Public-private partnerships (PPPs) create a long-term partnership between municipalities and the private sector, under the premise that the private sector can do some things better than the public sector, in particular around innovation, service delivery, commercial orientation, and the drive for efficiency. In some cases, a municipality can simply hire a private entity to provide a service or deliver a product, for example, under a contract for sale or a construction contract. But for many services, the best way for a project to mobilize the combined strength of the municipality and of the private sector is a PPP, where both parties share critical risks and liabilities to align interests and coordinate efforts.
If well designed and managed, PPPs can deliver quality, reliable, and cost-efficient infrastructure. By mobilizing private expertise and human and financial resources, PPPs can accelerate the construction of infrastructure, improve the efficiency of public services, and foster innovative solutions that offer a better response to user needs than would poorly functioning public service provision.
The exact definition of PPP can vary significantly between different countries. Where a PPP policy or legal framework is in place, users should take note of exactly how a PPP is defined by law. This is important since the definition of PPP often determines responsibilities, requirements, procedures, stakeholder expectations, and so on when PPP projects are prepared and implemented.
In this Municipal PPP Framework, PPP includes different approaches to private entities partnering with municipal authorities to deliver infrastructure services, with the private sector making a long-term commitment and taking significant project risks. A municipal PPP is a PPP where the government entity is a municipal or local government body and where the public asset or service is a municipal asset or service. The term ‘municipal’ is used to cover the many forms of local government public bodies serving local communities under different administrative, legislative, and constitutional systems around the world.
Within the broad category of PPP, a variety of project structures are available, each with its own characteristics and priorities. In addition to determining the parties’ rights and obligations, another key aspect of PPP structure is the allocation of project risks among the parties to the PPP. Risk allocation affects the ability to attract private investment, the quality of competition among bidders, and the cost of capital.
In general, as more risk is transferred to the private partner, it will in turn need to have more control over the project to manage those risks and will need to be compensated for the risk borne, increasing the cost of capital. While transferring some risk to the private partner is a key element of a PPP, shifting too much risk to the private partner can reduce a project’s value for money and, in the extreme, lead to failure during procurement where potential investors or their financiers are not willing to bear the levels of risk required. Even if bids are received and the project awarded, the level of risk may be too much for the private sector to manage, which can lead to project failure.
To learn more about defining municipal PPP, different PPP structures, and risk allocation within PPP projects, download the full Guidance Note.
PPPs seek to help municipalities deliver better and more reliable quality of service at a better cost to the municipality when compared to what can be achieved by public sector delivery alone. The private partner has different incentives and accountability for managing design, procurement, construction, inspection, operation, maintenance, and ultimately delivery of services, which in the right circumstances and under a properly structured and procured PPP contract can achieve improved performance and services as compared to publicly managed services.
When a PPP project is well structured, it motivates the private operator to apply its full capabilities to deliver infrastructure services as required by the contract. The private sector’s capacity differs fundamentally from the public sector, and it is these differences that provide new opportunities to deliver services for the municipality more efficiently. By mobilizing private expertise and human and financial resources, PPPs can accelerate the construction of infrastructure, improve the efficiency of public services, and foster innovative solutions that offer a better response to user needs.
However, implementing PPP also presents unique challenges for municipalities, including funding robust project preparatory work, managing long-term direct and contingent fiscal liabilities, determining an appropriate project structure, and conducting contract management and performance monitoring over the life of the PPP. This can have consequences on the size, structure, nature of work, and skill requirements of the municipality, and expose its inherent limitations.
To learn more about the advantages and challenges of implementing municipal PPPs, download the full Guidance Note.
PPPs are not ‘free money’. PPP always includes a source of revenue sufficient to cover all operating costs and bank loans, and a reasonable return on the investor’s equity is repaid. This revenue will come from some combination of payments from (a) users of the service, (b) commercial revenues generated by the project, and (c) public sector. Understanding who will pay, and how much they must pay, is an essential step for the municipality before undertaking a PPP. Therefore, municipalities must always account for the fiscal risks arising from PPP.
PPPs are not ‘easy’. PPP projects require time and money to prepare well. This investment will reap benefits in terms of likelihood of success of the project, lower cost of private investment due to reduced project risk and attracting better, more effective private partners.
PPPs are not anti-labor. A PPP will provide more opportunities, better training, and a performance-based employment regime. For those with vested interests in avoiding change, a PPP can be designed to provide a special regime for these staff and their representatives.
PPP is not privatization. The project assets either remain under government ownership or will revert to government ownership at the end of the project period.