Public private partnerships: to be or not to be, that is the question

 
BRISBANE, Australia - Nov. 9, 2017 - PRLog -- The Public Private Partnership (PPP) model is a form of service delivery where private contractors are recruited by public sector organisations to provide public services on a long-term basis while incurring the necessary capital costs ostensibly at their own risk. PPPs are generally relatively complex arrangements and require extensive preparation.

Benefits of PPPs to the public sector

The PPP model removes the challenge of having to undertake design, construction and managerial tasks, eliminates the risk of budget overruns and avoids the government or public sector organisation's need to raise loans to defray capital costs. The latter, in turn, restricts the public entity's overall debt burden and this can be of considerable benefit to governments or public sector organisations that face serious difficulties in raising loans by conventional means or have agreed debt ceilings that they would otherwise breach.

The major innovation offered by the PPP model is the transfer of risk from the public to the private sector which is documented in PPP contracts through measures such as performance benchmarks, performance-linked payment regimes and penalties stipulated for poor performance. Contractors seek to mitigate such risk both by charging a premium for risk assumption and by introducing a wide range of obligations on the public sector client that help to secure the contract's cost base and revenue stream.

The public sector client is then required to offer restitution for variations outside the stated parameters. This risk reversal clearly serves to diminish the public sector benefits of the PPP vehicle as the public sector client both pays for the risk transfer and pays if the mitigation criteria are breached and private sector contractors have shown themselves keen to develop this mechanism to limit the application of risk transfer.

The key PPP question

Most countries make extensive use of private sector services in their array of public service delivery mechanisms. The key question addressed by PFMConnect is not whether private sector contractors should be employed to provide public services but the applicability of the PPP model for this purpose. In particular, are risk reversal clauses being developed excessively by contractors to the expense of the public sector clients who pay handsomely for risk transfer that is largely negated in practice by contractual provisions.

PPP decision criteria

Some striking examples of issues surrounding the use of PPPs and key questions to be addressed are highlighted in PFMConnect's "Risk and Reward: Issues Confronting Current PPP Developments" blog now available at the PFMConnect blog site www.blog-pfmconnect.com. The blog raises a number of questions to be addressed by public sector organisations when considering the nature of the PPP deal on offer. After addressing the relevant issues in a prospective PPP transaction, we suggest that sometimes the best decision for a public sector entity is not to proceed at all.

Development partners are showing material interest in the role of PPPs as public service delivery mechanisms. USAID have featured PFMConnect's blog in its DRG Center October 2017 newsletter. PFMConnect continues to monitor developments in the use of PPPs around the world. An extensive range of articles on PPPs is available on PFMConnect's PPP board, http://blog-pfmconnect.com/category/public-private-partne....

Note: PFMConnect is a consultancy that supports the development of good standards of public financial management in order to improve public service delivery, extend public accountability, encourage local business development and combat corruption. Its work is principally centred on developing countries, working in cooperation with governments and other stakeholders.

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John Leonardo
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