Public Private Partnership: A new way of community Growth

Public private partnership is a joint effort of the government and the private sector. It finances, builds, operates and maintains public infrastructure and services.

In today’s time, governments struggle to deliver quality public services. The limited budget further adds to these challenges.

Public assets like roads, hospitals, schools, and railway stations need significant investments.

Advanced technology and effective management are also necessary in building these services.

This is where public private partnership play a vital role. You can say it is a mix of the public sector’s duty with the private sector’s innovation and efficiency.

Together, they can boost a country’s development.

Sounds empowering, right? Yes, public private partnership helps in a country’s upgradation in many ways.

In this blog, we will explore the benefits, challenges, process and more. Keep reading.

What is a public-private partnership?

In simple words, the answer to your question, what is public private partnership means:

A long term contractual agreement between government authorities and a private entity.

To make it simpler for you in a public private partnership

• Firstly, the government informs about the public standards and needs
• After being informed, the private partner designs, finances, and builds this project. In some cases, the private partner also operates this project.
• During the process, risks and rewards are shared between both partners or parties

Traditional government contracts are different from public private partnerships. A public private partnership focuses on performance based outcomes.

What are the benefits of a public-private partnership?

The public private partnership offers various advantages. It assists businesses, governments, and citizens. Want to know what the benefits are? Let’s go

• Firstly, better infrastructure solutions help to develop countries and communities. Also, public private partnership give easy access to vital services for everyone.
• Private sectors provide professional management, technology and innovation to the projects. This helps in enhancing the service quality and project efficiency.
• Moreover, a faster delivery of projects: Yes, you heard it right. Public private partnership reduce delays by combining private funding and expertise.
• The sharing of risks, such as financial, operational, and construction, involves multiple parties. These risks are allocated to the parties who have the best resources to manage them. It means high quality service with less cost and waste.
• The concise use of public funds takes place in public private partnerships. Governments use this to avoid large capital expenditure. This frees public funds for other social programs.

If you have read so far, I know what you are thinking, possibly.  The world of the internet needs modern technology for fast paced works, right?

• Yes, in a public-private partnership, private partners use smart systems and new technologies. They develop digital solutions. This helps in ensuring better asset quality over time.

Is there any challenge in public-private partnerships?

Any kind of partnerships involve some of the challenges. The public private partnership is not an exception in this.  Yes, on one hand, it offers various benefits as I mentioned before. However, on the other hand, it brings various challenges.

1. The legally and financially complex agreements often demand expert planning and negotiation
2. If contracts are poorly structured, the public sector may still bear significant risks. They bear a significant amount of financial and operational responsibilities.
3. A delayed implementation occurs in the case of land acquisition, regulations, and approval. This causes delays in projects.
4. If you look at the transaction costs, they are expensive. Feasibility studies, legal advice and so on are costly.
5. Inaccurate costing is another challenge in public private partnerships. In some areas, governments are not experts, but a private partner is. Here, examining the cost proposals can be a challenge.
6. The absence of competition in certain projects reduces cost-effectiveness. This impacts the partners negatively.

Key features of Public-Private partnership

The public private partnership is a unique approach on its own. In contrast to other government partnerships, the public private partnership is:

• Performance-based payments mean shared risks and values.
• Secondly, the long term contracts usually last from 10 to 30 years. These contracts help in maintaining the public assets for a long period of time
• The risks and rewards both are shared. This means the private partners don’t need to worry about worthy compensations. The public partner has a lower risk of wasting resources.
• Private financing or co financing ensures the completion of the projects. The completion happens within a certain time.
• In public private partnership, the outcome is more important than the inputs. This helps to assure a high quality public service and assets.

What are the types of public-private partnerships?

There are various public private models. Each one of these are designed for different project needs. The list below is simplified for you:

• Build-Operate Transfer (BOT)

(i) The private sector designs, finances, and builds a facility. The private sector also operates the facility.

(ii) After this, they transfer it to the public sector after a specific time

(iii) Here, the private partner recovers costs through revenue. It is generated in the operation phase.

In recent times, you can find that there are other models of public private partnership. These are:

• Engineering, procurement and construction (EPC):

(i) In other words, you can call it a turnkey model.

(ii) It is a contracting arrangement in the construction and infrastructure sectors

(iii) EPC is often compared with PPP models, but it is not considered a true PPP because the government bears most risks.

(iv) After completing the project, it is handed over to the government. They take care of the maintenance.

• Hybrid Annuity Model (HAM):

(i) It is a very new approach of public private partnership

(ii) It blends the elements of the BOT and EPC model

(iii) Under the HAM model, the government takes care of 40% of the project cost

(iv) The private partner bears the 60% of the project cost. This occurs under this model of private public partnership.

(v) The government pays annuity payments to the private partners. These payments occur over the concession period.

• Toll-operate Transfer (TOT) Model:

(i) Similar to HAM, TOT is a very recent venture in infrastructure development

(ii) It is mainly used in making roads

(iii) In this type of public-private partnership, governments give things like highways to private companies.

(iv) The private partners then operate and maintain these assets.

(iv) It usually ranges from 15 to 30 years of time

(v) The collection of toll taxes is a compensation for the private partners under this model.

The different government schemes for Public private partnership

Do you know that the government of India has different schemes? These schemes support public private partnerships. Yes, that’s true. There are various initiatives to encourage this partnerships. These schemes are as follows:

1. VGF (viability Gap Funding) scheme funds up to 40% of the cost of projects. This funding is accessed in the form of capital grants.

2. IIPDF stands for India Infrastructure Project Development Fund. It supports central, state governments and local bodies by giving financial aid.
3. IIFCL stands for India Infrastructure Finance Company Limited. It grants long term debts to infrastructure projects.
4. FDI or Foreign direct investments provides 100% equities SPVs in the public private partnership sector. This allows access for many sectors.

How to form a public-private partnership?

If you have read so far, and are thinking about the process of public private partnership, let me tell you this:

Though there is no specific process for the public private partnerships, it generally follows:

• The government identifies the priority sectors for projects. It includes healthcare, roads, energy or water
• A detailed examination of costs, demand and risks in the project.
• Project approvals, infrastructure and risk allocation for the projects
• After this, a competitive bidding takes place to select the best private partner
• A management of contract is made to manage performance, service quality and compliance
• Lastly, the transfer of the asset or contract takes place

Final Thoughts

To sum up our discussion, the public private partnerships are powerful tools. It helps in sustainable development. When designed and managed well, public private partnership deliver a good infrastructure. Besides this, efficient services and long-term value for money are also important.

Moreover, we need to remember that success depends on clear policies. Success also depends on fair risk sharing. Here, strong governance and clear processes also matter. Governments need to focus on public interest. Private partners need to commit towards quality and accountability.

FAQs

1. What sectors commonly use public private partnerships?

The sectors like transport, healthcare, water supply, energy, and education commonly use public private partnerships. This applies to many other sectors as well.

2. Are public private partnerships suitable for developing countries?

Yes, public private partnerships help developing nations to attract investments, technology and expertise. These partnerships are used for large-scale structures.

3. Who bears the financial risk in public private partnerships?

Here, the financial risks are shared. But the private partners bear the construction and operational risks.

Disclaimer 

This article is for informational purposes only and does not constitute legal advice. Online Legal India is a digital platform. If you require legal assistance, we strongly recommend consulting a qualified lawyer or law firm.