By Hassan Abdulrahim 

The public-private partnership (PPP) approach enables governments to procure and deliver public infrastructure or services by leveraging the resources and expertise of the private sector through risk-sharing arrangements. If properly designed and executed, PPPs can provide significant benefits to both the public sector and the private sector.

For the public sector, advantages include project funding, faster project completion, efficiency, expertise, risk sharing, and innovation. The private sector benefits from stable revenue streams, profit potential, risk mitigation, market expansion, and access to public assets. Over the last decades, countries worldwide have increasingly adopted dedicated PPP laws and established special PPP units with varying responsibilities, jurisdictions, and locations within governments.

The Kuwait Authority for Partnership Projects (KAPP) is a prime example of such an initiative. At Visionary Consulting, we believe strongly in the significance of PPPs for infrastructure development. Consequently, we prepared this executive guide to educate those involved in PPPs, such as public officials, professionals, engineers, project managers, and lawyers. The guide aims to introduce the PPP concept as an option for procuring and managing infrastructure, highlighting the main differences between PPP and traditional infrastructure procurement (TIP), and explaining the characteristics of the PPP approach.

Additionally, we discuss other key PPP-related issues such as benefits and limitations, PPP models, risks, project cycles, and financing.

PPP, the concept

A PPP is a long-term contract, typically over 20 years, between a public party and a private party for the development and/or management of a public asset or service. The private party bears significant risk and management responsibility throughout the contract’s life, and remuneration is significantly linked to performance or the demand or use of the asset or service. PPPs can be applied in various sectors such as transportation, energy, utilities, education, healthcare, and digital infrastructure.

Types of infrastructure

Infrastructure is broadly categorized into two types: Economic Infrastructure and Social Infrastructure. Economic Infrastructure: This type of infrastructure supports economic growth, trade, and competitiveness. It includes transportation networks (roads, railways), utilities (power plants, water supply systems), and other facilities that enable business activities. Fees are typically charged for using these services. Examples include toll roads, airports, and energy supply systems.

Social Infrastructure: This type of infrastructure promotes social cohesion, equality, and human development. It includes facilities such as healthcare centers, educational institutions, prisons, social housing, and courts. These infrastructures do not usually generate user payments. Their primary purpose is to provide essential services that enhance the quality of life for individuals in the community.

PPPs vs privatization

PPP and privatization are often confused but have distinct differences

Asset Ownership: In privatization, the private sector owns the asset entirely. In PPPs, the government typically retains ownership, and the asset is handed back at the end of the contract.

Contractual Relationship: Privatization involves regulations rather than contracts. PPPs, on the other hand, involve detailed contracts outlining the rights and obligations of each party.

Time: Privatization has no time limit for operating the asset, while PPPs are limited by the contract duration.

Output specifications and pricing: Privatized entities set their own quality, quantity, and pricing of goods or services. In PPPs, the government specifies these details in the contract, ensuring that public needs and standards are met.

PPPs vs TIPs

Key differences between PPPs and TIPs include financing, duration, output specifications, and risk allocation.

Financing: TIP projects are funded by the national budget, with payments made to contractors based on construction progress. In PPPs, private partners finance the infrastructure, expecting a return on their investment through user fees or government payments. No public funds are disbursed during the construction phase in PPPs; payments are spread over the project’s lifetime based on asset availability and performance.

In “user-pays PPPs”, the public authority grants “Rights” to the private partners to collect fees from users, such as tolls on highways or fees from airlines using airport facilities. In government-pays PPPs, the government compensates the private partners through “Availability Payments”, where the private operator is paid upon the availability of the asset, meaning it meets the quality standards and specifications set out in the PPP contract. If these criteria are met, the government pays a fixed fee to the private operator over a pre-agreed period.

Duration: In TIPs, the relationship between the public authority and the private partner ends once construction is completed. In PPPs, structures such as DBFOM (Design-Build-Finance-Operate-Maintain) and DBOM (Design-Build-Operate Maintain) ensure that the relationship continues far beyond construction. The private partner is responsible for operating and maintaining the asset for a predetermined period, often more than 20 years. During this time, the public authority regularly checks the private operator’s performance. At the end of a PPP contract, asset rights typically revert to the public authority. Input vs.

Output: PPP contracts focus on outputs and performance, specifying the desired outcomes rather than the means to achieve them. This allows private partners to employ innovative techniques for delivering public services. For example, in a highway project, PPP specifications might refer to road surface quality indicators rather than specific construction details. In an airport project, output could be the capacity to handle 12 million passengers per year. This output-focused approach encourages private sector innovation and can lead to high-quality services and cost savings. However, it requires a different mindset from public authorities used to traditional, input-oriented approaches.

Risk Allocation: Risk allocation is central to any PPP model. In TIPs, risks are primarily borne by the public sector. In PPPs, risks are shared, with each party handling the risks they are best equipped to manage. For example, the private sector is usually better at managing construction and operational risks due to its resources and expertise.

In TIP projects, cost overruns and delays are financial risks borne by the public sector. In PPPs, these risks are transferred to the private partner, reducing the public sector’s exposure. PPP contracts typically undergo thorough risk assessment during the project preparation phase to allocate risks appropriately. In short, PPPs offer a strategic approach to infrastructure development, combining public oversight with private sector efficiency and innovation.

By understanding the distinctions between PPP and traditional methods, and the specific benefits and challenges of PPPs, stakeholders can better navigate the complexities of infrastructure projects and achieve more effective and sustainable outcomes. Note: Hassan Abdulrahim is senior instructor – Economics & Finance, Canadian College Kuwait and Deputy CEO, Visionary Consulting Company