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Public Private Partnership

Public Private Partnership (NYSE:PPP) is a phrase often used but not always fully understood. A PPP may be described as a project jointly undertaken by a public body (i.e. Government at any level from national to municipal) and one or more private enterprises. Whereas the private party typically develops and operates the project and provides the entrepreneurialism and drive, the public body may contribute the land (e.g. for a highway, railway, prison, hospital, etc.) and sets the rules of the game, in the public interest, by way of enabling legislation, regulation, or via tender rules.

For a PPP to be successful, there must be a well-defined public need (e.g. in the case of a school, more than simply suggesting there is a need for a school building, also mapping out the number of students, the size of the classrooms, the recreational facilities required, etc. or, in the case of a bridge, defining the exact location of the bridge, the load that the bridge must bear, its life span, etc.). Rather than the public body itself building the project, it would normally create a tender, defining in the tender documents what each of the public and private parties are expected to contribute to the project, the allocation of risks and rewards, etc.

The advantages of PPP from the public perspective are manifold: first, it reduces the amount of public expenditure required, thereby helping to reduce financing needs and deficit. Second, bringing in a private sector party to manage the project usually allows for a more entrepreneurial and flexible form of management than is typical for an entirely public project. Third, certain risks are better absorbed by the private sector than by the public sector (e.g. if expected demand does not materialize, if there is litigation against the project, etc.) And fourth, full ownership of the project and any real estate or assets associated with the project will usually revert to the government after a predefined period.

As a good example, PPP projects in the highway sector may save billions of Euros of public expenditure. The quid pro quo is that users of the highway will need to pay a toll for a defined period, to defray the costs of construction, operating costs, and to ensure a reasonable return for the private operator. There is actually a certain degree of justice in making the users of a particular highway pay for the use of that asset, rather than having society at large pay for the project.

However, what happens if the toll is set too high? That can create a social backlash, causing a loss of popularity for the Government; excessive tolls may also cause demand to diminish, meaning that the number of users required to break even or generate a return does not materialize, and that the project may lose money.

In other words, in the case of most PPP projects, careful analysis is required prior to implementation, involving extensive market studies, to estimate the optimum and socially-acceptable pricing. Tenders should be carefully constructed to create healthy competition so as to keep costs in check.

The cost of the project can also be borne by the public body, as opposed to the end consumer; this would be the case in the case of a PPP for a fire department, prison, ambulance service, etc. In such cases, poor design or implementation may also result in excessive costs, that are “buried” (e.g. not directly in the public eye). Therefore, the two options of directly providing the service or outsourcing it via a PPP must be carefully considered by the public authority.

With most Central European governments trying to comply with the Maastricht criteria (e.g. keeping indebtedness below 60% of GDP and the deficit below 3% of GDP), PPP represents an excellent mechanism to boost growth and employment, accelerate the funding of infrastructure, harness the creativity, dynamism, and funding capacity of the private sector, and allow the population to enjoy an improved standard of living and productivity. What is often lacking in the public sector is the know-how to design and implement these very sophisticated tenders, and there is the potential for corruption to increase projects costs and risks and consequently costs to the consumer. Nevertheless, Central European governments at all levels are only scratching the surface when it comes to exploiting the full potential of PPP and we need to see big changes in the future, throughout the region.