A public-private partnership (PPP) is a collaborative organizational structure in which public, private, and non-profit partners agree to share risks, resources, and decision-making authority.
While there are many different ways for the public and private sectors to engage with one another-from contracts to simple dialogues-it's the sharing of decision-making authority that makes PPPs unique. In a well-designed PPP, this form of shared governance is capable of yielding new and innovative solutions. In a poorly-designed PPP, it can be a bureaucratic roadblock to progress. Though the specific allocation of decision-making authority is unique to each PPP, all PPPs are reliant on trust, communication, and cooperation. Through an iterative process of negotiation, participants in a PPP must develop a framework that encourages each partner to make decisions in the best interests of the partnership.
PPPs are flexible structures; each one must be tailored to the unique conditions of the problem it attempts to solve. But ultimately, the goal of a PPP is always the same: to capture long-term value for both partners. Note that where the private sector is concerned, "long-term value" may not necessarily mean immediate profitability. Sometimes, profitability from a PPP can be expected to arrive in a longer timeframe. In other cases, the profit motive may be secondary to more abstract goals, such as developing a market entry strategy or improving brand image. However, in the long run, sustainable economic results provide the foundation for the strongest partnerships.
PPPs are no longer primarily financing tools-increasingly, they are being used by developed countries as catalysts for innovation. PPPs are especially necessary in low- and middle-income countries, where complex health policy problems are often made more difficult by limitations in operational capacity.
PPPs can act as a source of that operational capacity-both in addressing fiscal risk and in spurring more effective infrastructure development. They can also act as an instrument to facilitate economic development and reform.
NOTE Is It a PPP? Given the many different ways that governments can interact with the private sector, it's hardly surprising that many non-PPP projects are often mislabeled as PPPs. This is often the case for traditional contractor-type arrangements (basically elegant forms of outsourcing), in which a government hires a private company to build a piece of infrastructure. But these are not necessarily PPPs. Generally speaking, a public-private partnership can be differentiated from other forms of cross-sector collaboration in two ways. First, in a PPP, the private sector partner must bear a significant amount of risk. And second, the private sector's profits must be at least partially contingent upon the success of the project at large. To illustrate how different forms of cross-sector collaboration can either be or not be a PPP, let's imagine a hypothetical project: the construction of a new subway line in a dense urban environment. Looking to expand its mass transit network, a city government identifies a route for a new subway line. The project will be expensive, requiring extensive tunneling, replacement of existing sewer and power lines, and the wholesale construction of several stations. But after a competitive bidding process, the government identifies an independent contractor who it believes can complete the project for a reasonable price-to be paid as a flat fee upon completion of the line. When the project is complete, the government assumes responsibility for operating and maintaining the line, and the contractor is paid. Is this a PPP? Though this does represent a type of collaboration between the public and private sectors, it would not fit the definition of a PPP, because the private sector does not shoulder a significant portion of the risk in the project, and its remuneration is not tied to the project's success. But let's imagine, now, that the company hired to build the subway line is also given a 75-year lease, during which it is able to collect fares from passengers at an agreed-upon rate. The government pays a smaller portion of the construction fees-not nearly enough to cover the private sector's costs, but mitigating some of the risk for the private sector nonetheless. It also contributes the public land for the project-the streets under which the subway line will run-at no cost to the private sector. When the project is complete, the company maintains responsibility for operating the trains and collecting fares from passengers, though any increase in fare or decrease train service may be negotiated with the government. This project is a public-private partnership. The private-sector partner is not merely a contractor paid at a flat rate, they are heavily invested in the success of the project. They have assumed risk: if the construction process goes over time or budget, or if unforeseen circumstances drive up costs, they shoulder-at least partially-the cost. Their profits are also closely tied with the success of the project: if the line is too slow, too inefficient, too dirty, or poorly maintained, passenger levels will drop, and the company will sacrifice profits. If, on the other hand, the line exceeds expectations, shuttling passengers to their destination quickly and pleasantly, they may stand to make even more fare income than projected. While our imaginary subway line does present an easy-to-comprehend example of the difference between a PPP and other forms of cross-sector collaboration, it is important to note that not all PPPs are alike. It is not essential, for example, that consumers pay a market tariff (such as the fares paid by the passengers) directly to the company. It is only essential that remuneration be in some way tied to performance. And in fact, in the following chapters we will discuss further how PPPs can still work in situations where the public is unable or unwilling to pay for services. |