Public Private Partnerships
Guidance and documentation on PPPs
How does a PPP work?
Normally, a government agency would contract designers and architects to plan an infrastructure project, builders and engineers to create the asset, and then one or more contractors to maintain it for the rest of its life. The government would take out a loan to pay for the build, and then pay this loan back over time. It would be responsible for maintaining the asset as well.
With a PPP, the government agency works out what it would cost them to build the asset and maintain it for 25 years to a certain standard under the traditional approach. Private sector bidders then work out how they can deliver these bundled services to a better outcome for this same price. A PPP will only be pursued and accepted if it delivers demonstrably better value than the agency would have got by doing the job itself.
With the bid accepted, the private sector partner then builds the asset and maintains it for the next 25 years – billing the government quarterly (including the repayment of debt incurred by the partner) from the time it’s built until the 25 years is up. If the asset doesn’t meet the agreed performance standards, the partner is paid less.
After this, the debt has been repaid and the asset will have been maintained to a pre-agreed condition. The government maintains ownership of the asset throughout the 25-year period and beyond, taking responsibility for asset management at the end of the PPP.
In this way, PPPs are financially a bit like a 25-year, no-deposit home mortgage where the bank takes care of any maintenance and wraps this cost in with the loan.
What are the benefits of PPP?
PPPs incentivise people to work out how to get best value from an infrastructure project.
If government consistently delivered infrastructure to time and to budget and maintained it well, there’d be no opportunity for PPPs to outperform ‘business as usual’ and we would have no need for PPPs.
However, in recent years we’ve seen examples of challenges across three areas with government ‘business as usual’ procurement:
- projects announced and budgets committed to early, before detailed costings were done (resulting in cost overruns)
- frequent changes to scope after the project was started (leading to time and/or cost overruns)
- maintenance budgets being reprioritised to fund other service needs.
With a PPP, the contract is signed with a fixed price, time, quality and 25-year service level. This incentivises the private partner to efficiently deliver all the required services to the agreed performance standard – as it’s their money on the line if it costs them more or they fail to perform (noting that the government will lessen or withhold its repayments if the project is delivered late, or service levels drop at any time in the 25 years).
PPPs also incentivise good government planning up front., An agency will achieve better value if it is sure of its scope and performance requirements up front because PPP requires greater certainty and specification of service needs.
How does a private partner deliver better value?
In order to deliver better value, the private partner needs to find opportunities to optimise design, construction and operating trade-offs that will deliver the asset and services more innovatively and efficiently. It may also be able to manage risks better, by accessing expertise and using contractual incentives to ensure subcontractor performance.
The private partner can make these trade-offs because they are not constrained by doing things the way they’ve always been done, and they have long term stable revenues for the full contract period.
When might a PPP be appropriate?
The types of projects that suit PPPs are large projects (at least in the hundreds of millions of dollars) that have some, but not too much, complexity involved in their building and maintenance. This is because:
- the cost of setting up, tendering and administering PPPs is too high to make them worthwhile for small and medium projects
- PPPs must involve enough complexity that a profitable, better solution can be found. If a project is straightforward, there’s little opportunity to find a smart way of doing and packaging things better and still making a profit
- prospective PPP bidders will be put off if a project is so complex or interlinked with other systems that this creates risk that is outside the control of the PPP contractor to manage effectively.
Additionally, the project needs to have long-term, stable service needs – as the PPP will lock an agency into a 25-year service arrangement, whether the asset is being used or not.
Need help?
We can support government agencies, local authorities and others to procure and deliver major infrastructure projects. We can help with the preparation of business cases, market engagement advice, procurement support, negotiation and project delivery, this includes, where appropriate, embedded commercial and procurement expertise. We tailor our support according to the projects size, complexity, risk level and procurement capability.