Public-private partnerships (PPPs) are an important tool for delivering public services such as bridges, roads and even prisons and utilities in OECD and non-OECD countries alike. If used correctly, PPPs deliver value for money through lower costs, better outcomes and/or cost recovery. However, for PPPs to be a success for both the public and private sectors, a number of issues have to be acknowledged and tackled. Leading OECD countries have a number of lessons that can guide others as PPPs are increasingly used.
By PPPs we mean a way of delivering and funding public services using a capital asset where project risks are shared between the public and private sectors. A PPP is a long-term agreement between the government and a private partner where the service delivery objectives of the government are aligned with the profit objectives of the private partner.
There is a substantial stock of PPPs in a number of OECD countries and it is increasing. In the majority of OECD countries that use PPPs it covers less than 10 percent of investment, but in Korea, Australia, Mexico and Chile, 10-20 percent of public sector infrastructure investment takes place using PPPs. In the rapidly growing BRICs, large investment needs will require the use of PPPs. For instance, the Russia 2020 programme projects that by 2020 investment in electricity generation and distribution will increase by between 60 and 130 percent; that 81,500km of roads will be built; and that overall fixed investment will increase by about 10 percent a year.
Issues around PPPs
Good PPPs balance three tradeoffs that are inherent in a PPP procurement process. First, the public sector must be a prudent fiscal actor. PPPs should be affordable, represent value for money, and any fiscal risks, such as contingent liabilities, should be limited. However, research shows that for some countries the off-budget nature of PPPs – rather than their value for money – makes them more attractive than traditional procurement of assets. This demands a strong institutional response.
Second, the demands for investment from particular sectors such as transportation, health and education have to be assessed prudently so that the projects picked are those that yield the highest return on investment for society. Third, while private investors wish to make the best deals possible, the public sector must balance the risks taken by the private sector and those retained by the public sector in light of a realistic assessment of the price of these contracts. There is not necessarily one right solution to these tradeoffs; much will depend on the specific circumstances of each project.
Answers to challenges
The OECD countries have met these challenges in a number of ways. One key element is a dedicated PPP Unit. In 2010, 17 OECD countries had set up such units and more countries are following this trend. PPP Units should evaluate a project’s value for money in all its phases. This role should be complemented with the Ministry of Finance’s guardianship of the budget, the procuring agency handling of the project and the Supreme Audit Institution evaluating it.
These roles should ensure that the decision to invest is separate from how to procure and finance the project, limiting the siren song of off-budget financing. Also, PPPs should be treated as transparently as possible in both budgets and balance sheets.
PPPs can be politically controversial. It is therefore helpful if the country’s political leadership understands and supports the involvement of the private sector. This might also be helped if the end users are involved in the design and monitoring of the PPP. Finally, an important precondition is the presence of a clear, predictable and well regulated legal framework enabling a competitive process without integrity problems.
