Origin and principle of Public-Private Partnership
Public Private Partnerships (PPPs) are used to enable public authorities to call on private providers to finance and manage equipment or infrastructure contributing to the public service. This is a way of organising the public service but also a method of financing whereby the private service provider is remunerated by the public partners or by the users of the services provided.
Limited recourse finance for public infrastructure projects were already relatively known in the 80s’ but became known as PPPs in 1992 in the UK and were actually implemented in 1997 under Tony Blair, mainly in the health sector. This financing model was imported to France in 2004 under the name “Contrat de partenariat de l’ Etat et de ses établissements publics”. These types of contracts are most often used to finance motorways, railways, hospitals, etc.
This form of financing therefore allows the Public sector, and consequently individuals, to benefit from the initiatives developed by private companies. The local authorities do not therefore provide the initial investment for the work, but they may undertake to pay rent or other compensation of services over the long term. In certain cases, the public sector only provides for a concession to operate but gives only limited or non-financial backing for the projects.
The rationale for the model has been at least three folds:
- Productivity gains which have been believed to be gained from the assumed higher productivity in the private sector,
- Efficient risk sharing which allows the risks being absorbed by the party which is most suitable to do so,
- And reduced tax payor burden given the limited public sector investment in the projects.
What are the limits of the model?
The Public sector has allowed the private sector to acquire in some cases an oligopolistic situation. Some sectors have become cash cows, such as the British railways or electricity distribution most notably in the US but also in the first European countries where the electricity market has been liberalised. As a result, the level of service has in many cases declined and profits have been received by the private sector. In these cases, the general public has not benefited of improved public service.
Secondly, the idea of efficient risk sharing also relied on the private sector’s assumed capacity to produce service more efficiently than the public sector. Debate of this being or not being the case has remained open and seemingly anecdotal evidence talks both ways without consensus outcome. Or differently, this method of financing may or not bring any clear benefits in terms of management efficiency. The opinions here would seem to reflect political inclinations more than proven statistical evidence.
Finally about the cost, PPP as a finance method allows the Public sector to undertake development projects without initial cash expenditure. The Public sector thus avoids the indebtedness related to the construction costs. In the PPP cases where the public sector undertakes to act as the ultimate pair of services, the public will have to pay fees and/or rent for years to its private partner. These payment undertakings, while typically conditional upon service provider performance, simply represent a replacement for a debt service and operating payments. In a PPP, the private sector provider of services raises debt to a price that represents the basket of risks including the state backing, private sector performance risk and commercial premium.
PPP can be a short-term decision, which, in part, is often due to budgetary restrictions and political convenience. Thinking about saving money, the cost of long-term partnerships by way of payment or guarantee undertaking can often exceed the alternative cost of the project.
And finally, a criticism of the model is that this type of contract benefits only large groups but rarely SMEs with limited investment capacity.
Despite the limitations of the model, why do communities use this form of funding?
The use of this form of financing is largely linked to the off-balance sheet accounting system. Indeed, PPPs are not taken into account in the calculation of the public debt even when the contract requires the payment of a rent to the private contractor.
In order to illustrate this transfer of risk, the Court of Auditors’ calculations show that between 2020 and 2036, the rents for PPPs for prisons represent 40% of the prison building’s loans, whereas they represent only 15% of the places.
PPPs are therefore widely used to camouflage part of the public debt.
Today, the MFI wants to return to a much stricter public service balance sheet presenting all balance sheet and off-balance sheet expenses.