Public Private Partnerships projects - Guide to PPP

Guide to PPP

What?
In the past, it was usual for private sector organisations to work for the public sector as paid contractors on infrastructure projects. However, there has been a shift towards the private sector working more alongside the public sector, providing finance towards the project and sharing some of the risks. Any such arrangement can be called a Public Private Partnership (PPP).

Since the 1990s, a particular form of PPP projects has been in the limelight in the UK: the Private Finance Initiative (PFI). Under PFI, the private sector pays for construction of hospitals, schools and other projects, and then fully services and maintains the infrastructure for up to 30 years. In return the public sector makes an annual payment.

Why?
A key advantage for the public sector is that there is no need to pay up-front for the new infrastructure. Instead the costs are spread over many years. This has allowed extensive construction of infrastructure without substantial tax rises.

Another advantage is the sharing of some risks. For example, there is a long history of delays and cost overruns in the construction of public facilities and infrastructure. But under PFI there is a fixed price for a fixed date of completion; if there were any overruns, the public sector would receive compensation payments.

How?
Private sector companies such as Carillion form Special Purpose Companies (SPC), sometimes as joint ventures with other companies, to bid for the design/finance/build/maintain/service of PPP projects.

The SPC can raise private finance for a project in two ways:

• equity investment - the companies behind the SPC will provide money in return for shares.
  As shareholders they may also loan money in the form of subordinated debt.
• secured debt - this takes the form of long-term bank loans or bonds that are secured on the assets of the SPC.

Once private finance has been raised, and contracts signed, the SPC will then commission contractors - such as Carillion - for the design and build phase, as well as for on-going property and facilities services.

Each year, the public sector will pay the SPC the agreed annual fee, subject to deductions for any poor performance. The SPC uses this revenue to fund operations, repay debt, and provide a return to investors.