Education PPPs: Challenges and Solutions

Challenges

Uncertainty. The possibility of future changes in education policy and demographic shifts introduces uncertainty into the procurement process.

Other use policies. Depending on the contract, private partners may use the buildings and facilities for other purposes outside of school hours to generate extra income. Doing so can translate into more money that can then be channelled back to schools, where it can then be invested in other projects or improvements. However, the municipality may see uncertain revenues translated into a higher price and must also be careful to negotiate rights to after-school facility use.

High transaction costs. For small-scale projects, transaction costs can typically be high, particularly for cases where the procurement process is long and complicated. The capital value of individual schools may not attract sufficient sector interest.

Solutions

As mentioned earlier, bundling can be used to address the issue of small-scale projects with high transaction costs. In school construction, PPP becomes financially more attractive as the number of schools covered by the contract increases. This is particularly the case for the construction of primary schools, where projects tend to be small and of more limited scope.

The incremental model, in which different elements of the work can be called off on an ad hoc basis, is one option for reducing the challenges of uncertainty. The public sector would retain the option to contract with other partners without incurring financial penalties. This approach allows for some flexibility to meet demographic or policy changes. In addition, PPP contractual terms should be made flexible enough to provide for the possibility that the school may need to be enlarged.

Last, a "buy-back" model can be used, in which the government purchases the school building from the private partner once it has been completed and then contracts back for maintenance services.