Background & Overview
Public private partnerships involve the private sector in the provision of public services. It changes the role of the public sector from owner and provider to enabler, purchaser and guardian of the public interest for the end users.
The public-private partnership model gained ground in the 1980s and 90s, consistent with the theme of rolling back government involvement in the economy. This is driven by the belief that the private sector could deliver services more cost-efficiently and effectively than the public sector. At a more fundamental level, it was driven by a desire to improve the public infrastructure without overburdening public finance.
Traditionally, the government sector designed, constructed, operated and delivered services. PPP involves s the private sector assuming responsibility for one or more of the above functions ranging from design, construction, operation, management, maintenance and finance. The customers, as end users, are the purchasers of the service either through the government or through payments of services or a combination.
The public sector commonly commissioned private sector contracts and competitions for the construction of public service facilities. The design was usually prescribed by the public sector, possibly following a competition. Public Private Partnership y its UK original name Private Finance Initiative (PFI) took the approach of prescribing sets of results or outputs while leaving it to the public sector to determine the entire solution as to how the will be delivered and provided.
A further aspect of this approach is that the public service is not buying assets but is instead buying services. Further, the asset or infrastructure would not appear as a liability on the public sector entity’s balance sheet, which is said to transfer risk from the public sector to the private sector.
It was generally assumed at the start that the public sector’s cost and finances were below that of the private sector. The public sector was assumed to be a risk-free borrower that was able to raise funds at rates which would be below the private sector equivalent, which carried a default risk. These assumptions have been somewhat challenged by the financial crisis of 2008 forward.
It is assumed that the private sector’s greater cost of capital is offset by its bearing of certain risks and its overall ability to deliver services more efficiently than the public sector. By purchasing outcomes and services, the private sector is bearing certain elements of risk in that the public sector will only pay for services delivered. There is an attempt to lower the lifecycle cost for the assets and related services.
The principle of PPP is that the risk should be borne by the entity best able to manage it. The price being paid for the private sector bearing a particular risk should be value for money. It is presumed that the private sector is in a better position to manage and control risk.
The private finance initiative was launched in the United Kingdom in 1992. Most of the initial projects comprised services sold to the public sector as purchasers and users. The private sector financed and procured assets, providing services in relation to them, including maintenance. This included large capital assets such as hospitals, government accommodations, prisons, and schools.
Free-standing operations allowed the private sector to provide for the design, construction, operation, maintenance and financing of an asset. The cost was recouped over the life of the asset.
The joint venture project may involve a mix of end-user charges and public subsidy or contribution. There may be a direct contribution such as capital grants, contribution or other payments. In urban regeneration schemes, parties may donate surplus land as part of the consideration for regeneration for civic projects.
PFI was launched by the conservative government in 1992. The involvement of the private sector in public service delivery dates back to 1980. The Chunnel Tunnel was one of the earliest private-sector projects, and it was awarded without public-sector capital. Similarly, a number of bridges, including the Severn Bridge, were built in accordance with PFI principles.
The Irish PPP initiative was established in the late 1990s, based on experience with the PFI in the UK, the Irish PPP unit within the Department of Finance, published guidance and indicative approaches to a range of PPP issues.
The Public Private Partnership Act 2002 was passed to remove any doubts about the ability of Irish public authorities under their constituent statutes to enter public-private partnership-type arrangements. Most public bodies are set up under legislation which defines a limited power. Because the PP types of procurements and arrangements work wholly outside the traditional modus operandi of such bodies, a general piece of legislation was necessary to confirm the requisite powers.
The National Development Finance Agency Act 2002 established the National Development Finance Agency. Its role is to advise state authorities on
- the best means of financing public investment projects
- how to achieve value for money and
- provide advice in relation to finance insurance risk analysis in public investment projects
The NDFA has the power to advance money and enter into financial arrangements with respect to projects approved by a state authority. The Agency was expanded to include specialist PPP procurement functions. This was embodied in the National Development Finance Amendment Agency Act 2007. This latter act expands the role of the NDPA to enter PPP arrangements with a view to transferring rights and obligations under the arrangement or to act as an agent for the state authority in entering the PPP arrangement. The arrangements do not apply to road and rail sectors, for which other agencies and arrangements exist.
The agency is responsible for procuring projects within parameters set out by the sponsoring Department or the agency itself. It hands over the responsibility for the operational phase to the Department after the construction and completion of the asset.
The central PPP unit in the Department of Public Expenditure facilitates the PPP process by developing a general policy and legal framework within which PPPs operate. It provides guidance to departments and state authorities. It has published its guidance, which is available on the Internet.
The central PPP unit chairs a high level steering committee which oversees progress on PPP projects.
Irish PPP projects have tended to operate within niche areas. Several have been completed on a concession basis, while others are operated on a design-build, finance operation and management basis. The new Criminal Courts complex was built on a DBFOM basis in 2009. It is operational contract runs to 2035.
A number of bundles of schools at all levels operate on a PPP basis on a design, build, finance and operate basis. A number of sewage schemes have been provided on a design, build, and operate basis.