The PPP crisis. Part Three: The current model

A review of conventional PPPs and the 3 main reasons to choose them.

As I described in Part Two, the conventional PPP model is the result of an evolution of infrastructure and development policies in a number of countries; policies that multilateral institutions have promoted, adapted and gathered in a sort of “body of knowledge” that has reached theoretical and practical maturity, as reflected in the PPP Knowledge Lab initiative.

The benefits touted by the defenders of the traditional PPP model are many, but three of them stand out in particular, namely:

1. Access to more financing for infrastructure provision;
2. Creation of short and medium-term public value through an optimal allocation of risks between the parties;
3. Creation of long-term public value through the consolidation of dynamics of collaboration with the private sector that increase the capacity of public sector managers, the exchange of knowledge, the economic activity and ultimately the social welfare of the beneficiaries.

Figure above: The three pillars of the PPP model

There is no single definition of a PPP: it is very difficult to have it, given the breadth and variety of the issues it covers. Nonetheless, there are a number of features that identify a conventional PPP more or less clearly, to name a few:

• They are based on one of more contracts between a government (public partner) and the private sector (private partner) to carry out an infrastructure or service, with the public partner maintaining the ownership of the asset. It is, therefore, a form of public procurement.
• The ultimate purpose of the contract is not the provision of the physical infrastructure -the asset- itself, but the service it brings to the users.
• The investment amounts required for the construction and operation of the infrastructure are very large (often in the hundreds of millions of Euros).
• The contracts are articulated so that each risk is allocated to the party most capable of managing it -this is the principle of efficient risk allocation. In practice, it follows from this principle that the private partner brings financial resources that the public partner does not have, in addition to the experience and incentives needed to construct and operate the infrastructure efficiently.
• The private partner finances, builds and operates the infrastructure in exchange for the right to receive payment from the users, the public partner or both.
• It is usually delivered through “special-purpose vehicle (SPV) companies” that assume the contractual rights and obligations.
• A substantial part of the investment is financed by debt -most PPPs are “leveraged” investments. This makes the credit contracts a fundamental and determining element of PPPs.
• The contract term is usually very long, precisely because of the time needed to repay the creditors in full.
• At the end of the contract the infrastructure or public good is usually handed back to the public partner, who will decide on the subsequent form of management.

According to the conventional thinking about PPPs, these principles should suffice to, once deployed in an appropriate institutional and economic environment, encourage competitiveness and maximise the benefits private participation in infrastructure provision. It turns out, however, that the results are often the opposite.

This is because of the dysfunctionality of the traditional PPP model, which directs all efforts and attention to the technical sophistication of the contractual instruments and financial flows, neglecting phenomena that shape much more subtly and decisively the result of the collaboration. Moreover, the impact of this decoupling between PPPs and reality goes beyond individual projects: it gradually undermines the confidence in the model and, ultimately, in the institutions that legitimise it.

At the center of this dysfunctionality is the complexity of the system where the infrastructures dwell: an increasingly numerous, more interdependent, more dynamic, less linear, less hierarchical, more demanding and more unpredictable system. Citizens demand more and better infrastructure solutions for problems that arise from this very complexity, which in the case of cities is exacerbated. What is more, whether the demands are reasonable or not often becomes an irrelevant question.

Figure above: Theory and reality of PPPs. Reality holds many interdependencies

In the next parts of this series I will examine the difference between theory and reality for each of the three pillars of the conventional PPP model: i) access to more financial resources, ii) greater efficiency in the provision of the service; and iii) long-term benefits from collaborating and the exchanging of experience between the parties.

<- Go back to Part Two: History

?Go to Part Four: Financing ->

This article is the English translation of a post originally published by Jose Cordovilla in his Spanish-language blog Infraestructuras y Gobernanza, where he writes about governance issues in infrastructure. All the articles in this PPP monographic series have been registered by the author on Safecreative under Creative Commons License conditions for sharing - Attribution, NonCommercial, ShareAlike 4.0