Public–private partnership

A public–private partnership (PPP, 3P or P3) is a cooperative arrangement between two or more public and private sectors, typically of a long-term nature. They are primarily used for infrastructure provision, such as the building and equipping of schools, hospitals, transport systems, water and sewerage systems. PPPs have been highly controversial as funding tools, largely over concerns that public return on investment is lower than returns for the private funder. It is closely related to concepts such as privatization and the contracting out of government services. The lack of a shared understanding of what a PPP is makes the process of evaluating whether PPPs have been successful complex. Evidence of PPP performance in terms of VfM and efficiency, for example, is mixed and often unavailable. Common themes of PPPs are the sharing of risk and the development of innovation. A public–private partnership (PPP, 3P or P3) is a cooperative arrangement between two or more public and private sectors, typically of a long-term nature. They are primarily used for infrastructure provision, such as the building and equipping of schools, hospitals, transport systems, water and sewerage systems. PPPs have been highly controversial as funding tools, largely over concerns that public return on investment is lower than returns for the private funder. It is closely related to concepts such as privatization and the contracting out of government services. The lack of a shared understanding of what a PPP is makes the process of evaluating whether PPPs have been successful complex. Evidence of PPP performance in terms of VfM and efficiency, for example, is mixed and often unavailable. Common themes of PPPs are the sharing of risk and the development of innovation. There is no consensus about how to define a PPP. The PPP phrase can cover hundreds of different types of long term contracts with a wide range of risk allocations, funding arrangements and transparency requirements. The advancement of PPPs, as a concept and a practice, is a product of the new public management of the late 20th century and globalization pressures. The term 'public-private partnership' is prey to thinking in parts rather than the whole of the partnership, which makes it difficult to pin down a universally accepted definition of PPPs. The Government of India defines a P3 as 'a partnership between a public sector entity (sponsoring authority) and a private sector entity (a legal entity in which 51% or more of equity is with the private partner/s) for the creation and/or management of infrastructure for public purpose for a specified period of time (concession period) on commercial terms and in which the private partner has been procured through a transparent and open procurement system.' According to Weimer and Vining, 'A P3 typically involves a private entity financing, constructing, or managing a project in return for a promised stream of payments directly from government or indirectly from users over the projected life of the project or some other specified period of time'. A 2013 study published in State and Local Government Review found that definitions of public-private partnerships vary widely between municipalities: 'Many public and private officials tout public-private partnerships for any number of activities, when in truth the relationship is contractual, a franchise, or the load shedding of some previously public service to a private or nonprofit entity.' A more general term for such agreements is 'shared service delivery' — municipalities joining together, with private firms, or with nonprofits to provide services to citizens. Governments have used such a mix of public and private endeavors throughout history. Muhammad Ali of Egypt utilized 'concessions' in the early 1800s to obtain public works for minimal cost while the concessionaires' companies made most of the profits from projects such as railroads and dams. Much of the early infrastructure of the United States was built by what can be considered public-private partnerships. This includes an early steamboat line between New York and New Jersey in 1808, many of the railroads including the nation's first railroad chartered in New Jersey in 1815, and most of the modern electric grid. In Newfoundland Robert Gillespie Reid contracted to operate the railways for fifty years from 1898, though originally they were to become his property at the end of the period. However, the late 20th century and early 21st century saw a clear trend towards governments across the globe making greater use of various PPP arrangements. This trend seems to have reversed since the global financial crisis of 2008. Pressure to change the standard model of public procurement arose initially from concerns about the level public debt, which grew rapidly during the macroeconomic dislocation of the 1970s and 1980s. Governments sought to encourage private investment in infrastructure, initially on the basis of accounting fallacies arising from the fact that public accounts did not distinguish between recurrent and capital expenditures. In Japan since the 1980s, the third sector (第三セクター, daisan sekutā) refers to joint corporations invested in by both public and private sectors. In 1992, the Conservative government of John Major in the UK introduced the PFI, the first systematic programme aimed at encouraging public-private partnerships. The 1992 programme focused on reducing the public sector borrowing requirement, although, as already noted, the effect on public accounts was largely illusory. The Labour government of Tony Blair, elected in 1997, expanded the PFI initiative but sought to shift the emphasis to the achievement of 'value for money', mainly through an appropriate allocation of risk. However, it has since been found that many programs ran dramatically over budget and have not presented as value for money for the taxpayer, with some projects costing more to cancel than to complete. An in-depth study, conducted by the National Audit Office of the United Kingdom concluded that the private finance initiative model had proved to be more expensive and less efficient in providing hospitals, schools and other public infrastructure than public financing. In economic theory, public–private partnerships have been studied through the lens of contract theory. The first theoretical study on PPPs was conducted by Oliver Hart. From an economic theory perspective, what distinguishes a PPP from traditional public procurement of infrastructure services is the fact that in the case of PPPs the building and operating stages are bundled. Hence, the private firm has strong incentives in the building stage to make investments with regard to the operating stage. These investments can be desirable but may also be undesirable (e.g., when the investments not only reduce operating costs, but also reduce service quality). Hence, there is a trade-off and it depends on the particular situation whether a PPP or traditional procurement is to be preferred. Hart's model has been extended in several directions. For instance, authors have studied various externalities between the building and operating stages, insurance when firms are risk-averse, and implications of PPPs for incentives to innovate and gather information. Clarence N. Stone frames the public private partnership as 'governing coalitions'. In Regime Politics Governing Atlanta 1946–1988, he specifically analyzes the 'crosscurrents in coalition mobilization'. Government coalitions are revealed as susceptible to a number of problems primarily corruption and conflicts of interests. This slippery slope is generally created by a lack of sufficient oversight. Corruption and conflicts of interests, in this case, leads to costs of opportunism; other costs related to P3's are production and bargaining costs.