PPPs have generally proven to be an effective infrastructure delivery tool, but a number of projects nevertheless have failed to live up to their advance billing. A big part of moving up the maturity curve entails improving a government's capacity to execute and manage innovative partnerships. Common pitfalls generally fall into these major categories:
• Poor setup. The success or failure of PPPs can often be traced back to the initial design of PPP policies, legislation, and guidance. A common mistake is placing so many restrictions and conditions and expectations of risk transfer on the private sector sponsor and agencies involved that a financially feasible deal becomes impossible to structure. Another is having unrealistic expectations of PPPs-thinking that they provide "free money" or that they're the solution to all problems.
• Lack of clarity about project objectives. Sponsors sometimes lack consensus about the purpose of and expected outcomes for the project. Government officials then often try to compensate for this failure by overspecifying inputs.
• Too much focus on the transaction. The government may view PPPs merely as financing instruments when in fact they represent a very different way of working. This leads to poor operational focus.
• Inappropriate risk model applied to project. Much of what differentiates the various PPP models is the level and nature of risk shifted to the private sector. A common mistake is transferring demand risk, the amount of use the infrastructure will receive, to the private sector even when the private contractor has no control over demand factors.
• Lack of internal capacity. Even when the government is supported by external advisers, many tasks cannot be outsourced, and often the agency does not have the skill sets internally to manage complex PPPs or the dedicated team required to address the time intensive upfront structuring needs.
• Failure to realize value for money. This failure occurs when the borrowing and tendering costs associated with PPPs are not sufficiently offset by efficiency gains or when government officials don't have a real understanding of how to test value for money.
• Inadequate planning. Without taking proper account of the market in the planning phase, governments may come out with more projects than bidders which creates a noncompetitive environment. On the flipside, too few projects may result in industry moving on to a more active jurisdiction.
Taking PPPs to the next stage of maturity means avoiding these mistakes and overcoming the challenges. While a step by step guide to designing and implementing PPPs is beyond the scope of this study, lessons learned from PPP trailblazers suggest several strategies for successful execution of these partnerships.
First, governments need a full life-cycle approach (e.g., a clear framework) for partnerships that confers adequate attention to all phases of a PPP-from policy and planning, to the transaction phase, and then to managing the concession. Such an approach can help avoid problems of poor setup, lack of clarity about outcomes, inadequate internal capacity, lack of interest from the private sector, and an overly narrow focus on the transaction.
Second, a strong understanding of the new innovative PPP models developed to address more complex issues can help governments achieve the proper allocation of risk-even in conditions of pronounced uncertainty about future needs. Proper risk allocation allows governments to better tailor PPP approaches to specific situations and infrastructure sectors.
The third strategy involves using PPP transactions to unlock the value from undervalued and underutilized assets, such as land and buildings, and using it to help pay for new infrastructure. This strategy gives taxpayers more value for their money. It also encourages greater bidder competition because there is less risk associated with obtaining an interest in the revenue associated with the project.