An Ideas-Based Online Magazine of the Global Network for Advanced Management

Are Public-Private Partnerships the Best Way to Provide Government Services?

The public-private partnership model, a tool to bring private capital and expertise to public services, has been expanded around the globe and is applied to an increasing variety of projects. HEC’s Bertrand Quelin says that such projects are generally successful—but they aren’t always perceived that way.

Bridge construction

Where did public private partnerships come from?

Public procurement—soliciting bids from private companies to build public infrastructure—used to be the dominant development process in many countries. Since Margaret Thatcher, Britain has allowed private firms to run more and more of what had been considered public services. That model has been influential as countries have faced tight budgets while still needing long-term investment in public infrastructure.

The public-private partnership (PPP) model has evolved to include new types of partners and new areas. We used to have PPPs primarily related to infrastructure, then they began to include services like education, health, and even prisons. It’s increasingly common to have foundation, charities, and NGOs involved. For example, Roundabout Water Solutions has an agreement with the South African Department of Water Affairs. This NGOs is raising donor funds to supply rural communities with clean drinking water by means of a sustainable pumping system, called a PlayPump that is powered by the play of children.

In Europe PPPs are not at all a traditional way to solve problems. The traditional answer is, the government can do it, the municipality can do it, whatever it might be. But governments are not as rich as they once were. And the private side has developed very deep technical capabilities. So that is part of why we can observe a boom of PPPs all around the world.

What problems do PPPs solve?

On one side there is a capacity failure in what a government can afford or has the expertise to deliver. On the other side there might be a market failure which makes a purely private solution impossible. Or oftentimes there are ownership questions, sometimes about land or turning over public infrastructure to a private company forever.

PPPs can be a way to reach long-term development goals. Procurement worked as a way to cross-subsidize. PPPs can do that as well, if the parties agree to that ex ante and build it into the contract. As an example, in Morocco a PPP was created to build a municipal water system. A market solution would have been a system that served only the richest part of the population that could afford the service. From the social perspective, that’s not very attractive, but the municipality couldn’t afford to simply pay for the system. In this case, the richest pay a price a bit higher than the market-based price in order to cover some expenses not fully paid by the poorest population.

How does a PPP work?

It’s not easy. There is always a potential conflict between the public body seeking to meet the long-term objectives of a community and the private company seeking to earn profits in the shortest period of time possible. The question is, do they have converging interests?

The business model is very important. That's the way to potentially bring together non-convergent interests. If we pay attention to the contract, the public authority can receive true benefits from access to private capabilities.

The dominant contractual device is BOT: Build, Operate, Transfer. The private party will provide money upfront to build the power plant, the water system, the hospital, or the school. In return they operate it for a number of years. It's common for private partners to operate highways, bridges, or water systems—less so for hospitals and schools, but it happens. Contracts are regularly 20 to 25 years and can be longer. In that time, the company earns back their initial investment and a return. After the agreed period of time, the infrastructure is transferred back to the public authority.

We see with bridges, tunnels, and sometimes for highways the primary investment has been covered so the public authority takes over operations and removes the tolls. But with these complex projects and long contracts there is uncertainty. Sometimes the transfer is postponed because additional investments are needed and the private solution is the most affordable. An in-between option is that the partnership continues with a new distribution of tasks and benefits.

Are PPPs consistently more efficient than other solutions?

Ideally, we’d like more cases and a longer period of time, but the efficiency of PPPs has been demonstrated for many dimensions. The economic and technical aspects are efficient. The social acceptance is still debated.

At times we still have some social parties that are very reluctant to see private interests operating public goods. In Buenos Aires there were issues with the PPP providing water to the city. People who were not able or didn't want to pay for service were physically tapping into the network. The private company was losing a lot of revenues to the unmetered use, but it was the responsibility of the city to stop it. The company didn’t see the response they wanted. It led to a lot of fighting. It’s an interesting example of the role of social acceptance.

It's common to have activists—even in the U.S. and other developed countries—ready to protest the pricing or the way benefits are being shared among the different partners. In order to respond to these concerns, the partners, both the public and the private, need to disclose more information and prove that there will be social benefits. That is a key part of assessing whether PPPs are efficient.

How can stakeholders beyond the primary partners be brought into the process?

A PPP was used to build a circumferential highway around the city of Lyon. There was general social acceptance because traffic jams were terrible. However, people were upset about the cost of the toll. They organized a protest that blocked the road for two days. The mayor couldn’t simply lower the toll; he had signed a contract that set the price. But he organized a three-party meeting where they agreed to extend the duration of the contract while reducing the toll.

That’s an example where they found a good equilibrium to respect the interests of the different parties, but that can be very tough. Politicians can’t just say, “We have signed the contract. It's over.” They know the public will be voting in the next election. So both parties know there is no reason to believe once the PPP contract is signed it’s final.

By bringing in social activists or nonprofit-oriented groups to think about the social interest early on, the main partners demonstrate that these issues matter to them. And it's a way to understand how well the project will be received. Will people pay to use this highway every day at the proposed price?

From a theory perspective, it's very close to what the Nobel Prize in Economics winner Elinor Ostrom described for the role of the local community in preventing tragedies of the commons. She wasn’t looking at PPPs. She worked on fisheries, forests, aquifers—commons that can be destroyed by overuse. She demonstrated that if we don't pay attention to local community interests, the commons cannot be protected, but if we do, they can be used sustainably.

PPP and the tragedy of the commons would seem to be completely distinct, but from a conceptual dimension the frameworks to develop oversight are quite similar.

What issues is the private company watching for?

There are many. I already mentioned that if the true level of demand is below the expectation, it directly impacts the business model.

Another concern is the cost structure. Paris has a bike-sharing program. The company operating the system didn’t accurately estimate the maintenance cost for the bikes. They were able to negotiate a revision of the contract with the city, but the cost structure is always part of the debate among partners.

In many cases, the public side is a signatory to the contract and it is also the regulator with the capacity to change the rules. It happens sometimes. The private side is very aware about the potentially dramatic consequences.

South of Paris there was a PPP to build a hospital. In the five years it took to complete, the government changed the regulations on hospitals a number of times. This meant trouble because there was no clear understanding of who would pay for unforeseen extra costs. Avoiding these problems or at least having a framework for solving them goes back to the quality of the contract.

What’s the role of the public partner?

Most advanced countries have national laws and specialized offices. In some cases the public side has developed a managerial skill set. Some municipalities, regions, and countries have built the capabilities to monitor PPP contracts correctly. There are PPP units that are able to enforce the law, offer consulting services, initiate preliminary negotiations, and diffuse best practices.

The Flemish PPP Knowledge Centre provides the private sector with information on PPP policy and possibilities. Partnership BC serves as a resource for the private sector interested in PPPs in British Columbia. The National Australian PPP forum, created in 2004, is a national coordination and cooperation mechanism among the federal, state and local governments on PPPs. Portugal’s central PPP unit, Parpública SA, conducts a technical assessment of proposed PPP projects before the procurement phase and provides its recommendation to the Ministry of Finance.

My own research has shown that when these public capabilities have been well developed they give more responsibilities to private companies. And they involve nonprofit institutions more. So what is the final role of public bodies? Maybe it is to supervise, monitor, and sometimes penalize if the contract is not respected. That’s pretty interesting as a theoretical concept. Maybe we don't need public authorities doing things as much as supervising.

What do countries need to make PPPs work?

PPPs offer a workable contractual device if countries have the relevant laws that support them.

Brazil put the relevant federal laws in place in 1995, but for a long time both public and private partners continued to prefer traditional public procurement. Now, the PPP is becoming more common, particularly at the municipal level. Favelas in Rio de Janeiro are working with private and nonprofit partners to develop education and water systems.

China puts a threshold on the maximum financial investment coming from foreign partners. That can be a big constraint.

At times, the relevant question is, do we have the quality of public institutions needed to avoid any bribery and corruption? It's a very delicate issue for many countries, not just the very poor countries but even for more advanced emerging countries.

The PPP is not a perfect device, but at least the solution is based on the ability for the private company to provide a technical solution where benchmarks and best practices from different experiences across countries are available. With public procurement, bribery, corruption, lack of transparency, and the potential to tilt the playing field has been an issue in many countries.

For emerging countries that will need the support of international funding sources like the World Bank or the IMF, a private partner can be a signal that the project will have the needed professional services and ability to achieve the long-term objectives.

Where do nonprofit partners fit?

Nonprofit-oriented organizations are increasingly involved. They don’t have a profit focus and can think about longer-term issues. The Bill and Melinda Gates Foundation is very active in developing PPPs. Their strength is money. They can finance what they want. But they are very much aware of the importance of local partners.

For examples, on a health project in Africa they will bring in African NGOs on social, cultural, and individual dimensions, where it's not easy for an external actor to connect with the local population. The role of that very local NGO is to educate people and to be the true partner between the foundation and the local population.

They will bring in the national public health authority to give the project additional legitimacy. The Gates Foundation even has the power to bring in private pharmaceutical firms at times.

We used to have the public authority as a leader. And now in some specific cases we have nonprofits as the catalyst, leader, and dominant partner.

Are there limits to what PPPs can do?

Uncertainty can limit PPPs. When investors cannot easily identify the returns (rate, flow, and duration), they are hesitant to join a PPP. Neglected or abandoned diseases might benefit from the capacity of private partners, but since there isn’t a sustainable business model, at this point, nothing can replace public research activity. Uncertainty around pricing risk can also restrict private involvement. Can we anticipate a dominant private contribution for the conquest of the moon?

A colleague in Toronto is working on what she calls outsourcing of previously public activities—from a policy perspective, what are the social and political dimensions of outsourcing public functions? One case she is studying is the U.S. use of private contractors to provide security in Iraq.

Prisons offer another example. It is easy to anticipate that PPPs are relevant for construction, even for operating services like maintenance and food. However, should private companies manage the security and supervision of inmates? As citizens there is reason to pay attention to the traditional role of public authorities versus the new scope for private companies.

Beyond economic efficiency, it is still in the hands of the community to decide what should be kept as a public good. It is the responsibility of private companies to demonstrate that they can run previously public activities in a way that supports long term objectives and social responsibility.

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