Also called PPP, P3 or Triple-P, a Public-Private Partnership, at a high level, is a contract through which a public sector sponsor (government, municipality or agency) grants a qualified private sector company (a partnership of expert companies typically called SPV) 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 this model, the infrastructure assets built and/or operated by the private sector remain under the public sector ownership. Building, Operating and Maintenance is privatized. At the end of the PPP contract, the asset is turned over back to the public sponsor
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 availability payments, 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) and private shareholders' expectations for profits (cost of equity) for their equity investments being higher than the public sector's borrowing costs.
If the SPV (the private sector partnership) fails due to low user volume, the public sponsor may need to assume the operation and the unpaid debts. If the user volume is guaranteed through availability payments by the public sponsor, user volume risk is borne by the public.
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 must exceed the private sector cost of equity and debt in addition to PPP proposal evaluation costs.
