PPP: What is it?
PPP stands for public-private partnership. PPP is a kind of cooperation between public-sector clients and businesses in the private sector who act as contractors. Their purpose is to realize public-sector infrastructure projects as quickly as possible and to a high standard of quality, and make them available to the public. In public-sector building construction, for instance, such projects take in schools, town halls, hospitals, police stations or cultural buildings. In the area of long distance road-building, they include highways, bridges or tunnels. The business model is also known as P³ or private finance initiative (PFI).
How does PPP work?
Businesses in the private sector are contracted by the public sector with the planning, financing, construction or refurbishment of public buildings or transportation projects. After completion, they operate the projects for several years or even decades. In doing so, as a rule the company will provide all services from a single source—delivering an all-in package. In exchange it receives regular payments from the public-sector client throughout the contract term of up to 30 years. All services and remuneration are set out in the contract. This means that remuneration depends on the contractor fulfilling its duties: only if the performance is delivered does the company receive money. At the end of the contract term the buildings, roads, bridges or tunnels are returned to the public sector in perfect condition and debt-free. Ownership generally remains with the public-sector cost carrier during the entire period.
What are the advantages?
PPP makes it possible to realize urgently needed infrastructure projects quickly, economically, and to a high standard of quality. At the same time, the business model is not a purely a financing vehicle. PPP projects are also completed faster and deliver high quality. These two points are set out in the public-sector client’s contract and are guaranteed by the private-sector partner throughout the entire contract term. The private-sector contractor invests its capital in the project and brings in its technical know-how. This is efficient because it provides all services from a single source—from planning through financing and construction to operation. This means that early on in the planning stage, the company can already give thought to what will be necessary during later operation, and optimize workflows. This can help to reduce construction time. The public-sector client does not need to use any of its own resources for the construction work and thus makes savings. In addition, the client can plan its budget reliably and over the long term because the private-sector contractor’s remuneration has already been determined for the entire term of the contract. Once the contract expires the private-sector partner is required to hand over the project to its public-sector partner in a previously defined perfect condition. Another reason why it is in the former’s interests to use the very best materials.
What is the difference to conventional construction bidding?
With a conventional bid, the public-sector client will put the services such as planning, construction and maintenance out to tender individually, awarding the contracts to private-sector companies. It remains responsible for financing the construction project and must therefore either use available public funding or take out a loan. It has to organize operation with its own personnel and own equipment or have it handled by specially contracted external service providers. In this case, the public-sector client bears all investment and operating risks. If the contract is awarded on a PPP basis, the private contractor provides all services from a single source: it handles planning, financing, construction and/or refurbishment, as well as operation and maintenance. The contractor bears the investment and operating risks.
Critics say that PPP is more expensive than conventional models. Is this true?
PPP is not more expensive that conventional procurement. On the contrary: A comparison of costs usually shows in favor of public-private partnerships. This is easy to explain: An all-in package of services from a single source is more likely to be more competitively priced than the sum of many individual contracts. At the same time, it is in the company’s own interests to constantly optimize project costs—after all, it wants to make a profit. To achieve this it dovetails planning, construction and later operation. This is efficient and, as a rule, it saves more money than the public-sector client could save by taking out a low-interest loan itself. In addition, the company’s remuneration depends on whether it provides the contractually agreed services in full and on time. If the public infrastructure is not available to the citizens as agreed, the company has to expect significant deductions from its remuneration. Last but not least, the public sector benefits from PPP thanks to the low administration costs because PPP projects tie up only few public-sector administrative resources. In case PPP should not be the best economic solution for a project, the project has to be awarded under a different model – that’s something all parties involved agree on. Economic viability continues to have top priority.
To what extent does HOCHTIEF handle PPP projects?
At the moment our PPP specialists are working on several dozen projects worldwide: These include, for instance, the new ballet rehearsal building in Düsseldorf, the police headquarters in Aachen, and the Berlin-Brandenburg State Laboratory (Fotos). With the A7 in northern Germany and the A6 in Baden-Württemberg we are involved in two of Germany’s currently most important highway projects. In Canada we are building one of the most important transportation infrastructure projects in North America—the New Champlain Bridge. We have realized numerous other PPP projects through out participating interests in Australia and North America.