Executive Summary

Citizens around the globe confront the world's glaring infrastructure deficit daily. Evidence of the large and growing gap between infrastructure needs and the resources that governments have historically invested in meeting those needs is everywhere: congested roads; bridges in need of repair; poorly maintained transit systems and recreational facilities; and deteriorated hospitals, schools, and waste treatment facilities all in urgent need of rehabilitation and repair. These problems in turn impose huge costs on society, from lower productivity to reduced competitiveness to an increased number of accidents.

Less well understood is the revolution taking place in the way that governments are trying to narrow the infrastructure deficit. Increasingly governments are turning to the private sector for financing, design, construction, and operation of infrastructure projects. Once rare and limited to a handful of countries and infrastructure sectors, these public-private partnerships (PPPs) have emerged as one of the most important models governments use to close the infrastructure gap.

The United Kingdom has pioneered the trend. Through its Private Finance Initiative (PFI), the UK government makes use of partnership models to develop and deliver all manner of infrastructure, from schools to defense facilities.1 PFI projects now represent between 10 and 13 percent of all UK investment in public infrastructure, a sea change from a little more than 10 years ago when PPPs were barely a blip on the radar screen.2

One offshoot of the rapid worldwide growth of public-private partnerships for infrastructure is that countries remain at vastly different stages of understanding and sophistication in using partnership models. Many countries are still at the first stage of PPP development: designing the policy and legislative framework that enable successful partnerships, getting the deals right, building the marketplace, and so on. Being a latecomer to the PPP party can have its advantages-provided the right lessons are learned from the trailblazers who have moved to more advanced stages. Meanwhile, those countries that are higher up the maturity curve and that have expanded their use of PPPs into new sectors could benefit from a deeper understanding of the challenges and potential solutions particular to each infrastructure area.

Benefits of PPPs. Public-private partnerships are unlikely to fully replace traditional financing and development of infrastructure, but they offer several benefits to governments trying to address infrastructure shortages or improve the efficiency of their organizations.

First, public-private partnerships allow the costs of the investment to be spread over the lifetime of the asset and thus can allow infrastructure projects to be brought forward by years compared with the pay-as-you-go financing typical of many infrastructure projects. Second, PPPs have a solid track record of on-time, on-budget delivery. Third, PPPs transfer certain risks to the private sector and provides incentives for assets to be properly maintained. Fourth, public-private partnerships can lower the cost of infrastructure by reducing both construction costs and overall lifecycle costs. Fifth, because satisfaction metrics can be built into the contract, PPPs encourage a strong customer service orientation. And finally, because the destination, not the path, becomes the organizing theme around which a project is built, public-private partnerships enable the public sector to focus on the outcome-based public value they are trying to create.

Moving up the Maturity Curve. While PPPs hold significant benefits, they also present formidable challenges, both at earlier and later stages of market development, as countries increasing apply the PPP approach to infrastructure projects across a number of sectors. A big part of moving up the maturity curve entails improving a government's capacity to execute and manage innovative partnerships. Lessons learned from PPP leaders suggest several strategies for successful execution of PPPs.

First, governments need a clear framework for partnerships that confers adequate attention on all phases of a life-cycle approach and ensures a solid stream of potential projects. This can help avoid problems of a poor PPP framework, lack of clarity about outcomes, inadequate government capacity to manage the process, and an overly narrow transaction focus.

Second, a strong understanding of the new innovative PPP models developed to address more complex issues can help governments to achieve the proper allocation of risk-even in conditions of pronounced uncertainty about future needs. This allows governments to better tailor PPP approaches to particular situations and infrastructure sectors.

Last, in addition to providing higher-quality infrastructure at lower cost, governments can use PPP transactions to unlock the value from undervalued and underutilized assets, such as land and buildings, and use those funds to help pay for new infrastructure.

Sector Opportunities. Countries that have reached the second and third stages of maturity typically employ partnerships in more than one or two infrastructure areas. The major infrastructure sectors where PPPs have been successfully applied include transport (including road, rail and ports), water, waste, hospitals, schools, public housing, prisons and defense. Each sector carries with it different challenges across each phase of the PPP life cycle. Budgeting is a challenge for the education sector, for example, because of high procurement costs for small projects and the uncertainty of alternate revenue streams. Moreover, future demographic and policy changes moreover make too rigid, long-term contracts less suitable for schools. The bottom line: PPP policies, approaches and political strategies must be tailored to the unique characteristics of each individual sector.

PPPs alone are not a panacea. Rather, they are one tool governments have at their disposal for infrastructure delivery-a tool that requires careful application. Without seeing the partnership as a true partnership-not simply a different type of transaction-and adopting a tailored approach that suits the relative uncertainty and scale of the project at hand, governments are likely to repeat the errors of those before them. By making the best use of the full range of delivery models that are available and continuing to innovate-learning from failure instead of retreating from it- the public sector can maximize the likelihood of meeting its infrastructure objectives and take PPPs to the next stage of development. This development, in turn, will enable this relatively new delivery model to play a far larger role in closing the infrastructure gaps confronting governments across the world.