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A smarter way of thinking about public-private partnerships
Public-private partnerships (PPP) are becoming an increasingly popular way to build large infrastructure projects. Compared to traditional procurement solutions, these solutions show a much greater level of private sector involvement in order increase the efficiency and effectiveness of a project throughout its life cycle than development by the end of the operational phase. PPPs can also spread the cost of a project over a longer period of time, thereby freeing up public money for investment in sectors where private investment is impossible or otherwise inappropriate. However, PPPs should not be seen as an instrument to address budgetary constraints or public sector financing gaps, but rather as a tool to deliver efficient, profitable projects and related services.
Too often, however, these initiatives fail to achieve optimal private sector participation and, as a result, face the same challenges as traditionally procured public projects - cost overruns, delays and increased complexity. What is happening? The main challenge is that governments may not take full advantage of the real benefits of private sector stakeholder engagement: their ability to assess, measure and manage certain types of risk. PPPs that do not transfer risk - and use private sector risk management capabilities - are unlikely to live up to expectations
Government decision-makers can work with the private sector to improve their performance and better manage the risks associated with undertaking a major project. The transfer of identified project risks and responsibilities throughout the project life cycle - including development, construction and operation - to private sector investors (and lenders) takes advantage of the risk management capabilities of the private sector and the relevant markets while the public sector often remains the legal owner of the project. This approach often entails a risk premium which in large private projects is a central part of the cost equation and as such should be included in the PPP account.
As governments seek to modernize infrastructure and tackle the challenges of climate change, the need for private sector involvement has increased. Through considering and pricing risks in a comprehensive and transparent manner governments can benefit from the real knowledge of private entities. Finding the optimal level of private sector participation and risk transfer should result in more projects being delivered on time and on budget, better use of government resources, and benefits for the end-users of these projects, that is, the general public.
It may be a more efficient and effective approach to use private sector risk management capabilities for governments implementing public-private partnerships for large infrastructure projects.
Royal Oakland Limited