At a high level, a PPP is a contract through which a public sector sponsor (government, municipality or agency) grants a qualified private sector company the rights to operating, financing and/or building a public infrastructure asset (airports, roads, hospitals, bridges, schools or any other asset) for a long term (generally 20 to 50 years), during which the private sector company is allowed to earn an income from the operation of that asset.
PPP is not privatization where a public asset ownership is transferred to a private owner. Under the model, the infrastructure assets built and/or operated by the private sector remain under the public sector ownership.
PPPs have become popular as an alternative infrastructure procurement method that provides the public sector with low or no debt financing and risk transfer opportunities. PPP contracts allow private sector companies to raise the capital to build the projects. If financed without a government subsidy or grant, PPP projects do not raise the public debt and allow the project costs to be spread over the life cycle of the infrastructure asset in the form of taxes or user fees.
Private sector companies are expected to improve the infrastructure operation efficiencies and risk management by use of their technical expertise and management skills. PPPs are not cheap due to private sector borrowing costs (cost of debt) being higher than the public sector's and private shareholders' expectations for profits (cost of equity) for their equity investments.
In principle, in order for a PPP model to be effective beyond being a low-debt public financing mechanism, the value provided by the private sector efficiencies and risk expertise needs to exceed the evaluation costs as well as the costs of equity and debt.
