The idea of a corporation partnering with a government agency to build major public infrastructure is no longer new and it can result in excellent outcomes for the partners and end users but there are also some pitfalls to be aware of.
By Ranjit Thambyrajah
Public Private Partnerships (PPPs) may also be referred to as Build-Operate-Transfer projects. They are collaborations between government and the private sector to finance and develop large-scale projects including roads, public transport and other major facilities and infrastructure.
PPPs are now becoming the preferred funding method in developing countries as they do not negatively impact the sovereign strength of the country. They allow developing nations to expedite their growth with much-needed infrastructure developments but without the need to enter cumbersome and expensive large-scale loans.
The scale of some projects means they simply may not get off the ground in the first place without the input of both government agencies and corporate partners.
Over the decades some PPPs have proven to be extremely lucrative for corporations, particularly those that include some equity in the finished project and/or an ongoing income stream following the project’s completion. Toll roads in major cities are the most obvious example of this but there are many others throughout the world.
Roads can be built far more quickly when the project utilizes a combination of private-sector and public money. The private ‘partner’ then has an opportunity to recoup costs and garner profits from the operation of the resulting project.
On the upside private-sector technology and innovation can help the government entity to deliver better facilities for the end user and deliver faster.
In emerging economies PPPs can strengthen the domestic economy by attracting overseas investment whilst developing local corporate sector training, skills and supports, which can last much longer than any single project and can lead to flourishing domestic sectors that may not have existed without the PPP kickstart.
Such partnerships do come with risks for private operators. If planning is poor, the corporate partner in the deal can be burdened by cost and time overruns in the development or ‘build’ phase.
During the ‘operate’ phase, revenue targets may not be reached if the actual demand for the infrastructure does not match the projected demand.
Public sector funding and involvement can definitely come with strings attached in relation to quality assurance expectations that can be a resource drain for the private partner. Government requirements for the private portion of funding to come from certain sources can be another handbreak on the private operator’s entrepreneurial spirit and intent.
The operate and transfer parts of the arrangement may also consume the corporate partner’s resources and revenue for 30 years or more. The construction or development phase may be speedy but it is followed by a very long tail!
The potential for public-private partnerships expands with time and technological development. While most think of roads, bridges and public transport, the list of successful PPPs around the world now includes prisons, ports, airports, hospitals, water, wastewater, desalination and energy provision – even space exploration.
The prospects are limitless, the upside exciting but the private enterprise needs to understand PPPs are a long-term commitment and robust planning is essential.