Public-Private Partnerships

• Author: Michael B. Gerrard
• Position: Head of Public Private Partnerships at Partnerships UK

What are public-private partnerships, and how do they differ from privatizations?

Public-private partnerships (PPPs) are generally not "privatizations" in the sense that the latter term is most commonly used. (See Box 1.) A privatized business is one that was formerly owned by the public sector and is now owned by the private sector. It may operate in highly competitive markets-as, for example, an airline does-or it may hold a monopoly position and so require active regulation once it is transferred to the private sector-as a utility company does. In either case, the public sector is disengaged from the business.

Box 1. What is a public-private partnership?

Public-private partnerships (PPPs) combine the deployment of private sector capital and, sometimes, public sector capital to improve public services or the management of public sector assets. By focusing on public service outputs, they offer a more sophisticated and cost-effective approach to the management of risk by the public sector than is generally achieved by traditional input-based public sector procurement.

The discipline of drawing up a PPP contract between a public sector client and a private sector contractor, on the one hand, obliges the public sector to articulate its long-term service needs (which could be the provision of, for example, transport, education, or health sector services) and, on the other hand, ensures that the private sector will not put its capital at risk to deliver these services unless and until it is satisfied about the PPP's long-term sustainable performance. As such, PPPs can be an effective antidote to the temptations of short-termism in both the public and the private sector.

Many build-operate-transfer-style concession agreements could be classified as PPPs, insofar as the public sector remains ultimately accountable for delivery to the public of the underlying services, which is the case under the U.K. government's Private Finance Initiative (PFI). Examples of such agreements within the United Kingdom include the provision of schools or hospital accommodations and supporting services under long-term contracts, where payment by the public sector client (authority) to the private sector service provider (contractor) is spread over the term of the contract (for example, 30 years) and, furthermore, where payment is made only to the extent that the required outputs (service standards) are maintained, year after year.

By contrast, a PPP is a business relationship between the public and private sectors that is not patterned on either of these models. In the case of a Private Finance Initiative (PFI) project, the business is defined by a long-term contract in which public services to be delivered by the PPP-the outputs-are specified in great detail. In its form as an equity joint venture between the public and private sectors, a PPP is a business with certain public sector obligations set out in its constitutional documents or...