Public-Private Partnerships
Michael B. Gerrard
What are public-private partnerships,
and how do they differ
from privatizations?
P
UBLIC-private partnerships (PPPs) are gen-
erally not "privatizations" in the sense that
the latter term is most commonly used. (See
Box 1.) A privatized business is one that was
formerly owned by the public sector and is now
owned by the private sector. It may operate in highly
competitive markets—as, for example, an airline
does—or it may hold a monopoly position and so
require active regulation once it is transferred to the
private sector—as a utility company does. In either
case, the public sector is disengaged from the business.
By contrast, a PPP is a business relationship
between the public and private sectors that is not pat-
terned on either of these models. In the case of a
48 Finance & Development / September 2001
©International Monetary Fund. Not for Redistribution
Private Finance Initiative (PFI) project, the business is
defined by a long-term contract in which public ser-
vices to be delivered by the PPP—the outputs—are
specified in great detail. In its form as an equity joint
venture between the public and private sectors, a PPP
is a business with certain public sector obligations set
out in its constitutional documents or within con-
tracts with the public sector.
In all cases, the scope of PPP business, and so its
potential for profit, are constrained contractually
rather than by market forces or the intervention of a
statutory regulator. Normal private sector incentives
for management still apply within a PPP, such as the
need to earn an adequate return on capital, but the
business is, in effect, passively regulated by virtue of the con-
straints placed upon it contractually and without the inter-
vention of a regulator.
Moreover, within a PFI project, the public sector pays for
services on behalf of the general public and retains ultimate
responsibility for their delivery, whereas the private sector's
role is limited to that of providing an improved delivery
mechanism for the services. In the privatized utility model,
by contrast, ultimate responsibility for service delivery is
transferred to the private sector.
The essential role of the public sector in all PPPs—
whether PFI project, joint venture, or other partnership
structure—is to define the scope of business; specify priori-
ties, targets, and outputs; and set the performance regime by
which the management of the PPP is given incentives to
deliver—and, in the case of PFI projects, also to pay for—the
services. The essential role and responsibility of the private
sector in all PPPs is to deliver the business objectives of the
PPP on terms offering value for money to the public sector.
PPPs cannot always be well described as "partial privatiza-
tions." For example, there is an important distinction
between, on the one hand, a private sector company in which
the public sector holds a minority equity stake but has no
influence on the objectives or operations of the company
(which most would agree was well described as a partial pri-
vatization) and, on the other hand, a joint venture between
public and private sectors whose business is constrained by
public sector considerations or a service contract under
which the public sector retains all its statutory functions.
Both of these are forms of PPP.
The PPP model is very flexible and visible in a variety of
forms. To date, most PPPs implemented in the United
Kingdom have been concerned with the delivery of services
to the public sector by a private sector partner under a long-
term contract. Agreements for more than 400 such PFI proj-
ects, with a combined capital value of more than £19 billion,
have now been signed in numerous sectors, including health,
education, transport, defense, information technology, envi-
ronmental protection, and government accommodation.
A successful PPP program will likely require a degree of
reform by both the public and the private sector to create the
right enabling environment. As such, there are clear draw-
backs to a PPP approach to the extent that these reforms may
delay implementation of investment. For the public sector,
reforms would typically include a move from input- to
output-based contracting, which may require significant
investment in developing skills and guidance on best prac-
tices; enactment of enabling legislation—for example, to
overcome issues of public sector vires (legal authority) and
taxation of PPP contracts; and institutional reform to assist
in prioritizing, providing resources for, and approving trans-
actions. For the private sector, reforms may be required to
build capacity in the provision of integrated whole-life-of-
asset-based services to the public sector and to provide long-
term (that is, 25 years or longer) project finance. Conversely,
©International Monetary Fund. Not for Redistribution
Box 1
What is a public-private partnership?
Public-private partnerships (PPPs) combine the deploy-
ment of private sector capital and, sometimes, public sec-
tor capital to improve public services or the management
of public sector assets. By focusing on public service out-
puts, they offer a more sophisticated and cost-effective
approach to the management of risk by the public sector
than is generally achieved by traditional input-based public
sector procurement.
The discipline of drawing up a PPP contract between a
public sector client and a private sector contractor, on the
one hand, obliges the public sector to articulate its long-
term service needs (which could be the provision of, for
example, transport, education, or health sector services)
and, on the other hand, ensures that the private sector will
not put its capital at risk to deliver these services unless and
until it is satisfied about the PPP's long-term sustainable
performance. As such, PPPs can be an effective antidote to
the temptations of short-termism in both the public and
the private sector.
Many build-operate-transfer-style concession agree-
ments could be classified as PPPs, insofar as the public sec-
tor remains ultimately accountable for delivery to the
public of the underlying services, which is the case under
the U.K. government's Private Finance Initiative (PFI).
Examples of such agreements within the United Kingdom
include the provision of schools or hospital accommoda-
tions and supporting services under long-term contracts,
where payment by the public sector client (authority) to
the private sector service provider (contractor) is spread
over the term of the contract (for example, 30 years) and,
furthermore, where payment is made only to the extent
that the required outputs (service standards) are main-
tained, year after year.
once the enabling environment has been established, the
time taken to implement transactions and the fixed front-
end implementation costs, for both public and private sec-
tors, should steadily decrease, as has been the experience in
the United Kingdom.
PPPs are certainly not an easy procurement option for the
public sector, nor do they offer a universal solution.
However, they do provide a flexible framework within which
the skills and resources of the private sector can be mobilized
to provide better-quality, sustainable, and more cost-effective
public services in the right circumstances. (See Box 2.)
Evidence to date within the United Kingdom, which shows
new investments in public services made through PPPs being
largely completed ahead of schedule and within budget, sup-
ports the conclusion that while it may initially be more
demanding for the public sector to contract on this basis,
very worthwhile gains are available.
Supplementing the flow of PFI projects in the United
Kingdom are a growing number of PPPs designed to make
Finance & Development / September 2001 49
more efficient use of existing public sector at the other. Outside the United Kingdom,
assets rather than deliver public sector ser- there are PPP businesses jointly owned by the
vices by constructing new assets. These PPPs public and private sectors, but with the
concern assets—which could be tangible majority ownership held by the public sector.
assets, know-how, or intellectual property— Examples include water utility companies
that have either a dual use or spare capacity. within continental Europe. The explanation
Sometimes, realizing their potential will of why the U.K. model of PPPs generally
require an equity joint venture between the involves effective control by the private sector,
public and the private sectors. These PPPs fall if not majority ownership, lies largely in the
under the U.K. government's Wider Markets role that private sector finance plays in creat-
Michael B. Gerrard is Head
Initiative. ing the necessary management disciplines for
of Public Private
Between these two established forms of a PPP and in achieving a transfer of risk that
Partnerships at Partner-
PPP—a concessions-based business (PFI pro- provides value for money. Even when day-to-
ships UK, a firm estab-
ject), on the one hand, and a joint venture day management of the PPP is firmly in the
lished by the U.K.
(Wider Markets project), on the other—lies a hands of the private sector, which is generally
government to accelerate
broad spectrum of possible PPP structures hav- the case in the United Kingdom, the PPP
the development, procure-
ing features of both. These combination part- must still operate at the boundary between
ment, and implementation
nership structures offer some of the greatest the public and private sectors in a way that
of such partnernships. He
potential for future application of PPPs because privatized companies generally do not—thus
is also a Visiting Lecturer
of their adaptability to the specific needs of the further highlighting its special character.
at Imperial College
public sector. For example, where the scope of The value that a private sector investor
Management School
future service delivery cannot be fully defined at seeks from a PPP is a return on its capital
(London).
the outset, greater emphasis on joint-venture employed—as a management incentive, this
mechanics and less on detailed output specifications may be is no different from what any other private sector business
required. Alternatively, a public sector authority may decide to seeks. The private sector investor may also have contractual
hold a minority equity stake in a PFI project it has commis- interests in the PPP, but these are normally free-standing and
sioned, to share in the profits generated by the business. arm's-length. The public sector, by contrast, will apply a
The spectrum of possible PPPs also extends from busi- much wider concept of value to its participation as an
nesses almost entirely controlled by the private sector, at one investor in a PPP than simply the return on its capital
end, to those almost entirely controlled by the public sector, employed—this could include other policy considerations.

Box 2
Why are governments turning to PPPs?
PPPs generally spread the costs of procuring an asset over
time and/or cause the associated capital expenditure to affect
private firms' rather than the public sector's balance sheets.
These objectives may be achieved by basing the procurement
on the public services required—that is, upon outputs—
rather than on the underlying assets, or inputs. Where public
sector capital budgets are constrained, there are obvious
advantages in adopting a PPP to deliver public services that
might otherwise be unaffordable to a government.
At the heart of all PPPs is the deployment of private sector
capital. Within a PPP framework, this can result in greatly
improved value for money for the government in terms of
the risks transferred to the private sector (in cases where the
latter is better able to assess the risks) and powerful private
sector incentives for the long-term delivery of reliable public
services. These benefits are sufficient to ensure that PPPs
often become the favored means of procurement, even
where public sector capital constraints do not apply. In
many countries, such as the United Kingdom, therefore, the
motivation for making greater use of PPPs is to obtain
increased value for money in the procurement of public
services.
Much of the improved value for money comes from the fact
that when private sector capital is deployed and is at risk—to,
for example, the long-term performance of public service deliv-
ery—the right commercial decisions are made about design,
operating regime, human resource planning, whole-life-of-asset
costings, and so on. For a fuller analysis of the drivers of value
for money, see Value for Money Drivers in the Private Finance
Initiative: A Report by Arthur Andersen and Enterprise LSE
Commissioned by the U.K. Treasury Taskforce (London: 2000).
PPPs operate at the boundary of the public and private sec-
tors, being neither nationalized nor privatized assets and ser-
vices. Thus, politically, they represent a third way in which
governments may deliver some public services. Moreover, in a
practical sense, PPPs represent a form of collaboration under
contract by which public and private sectors, acting together,
can achieve what each acting alone cannot. Numerous member
countries of the Organization for Economic Cooperation and
Development now have active PPP programs, as do a growing
number of developing countries.

50 Finance & Development / September 2001

©International Monetary Fund. Not for Redistribution
 The rules by which a PPP operates must be clearly articu-
lated within its constitutional documents or other contrac-
tual arrangements, so that the management team knows the
constraints within which it must run the business. These
constraints are also likely to be important influences on the
human resources strategy of the business and will affect the
PPP's approach to attracting and retaining the right manage-
ment and staff.
To harness the potential of PPPs requires that their unique
characteristics be acknowledged and exploited: first, their abil-
ity to provide a flexible framework within which the comple-
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mentary roles and capabilities of public and private sectors can
be combined; second, their operation at the boundary between
public and private sectors, by which the public sector retains
ultimate responsibility for delivering public services; and third,
their status as a form of regulated business—in effect a busi-
ness that is passively regulated by means of its constitution and
the contracts it enters into with the public sector, without the
intervention of a statutory regulator. These characteristics also
explain why PPPs are generally not well described as privatiza-
tions or partial privatizations in the sense that these terms are
commonly used.
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Finance & Development / September 2001 51