Chapter 2 Private Public Partnerships

Private Public Partnerships (PPPs)

Overview

PPPs are a mechanism for public sector authorities to procure and implement public infrastructure services using the resources and expertise of private sector parties. PPPs are usually complex and are intended to deliver infrastructure or services over a long period of time. 

The types of projects that PPPs are used for are generally social infrastructure projects or economic infrastructure projects:

  • Social infrastructure projects:  The community can ultimately access the services that are being delivered, for example, health, education, transport and roads. Examples of social infrastructure PPPs are the Northern Beaches Hospital in NSW, Victoria’s Comprehensive Cancer Centre and Grafton Correctional Centre in northern NSW.
  • Economic infrastructure projects These are user fee PPPs, such as toll roads and rail projects.  Examples of economic PPPs are  the Gold Coast Light Rail in Queensland, and the Sydney Light Rail.

Public sector authorities are increasingly attracted to the PPP model for the delivery of large and complex infrastructure projects because a partnership with the private sector can help create efficient services, which can foster new solutions, bring alternative financing sources and implement emerging technology.

The cost of using the service is either covered by the user of the service, such as toll roads, or by the Government through an availability based payment mechanism where the private company is engaged to provide services, such as in a hospital.

Contractual relationships

PPPs involve a contract between a public sector authority and private sector parties for the delivery of service through public and/or private sector financing. The public authority remains responsible for meeting its service delivery objectives and goals, despite the private sector arrangement. 

Typically, a private sector consortium forms a company called a special purpose vehicle (SPV) to design, build, operate, maintain and finance the asset for the contracted/concession period.

Advantages
  • Allows the public sector to deliver infrastructure by utilising the private sector expertise and efficiencies. 
  • PPPs can reduce a government’s capital costs, helping to bridge the gap between the need for infrastructure and the government’s capacity for debt.
  • Shorter time to delivery once the project has started due to the incentive for private parties to generate income as soon as possible.
  • Opportunities and incentives to develop innovative solutions.
  • Value for money and reduced lifecycle costs.
Disadvantages
  • Tendering and procurement costs are usually much higher than under conventional procurement models.
  • Capital cost will be higher (approximately 1-2%) due to the project being funded by private finance. 
  • While PPPs represent opportunities to reduce the overall project cost, the private sector will usually include a price premium in its tender price.
  • The long term of PPP contracts can lead to inefficiencies in the operating phase as the operator will have a monopoly on the service or asset.
  • Political risks, such as public sector staff redundancies and the conduct of the private operator which may be seen as that of the government.

 

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