Public Private Patnerships

Public-Private Partnerships (PPPs): Definition,
How They Work, and Examples

By
THE INVESTOPEDIA TEAM
Updated June 06, 2024
Reviewed by
JEFREDA R. BROWN
Fact checked by MELODY KAZEL
Investopedia / Zoe Hansen
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What Are Public-Private Partnerships?

Public-private partnerships involve collaboration between a government agency
and a private-sector company that can be used to finance, build, and operate
projects, such as public transportation networks, parks, and convention centers.
Financing a project through a public-private partnership can allow a project to be
completed sooner or make it a possibility in the first place.
Public-private partnerships often involve concessions of tax or other operating

revenue, protection from liability, or partial ownership rights over nominally public
services and property to private sector, for-profit entities.
KEY TAKEAWAYS
 Public-private partnerships allow large-scale government projects, such as

roads, bridges, or hospitals, to be completed with private funding.
 These partnerships work well when private-sector technology and innovation
combine with public-sector incentives to complete work on time and within
budget.
 Risks for private enterprise include cost overruns, technical defects, and an
inability to meet quality standards, while for public partners, agreed-upon
usage fees may not be supported by demand—for example, for a toll road or
a bridge.
 Despite their advantages, public-private partnerships are often criticized for
blurring the lines between legitimate public purposes and private for-profit
activity, and for perceived exploitation of the public due to self-dealing and
rent-seeking that may occur.
How Public-Private Partnerships Work

A city government, for example, might be heavily indebted and unable to undertake
a capital-intensive building project, however, a private enterprise might be
interested in funding its construction in exchange for receiving the operating
profits once the project is complete.
Public-private partnerships typically have contract periods of 20 to 30 years or

longer. Financing comes partly from the private sector but requires payments from
the public sector and/or users over the project's lifetime.
The private partner participates in designing, completing, implementing, and

funding the project, while the public partner focuses on defining and monitoring
compliance with the objectives.
Public-private partnerships are typically found in transport and municipal or

environmental infrastructure and public service accommodations.
Risks are distributed between the public and private partners through a process of
negotiation, ideally though not always according to the ability of each to assess,
control, and cope with them.
Although public works and services may be paid for through a fee from the public
authority's revenue budget, such as with hospital projects, concessions may involve
the right to direct users' payments—for example, with toll highways.
In cases such as shadow tolls for highways, payments are based on actual usage
of the service. When wastewater treatment is involved, payment is made with fees
collected from users.
Advantages and Disadvantages of Public-Private
Partnerships
Advantages
Partnerships between private companies and governments provide advantages to

both parties. Private-sector technology and innovation, for example, can help
improve the operational efficiency of providing public services.
The public sector, for its part, provides incentives for the private sector to deliver
projects on time and within budget. In addition, creating economic diversification
makes the country more competitive in facilitating its infrastructure base and
boosting associated construction, equipment, support services, and other
businesses.
Disadvantages
There are downsides, too. The private partner may face special risks from engaging
in a public-private partnership. Physical infrastructure, such as roads or railways,
involves construction risks. If the product is not delivered on time, exceeds cost
estimates, or has technical defects, the private partner typically bears the burden.
In addition, the private partner faces availability risk if it cannot provide the service
promised. A company may not meet safety or other relevant quality standards, for
example, when running a prison, hospital, or school.
Demand risk occurs when there are fewer users than expected for the service or
infrastructure, such as toll roads, bridges, or tunnels. However, this risk can be
shifted to the public partner, if the public partner agrees to pay a minimum fee no
matter the demand.
Public-private partnerships also create risks from the general public's and
taxpayers' point of view. Private operators' partnership with the government may
insulate them from accountability to the users of the public service for cutting too
many corners, providing substandard service, or even violating peoples' civil or
Constitutional rights.
At the same time, the private partner may enjoy a position to raise tolls, rates, and
fees for captive consumers who may be compelled by law or geographic natural
monopoly to pay for their services.
Lastly, as with any situation where ownership and decision rights are separated,
public-private partnerships can create complex principal-agent problems.
This may facilitate corrupt dealings, pay-offs to political cronies, and general rent-
seeking activity. This would happen by attenuating the link between the private
parties who make important decisions over a project, from which they stand to
benefit, and accountability to the taxpayers who foot at least part of the bill and who
may be left holding the bag in terms of ultimate liability for the project's outcome.
Examples of Public-Private Partnerships

Public-private partnerships are typically found in transport infrastructure such as
highways, airports, railroads, bridges, and tunnels.
Examples of municipal and environmental infrastructure include water and

wastewater facilities. Public service accommodations include school buildings,
prisons, student dormitories, and entertainment or sports facilities.
What Is an Example of a Public-Private Partnership?

Public-private partnerships can be found in infrastructure projects such as in
building toll roads and highways. One example is Canada's 407 Express Toll Route
(407 ETR). This 67-mile stretch of highway was a PPP between the provincial
government of Ontario and a private consortium that was responsible for the
design, construction, financing, and maintenance of the highway with a lease term
of 99 years, during which time they are permitted to collect tolls from users of the
roadway. However, traffic levels and toll revenues were not guaranteed by the
government).1
What Is Revenue Risk in a Public-Private Partnership?

Revenue risk is the chance that the private party to a PPP will not be able to
recover its costs or ongoing expenses from operating a piece of infrastructure. For
a toll road, this may be due to lower-than-expected traffic or limits set on toll rates.
Extensive studies should be conducted ahead of time to avoid this risk and plan for
contingencies.
What Are Some Types of Public-Private Partnerships?
Public-private partnerships can be arranged in several ways. Here are just a few:
 Build Operate Transfer (BOT): A government hands overall construction

and operations to a private party for a set number of years (often several
decades or more). After that period of time, it is transferred to the
government.
 Build Operate Own (BOO): The same as a BOT, but the private entity is not
required to ever transfer the project to the government.
 Design-Build (DB): A government contracts with a private party to design
and construct a project for a fee. The government retains ownership and may
either operate it itself or contract out operations.
 Buy Build Operate (BBO): a government sells a pre-existing project that has
already been completed and may have been operated by the government for
some time to a private party, who will take it over fully. The private party may
need to invest in rehabilitating or expanding the project.
The Bottom Line

Governments use public-private partnerships to collaborate with private-sector
companies in order to finance projects. While there are benefits and drawbacks to
these types of partnerships, governments still use them frequently to finance
transportation, municipal, and environmental infrastructure, as well as public
service projects.

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Public-Private Partnerships (PPPs): Definition,

How They Work, and Examples

Updated June 06, 2024

Investopedia / Zoe Hansen

What Are Public-Private Partnerships?

Public-private partnerships often involve concessions of tax or other operating

 Public-private partnerships allow large-scale government projects, such as

How Public-Private Partnerships Work

Public-private partnerships typically have contract periods of 20 to 30 years or

The private partner participates in designing, completing, implementing, and

Public-private partnerships are typically found in transport and municipal or

Partnerships between private companies and governments provide advantages to

Examples of Public-Private Partnerships

Examples of municipal and environmental infrastructure include water and

What Is an Example of a Public-Private Partnership?

What Is Revenue Risk in a Public-Private Partnership?

 Build Operate Transfer (BOT): A government hands overall construction

The Bottom Line

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