legally defensible, and administratively executable.

Some of the typical requirements of the private sector are:

• The size of the private investment should be feasible and manageable
• The project should offer a lucrative ROI (return on investment), especially when the level of involvement and risk assumption metrics are considered
• Guarantee of protection of the private investment
• Relaxation and autonomy on the pricing of the services
• The government's commitment to continue the agreed policy and contract to prevent project failure
• A predictable timeframe for administrative and regulatory tasks
• An acceptable dispute resolution mechanism
• A project delivery method that ensures private parties can utilize natural, human, and financial resources at their will

Government support in PPP projects

Infrastructure projects are not commercially viable on many occasions, but their importance in terms of social and economic infrastructure development for the government might be very high. In such cases, it is the responsibility of the government to offer special incentives or subsidies that would make the project more viable for the private sector and attract private investment.

Following are some of the ways in which government intervention can make a project considerably attractive for private parties.

• Provide land and special economic zone
• Provide assistance in the form of capital grants & loan guarantee
• Provide revenue & performance guarantee
• Protect the project against foreign exchange risk
• Provide tax relief and incentives
• Relief in Force Majeure conditions
• Participate in equity stakeholding to remain invested in the project

Without the government's active interest and help, attracting private investors to invest in commercially unviable projects is impossible. Even government may frequently need to intervene and sometimes provide financial assistance in the early years of PPP development in a new and untested PPP market.

Risks involved in a Public-Private Partnership Project

• PPPs increase the risk of insufficient competition, which leaves the contracting authorities or implementing public agencies with lesser negotiating leverage.
• PPPs require an extensive series of consultations and negotiations between public and private entities. This negotiation time can be way more than the time needed in traditional projects.
• As per an auditing report by the EU, one-third of all major projects suffer considerable procurement delays that range from 5 to 6.5 years.
• Just like traditional projects, PPP projects too suffer from time delays and cost overruns which can go up to 30-40% of the preassigned budget.

Major PPP projects in India

1. Hyderabad Metro Rail Project (Completed) - ₹18,800 crores (USD 2.4 billion)
2. Greenfield Ganga Expressway (Contract Awarded to Adani Enterprises Ltd ) - ₹17,000 crores (USD 2.1 billion)
3. Teesta IV Project - 520 MW - Under Construction - 5,878 Crores (USD 720 million)

Major PPP projects in the USA

1. Pennsylvania Turnpike Lease - USD 12.8 Billion
2. Terminal A at Newark Airport - USD 3 Billion
3. UC Merced - USD 1.3 Billion

Major PPP projects in Europe

• Thessaloniki Submerged Tunnel, Greece - USD 500 million
• Millau Viaduct, France - USD 440 million
• N4/N6 Motorway, Ireland - USD 400 million

The Bottom Line

Public-private partnerships or P3s are a widespread project delivery option worldwide where a government agency or public agency and a private entity collaborate to achieve a common goal. However, P3s are only appropriate for some types of projects.

Even though these sorts of partnerships have both advantages and disadvantages, governments continue to employ them often to finance key infrastructure sector projects in transportation, public service, and utility projects. Because they are the right choice when the government has to stay away from fiscal constraints yet has to focus on different types of infrastructure development.

PPPs are similar to traditional projects in all sorts, except project management and contract management. The primary distinction between PPPs and conventional projects is the shared risk between the public and private partners. Generally, risks in a PPP project should be assigned to the party best prepared to manage them. This ensures optimal balance is maintained between risk and reward. The party which bears the risk is entitled to higher compensation. When it comes to risk sharing, the private partner bears the risks involved with the design, construction, financing, operation, and maintenance of the infrastructure. In contrast, the public partner handles regulatory and political risks.