WHAT IS PPP?
PPPs consist of long term agreements between the public and private sectors aiming at the provision of public services by relying on the private sector’s competence and its financial capabilities and expertise. Such partnership is not a partnership in capital nor in profits, but rather a partnership in risks, whereby the public sector transfers some of the project’s risks to the private sector and retains other risks according to each party’s ability to manage these risks.
Contrasting PPP to standard traditional procurement, the latter specifies inputs, fixing as such all variables of a project except for the price, which determines the winning bidder, whereas PPP specifies outputs taking advantage as such of all the benefits that the private sector can bring to a project, and putting all variables, including price, subjected to scrutiny.
PPP is often misperceived as privatization by the public. While privatization involves the sale of assets the receipt by government of a payment for the assets transferred, PPP involves the acquisition of assets and the payment by government for services rendered by the private sector and for the amortization of the acquisition price of the asset.
As such, privatization involves the transfer of all risks and benefits to the private sector, while PPP consists of risk sharing with the private sector.
Another misconception involves comparing the cost of government funds or the sovereign debt rate to private financing which includes a component of equity return. such comparison is flawed since
– It assumes that the project cost is the same regardless;
– It does not quantify and account for risks;
– It does not include the cost of impact on overall sovereign debt; and
– It does not include overall benefits to the economy.