Understanding Public-Private Partnerships

By Chongo Sombo Mulenga (MCIArb)

Like many countries, Zambia’s economy was rattled by the Covid – 19 pandemic. I gather that economic experts project that the global economy is heading for a recession. However, as the old adage goes, “the show must go on!” and now more than ever PPPs have been identified as fundamental tool that developing countries can utilize to facilitate public infrastructure development and social service delivery.

PPPs are an innovative way for governments to procure public assets and provide public services substantially supported by the resources and expertise of the private sector. The government benefits from the expertise of the private sector which brings new solutions to the table and resolves the challenges of dilapidated or non – existent infrastructure.
Additionally, the private sector contributes to efficient delivery of public services and allows the government to focus on primary functions such as policy, planning and regulation. PPPs are especially enticing when the private sector brings in technological advancements and innovation.

Although PPPs are generally financed by the private sector, a private party recoups its investment through user fees charged over the lifetime of the project and/or payments from the government, if so agreed by the parties. As PPPs are capital intensive, the duration of PPP agreements generally ranges between 20 to 30 years, or even more, so as to allow the private party adequate time to profitably recoup its investment without charging user fees that are burdensome.

Under a PPP agreement, the private party is not only responsible for financing the project but also designing, building, operating and maintaining the project infrastructure such as a road or hospital. On the other hand, the public partner monitors the private party’s performance and compliance with the project objectives. Considering that the private party’s remuneration is generally linked to performance, risk allocation is a critical aspect of PPPs.

Efficient risk allocation is crucial to achieving value for money in PPPs as it incentivizes sound risk management and, in turn, reduces costs and enhances project benefits. It is a basic principle of PPPs that project risks should be allocated to the party that is best suited to mitigate and manage the risk. During negotiations, risks are identified, assessed and distributed between the public and private sectors. However, more often than not, the private party bears significant risk and management responsibility as the private party has a greater involvement in the implementation of the project.

To sum it up, PPPs are characterized by public and private sector collaboration in the provision of services or development of assets that fall within the mandate of a public body. The public and private sectors both have a stake in the PPP project as the private party seeks to recoup its investment whereas the public sector is mainly interested in the development of public infrastructure and delivery of social services, hence the term “partnership”.

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