Public-Private Partnerships

A Public-Private Partnership (PPP) is a long-term contractual agreement between a public agency and a private sector party to secure funding, construction or refurbishment, operation and maintenance of an (infrastructure) project and delivery of a service that traditionally was provided by the public sector. It involves the sharing of risks and rewards, multi-sector skills, expertise and finance to deliver desired policy outcomes.  Moreover, it is a method of procurement and assumes a greater role of the private sector in the design, building, finance and/or operations of public facilities and services.

  • PPPs may include financing, but this is not always necessarily the case
  • Private sector financing is not a necessary condition for a PPP
  • PPP is not a financing model per se, but a procurement strategy with or without private financing

The concept of public-private partnership may cover different types of arrangements. One of them is the mixed economy company.  This is created by the will of two parties: a public entity, representing the local community, and a private one. Their intention is to reach specific goals with a clear division of roles, rights and obligations. Another application of PPP is project financing. It combines the responsibility of a public authority to establish public transport infrastructure, integrated into urban development, with the innovation, efficiency and funding capacity of the private sector.

Some examples of PPPs are:

  • Concession agreements – the granting of a right to the concession-holder by the administration of finance, build, management and maintenance of an infrastructure in exchange for a fee, either directly from the Public Administration or from the end-user of infrastructure.
  • Private Finance Initiative (PFI) – a way of creating public-private partnerships (PPPs) by funding public infrastructure projects with private capital.

Some advantages:

  • Better use of the private sector financial resources, know-how, expertise and organisational potential
  • The public sector only pays when services are delivered
  • Make projects affordable today
  • Under PPPs, the private sector takes the lifecycle cost risk
  • Provides better project risk management capabilities – with PPPs, risks are allocated to the party best able to manage each particular risk
  • Enables the public sector to exactly specify the service required and its quality, as well as to determine the price policy and arrange checks of the targets set – thereby forcing the public sector to focus on outputs and benefits from the start
  • Ensures mutual long-term commitment & partnership – the quality of service has to be maintained for the life of the PPP
  • Transparent, long-term financial preview and budgetary predictability
  • Beneficial combination of expertise

Key challenges:

  • The private sector has (in general) a higher cost of finance than the public sector
  • PPP procurement can be complicated, lengthy and costly
  • Does sufficient private sector expertise exist to warrant the PPP approach?
  • Does the public sector have sufficient capacity and skills to adopt the PPP approach?
  • It is not always possible to transfer lifecycle cost risk
  • PPPs do not achieve absolute risk transfer
  • PPPs imply a loss of management control by the public sector
  • PPPs are relatively inflexible structures in the long term

Some disadvantages:

  • Complexity – allocation of risks
  • Risk examples:
  • Cost risk
  • Construction risk
  • Operating risk
  • System integration risk
  • Revenue risk
  • Achieving balanced transfer of risk between the contracting authority and the private partner
  • Allocating risk components to the party best able to manage them
  • Each PPP agreement differs in the allocation of risks and responsibilities, ownership of assets and duration

Some conclusions:

  • Well-balanced allocation of risks is THE key success factor
  • The appropriate institutional environment is needed for successful project delivery
  • For project appraisal and selection
  • For steering and managing procurement
  • For contract management and regulation
  • The appropriate design depends on local conditions, with characteristics of
  • Government institutions for project selection
  • Public administration and its relation to decision-makers
  • Institutions for budgetary planning and control
  • Set a clear risk matrix and incentives
  • Rely on transport projects feasibility, not on potential extra benefits
  • Long-term PPP contract management requires specific skills
  • Some flexibility is required on both sides, despite the long-term nature of contracts
  • Level of partnership will determine the outcome of a PPP project
  • Keep the public informed through a website, plus advertising to let them know about the progress of the project
  • Plan early for urban development operations, modal integration including soft modes and private cars (P&R, K&R)

• Plan early for aerial / underground commercial use of stations, as this might require additional civil costs and licences


NODES strategic objectiveContribution
Enhance accessibility and integration +
Enhance intermodality +
Enhance liveability 0
Increase safety and security conditions 0
Increase economic viability and costs efficiency ++
Stimulate local economy ++
Increase environmental efficiency 0
Increase energy efficiency 0

Good practice

While the core idea of PPP models is the same in various countries and in different sectors, there is a major diversity in the way those models are applied and the results they finally produce. The European PPP Expertise Centre (EPEC) is an initiative involving the EIB, the European Commission and European Union Member States and Candidate Countries trying to help strengthen the capacity of their public sector members to enter into Public Private Partnership (PPP) transactions. EPEC has conducted a Practical Guide for Risk distribution and balance sheet treatment to assist the different member states since they are important aspects in PPPs. It also provides a checklist for putting PPPs and concessions in place. [Source: http://www.eib.org/epec/resources/publications/epec_risk_distribution_and_balance_sheet_treatment_2nd_edition_en.pdf]

For the same reason in Greece there is a separate unit named “The Special Secretariat for PPPs” which was set up in the Ministry of Economy and Finance along with the ratification of Law 3389/2005. This Unit replicates the structure and role of equivalent units in other Member States of the European Union for the promotion and implementation of PPPs. The mission of the Special Secretariat is the provision of support and assistance to the Inter-Ministerial PPP Committee and to public entities. According to the official website for PPPs in Greece (http://www.sdit.mnec.gr/en), Public-private partnerships constitute an important reform towards the construction of public infrastructure and the provision of quality services to citizens. This reform will significantly contribute to the development of the Greek economy over the coming years. In this framework, they develop a number of guidelines in Greek in order to assist the implementation of PPPs in Greece.

Application in NODES sites: Madrid Interchange Plan

The financing of the Madrid transport interchanges, in summary, has the following characteristics:

  • The five interchanges that integrate urban and regional buses, and on occasion long-distance coaches, with important Metro network nodes, have been self-financed, including their operation for 35 years, with no public administration capital investment.
  • These infrastructures allow cost-savings and increases in demand for bus operators, due basically to the existence of bus-exclusive tunnels that are superior to the payments made by these operators to the concessionary company of each transport interchange station.
  • During the concession period, the concession-holder also benefits from economic resources due to the sale or lease of resident and short-term parking spaces, as well as the lease of commercial space, advertising, vending machines, automatic teller machines, public telephones, mobile telephone coverage and other complementary services.
  • Important social benefits come with the time-savings experienced by public transport users and road users, in general. The existence of new tunnels makes the old “BUS ONLY” lines unnecessary, and with the increase in demand for bus service, these users also save travel time.
  • Furthermore, there are additional social benefits that are more difficult to evaluate, such as the profit from resident and short-term parking lots, depending on the case, the improvement in bus service regularity and quality, the creation of pedestrian areas in spaces previously occupied by bus terminals, the reduction in noise and pollution produced by over 3,000 daily bus journeys, etc.
  • The members of the Concessionary Company achieve reasonable profitability for their participation – some build, others obtain loans, and others are bus operators.
  • In addition to the share capital investment, bus operators also receive other profitable benefits generated by cost-savings and increases in demand higher than the cost per traveller and, in the case of long-distance buses, the tax per bus.

 

Other examples:

Barcelona (metro stations on line 9)

Heathrow terminal 5


Potential interchange performance improvement

A PPP provides annual savings to public governments. The payment for the construction and for the maintenance of the infrastructure is deferred in time and allows additional necessary infrastructures to be built up.

Maintenance costs could be lower with good maintenance practices, plus there are the profits from economic resources due to the lease of commercial space, advertising, vending machines, mobile telephone coverage and other complementary services provided by the concession-holder.

A potential shortcoming of applying a PPP is the complexity in the allocation of risks (cost, construction, operation, system integration, revenue).


Resources

For the concession model:

All costs are assumed by the transport authority, but unforeseen expenses related to maintenance are borne by the concession-holder.

  • A concession requires political, regulatory and economically stable frameworks, as well as independent courts and good administrative capabilities.
  • A concession requires strong political support and continuity through changes of government.
  • The legal framework should provide a basic system for providing security, balance in contracts and a reasonable return to investors, plus the balanced allocation of risks.

 

References

European PPP Expertise Centre. http://www.eib.org/epec/

European PPP Expertise Centre (2014) Risk Distribution and Balance Sheet Treatment. Available online

Madrid Interchange Plan. Available online