One of the most important, but complex ways to realize infrastructure projects is to use Public-Private Partnerships. PPPs are a special type of cooperation between the public and private sectors aimed at carrying out long-term investment projects in the social and infrastructure sphere, particularly where it is important to retain an element of public sector oversight or control over the service or asset(s). Typical PPP projects involve the construction/reconstruction of transport infrastructure (airports, roads, railroads, tunnels, bridges), public buildings (hospitals, schools, museums), utilities (water supply, wastewater, waste processing), energy, and also operation and maintenance of these facilities.
In PPP projects, the private sector commits to developing, building, and financing facilities, and operating them in accordance with the parameters and standards established by the government. In return, the private sector is paid by the public sector, with the amount dependent on results achieved (services provided). In some projects, this payment (or part of the payment) comes from the revenues generated by the commercial operation of the facility.
PPPs often allow the public sector to translate upfront capital expenditure into a flow of ongoing service payments. This enables projects to proceed when the availability of public capital may be constrained (either by public spending caps or annual budgeting cycles), thus bringing forward much needed investment.
The allocation of design and construction responsibility to the private sector, combined with payments linked to the availability of a service, provides significant incentives for the private sector to deliver capital projects within shorter construction timeframes.
PPP projects which require operational and maintenance service provision provide the private sector with strong incentives to minimise costs over the whole life of a project, something that is inherently difficult to achieve within the constraints of traditional public sector budgeting.
A core principle of any PPP is the allocation of risk to the party best able to manage it at least cost. The aim is to optimise rather than maximise risk transfer, to ensure that best value is achieved.
The allocation of project risk should incentivise a private sector contractor to improve its management and performance on any given project. Under most PPP projects, full payment to the private sector contractor will only occur if the required service standards are being met on an ongoing basis.
International experience suggests that the quality of service achieved under a PPP is often better than that achieved by traditional procurement. This may reflect the better integration of services with supporting assets, improved economies of scale, the introduction of innovation in service delivery, or the performance incentives and penalties typically included within a PPP contract.
The private sector may be able to generate additional revenues from third parties, thereby reducing the cost of any public sector subvention required. Additional revenue may be generated through the use of spare capacity or the disposal of surplus assets.
By transferring responsibility for providing public services government officials will act as regulators and will focus upon service planning and performance monitoring instead of the management of the day to day delivery of public services. In addition, by exposing public services to competition, PPPs enable the cost of public services to be benchmarked against market standards to ensure that the very best value for money is being achieved. International interest in PPPs is attributable generally to three main drivers:
Economic growth is highly dependent on the development and enhancement of infrastructure, particularly in utilities (such as power, water and telecommunications) and transport systems. Furthermore, in many countries there is an urgent need for new social infrastructure such as hospitals and healthcare equipment, prisons, education facilities and housing. For many governments this is seen as the most pressing area for private sector involvement.
The experience of privatisation has shown that many activities, even those traditionally undertaken by the public sector, can be undertaken more cost effectively with the application of private sector management disciplines and competencies
Significant amounts of public resources are invested in the development of assets such as defence technology and leading edge information systems that are then often used for a narrow range of applications within the public sector. Engaging private sector expertise to exploit these assets in a wider range of applications can lead to the realisation of substantial incremental value for the public sector
Implementing the Sustainable Development Goals through PPP infrastructure projects.
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