A PPP is a model or structure that uses private investment to undertake infrastructure development that has historically been the preserve of the private sector. ‘Project Finance’ is the cornerstone of the PPP approach. The PPP concept does not involve a new or novel mechanism for obtaining finance for a project or for structuring it. It uses the well-established approach and legal instruments of a technique known as Project Finance! It means essentially that lenders look to the project’s assets and revenue stream for repayment rather than to other sources of security such as government guarantees or the assets of the project sponsors.
In a PPP project, a private company is given a concession to build and operate a facility that would normally be built and operated by a government. The facility might be a power plant, airport, toll road, tunnel, bridge, water treatment plant, hospital, school or government building. The private company is also responsible for financing and designing the project. At the end of the concession period the private company returns ownership of the project to the government.
The concession period is determined primarily by the length of time needed for the facility’s revenue stream to pay off the company’s debt and provide a reasonable rate of return for its effort and risk.
In our Documents Library various examples of the use of project finance in practice are explained, in particular the developing role of the model – Public Private Partnerships across the world and acronyms for models such as PFI, BOT, BOOT, DBFO etc.
Benefits of PPPs
In the face of an ever increasing world population, greater expectations, demands from society and budgetary constraints, governments are facing an increasing amount of pressure to deliver new and improved infrastructure projects from transport (roads, railways, bridges); education (schools and universities); healthcare (hospitals, clinics and treatment centres); waste management (collection, disposal, waste to energy plants); water (collection, treatment, distribution), government accommodation and defence.
In many countries the financing requirements of current and prospective infrastructure needs far outstrip resources available.
Meeting these needs is critical to ensure continued process, development and economic growth. Budgetary constraints and an acknowledgement of private sector efficiencies and know-how are two of the principal reasons why governments around the world are taking the economic and political decision to accelerate the use of private sector finance and adopt Public Private Partnership models in order to deliver infrastructure projects which would have been previously built by the public sector using public sector finance.
- Infrastructure created through PPP can improve the quality and quantity of basic infrastructure such as the provision of water and its treatment, energy supply and transportation. In addition the process can be widely applied to a variety of public services such as hospitals, schools, prisons and government accommodation.
- Construction is being completed to plan and to budget; repairs and maintenance are planned at the outset and in consequence assets and services are maintained at a pre-determined standard over the full length of the concession. Early delivery of good quality premises and services is delivering wide social benefits.
- PPPs are helping the public sector develop a more disciplined and commercial approach to infrastructure development whilst allowing them to retain strategic control of the overall project and service.
- In PPP structures the risk of performance is transferred to the private sector. The private sector only realises its investment if the asset performs according to the contractual obligations. As the private sector will not receive payment until the facility is available for use, the PPP structure encourages efficient completion, on budget without defects.
- There is evidence of better quality in design and construction than under traditional procurement. PPP focuses on the whole life cost of the project not simply on its initial construction cost. It identifies the long term cost and assesses the sustainability of the project.
- The use of private finance enables the public to have access to improve services now, not years away when an governments spending programme permits.
- The expertise and experience of the private sector encourages innovation, resulting in shorter delivery times and improvements in the construction and facility management processes. Developing these processes leads to best practice and adds value.
- The process helps to reduce government debt and to free up public capital to spend on other government services.
- The tax payer benefits by avoiding paying higher taxes to finance infrastructure investment development.
- PPP projects can deliver better value for money compared with that of an equivalent asset procured conventionally.
- The PPP process requires a full analysis of projects risks at the outset. This fuller examination of risks by both the government and lenders means that cost estimates are robust and investment decisions are based on better information.
- PPPs are creating efficient and productive working relationships between the public and private sector.