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Evaluate the concept of public private partnership and its use in Australian context.

Introduction and Background

The main aim of this report is to evaluate the concept of Public Private Partnership in Australian context by examining the national Policy framework. PPP is increasingly used in both developing countries and in developed countries as it provides a number of advantages. The purpose of public private partnership is to improve the competitiveness and effectiveness of the public services (Liu et al.  2014). It is a contract of long term between a private party or organization and a government agency. In a PPP contract, the private party entails the finance, design, construction and maintenance. The PPP model is well established for construction, economic and social infrastructure projects (Delmon 2017). The public private partnership is mainly operated and funded through partnership of government and private business venture.

The public private partnership originated because of the increasing pressure of changing the general model of public procurement. The government sought to encourage the private investment in different infrastructure project (Hwang,  Zhao and Gay 2013). This idea of private provision of infrastructure represents an accurate way of implementation of an infrastructure project. Most of the public private partnerships are negotiated individually according to the requirements of the project. PPP gradually evolved in most of the developed countries. Over the last two decades, more that 1400 PPP deals were executed in European Union. However, there are certain issues associated with PPP projects, which are needed to be evaluated as well. A well known problem associated with a PPP projects is that majority of the financial risk has to be incurred by the private partner (De Schepper, Haezendonck and Dooms 2015). It has also been observed that in certain cases, the financial schemes that are proposed in a public private partnership projects are way inferior that the standard model of public procurement (Chou and Pramudawardhani 2015). One of the sub classes of public private partnership is product development partnership that mainly focuses on the pharmaceutical product development. The different concepts of PPP are elaborated in the following paragraphs.

1. Public Private Partnership

Public Private Partnership is a contractual agreement that is signed between public or government agency and private agency. The main idea behind engaging into a public private partnership is to leverage additional financial resources and expertise. APP assumes mutual benefit for both the parties engaged in a contract (Roehrich, Lewis and George 2014). Thus this type of partnership provides greater efficiencies and enhanced outcome of the project in which it is implemented. The PPP agreement between a public agency or government and a private agency generally facilitates greater participation by the private entity. Since PPP arrangement involves a  number of aspects of project implementation such as funding, finance, planning and design, the whole partnership or agreement might become complex for large projects. However, this type of arrangements is associated with a number of risks which in most of the times are transferred from the public agency to the private firms (Engel, Fischer and Galetovic 2013). This in turn improves the operational efficiencies in a project and ensures that the project is completed within a set schedule. Thus in PPP, a greater participation from the private agency is anticipated.

There are a number of public private partnership, out of which the infrastructure PPP one of the widely used Public Private Partnership. The infrastructure PPP is increasingly used by the government sector due to the increased efficiency of project delivery, operations and management (Cruz and Marques 2013). In its basic form, an infrastructure PPP deals with contracting out of specific operations in which the private firms are generally held accountable. PPP is considered when there is a lack of government funding. In PPP project certain explicit and implicit liabilities are imposed on the government. Therefore, a project can be implemented as a PPP project only if there is a gain of efficiency from project delivery along with operations and management (Iossa and Martimort 2015). For infrastructure projects, government prefers PPP as it offers an off budget mechanism for infrastructural development. This is because PPP has an ability of enhancing the supply of the infrastructure services that are needed. Furthermore, this type of partnership may not require any immediate investment.

There are certain differences between PPP project and a traditional project. The PPP projects considerably differ from the convectional construction or infrastructure projects in terms of development of the project, implementation of the project and its management (Roumboutsos and Pantelias 2015). Another significant difference between construction contract and a PPP contract is that the tenure of a PPP contract is much longer than the construction contract. Therefore, not every project can be implemented with PPP. Furthermore, a standard PP project may be more costly than the other projects unless the additional cost cannot be set through efficiency gains. These are certain major limitations associated with a public private partnership project.

2. Public Private Partnership in Developed and Developing Countries

As discussed earlier, the public private partnership is increasingly being adopted in both developed and developing countries.

PPP in Australia

In Australia, the public private partnership is vital for the development of infrastructure in Australia since by this method, both government and private sector can work together and share the resources needed in project implementation. The ongoing public private partnership project in Melbourne, Australia includes North East Link road PPP project and Peninsula Link PPP Project (Zhang and Chen 2013). In Australia, the public private partnership enjoys a good reputation of delivering projects on time and within the budget. However, there are certain cases of project failures as well. The PPP projects are widespread in Australia since it offers a number of benefits including the transfer of risk. There are certain unique benefits of PPP which arises for private sector finance. This is because the use of private sector debt can provide a buffer against different risks associated with the project. This type of project is mainly based on rigorous risk assessment and management, which explains the superior time and cost performance in comparison to the traditional procurements and contracts.  In this context, the disadvantages of Public private Procurement are needed to be discussed as well (Cruz and Marques 2013). PPP projects generally have less flexibility, which is a significant disadvantage of this approach. Certain PPP projects have high transaction and financing issues that in turn increases the complexities of a project. Thus it is essential for a PPP model to continually evolve in response to the lessons learned and market condition. For its increasing use, a PPP project should provide better values to the governments. For most infrastructure projects, PPP provides better values than other alternative procurement methods.

In Australia, the PPP project methods follow a number of stages. At first, the government announces that it intends in delivering a project by PPP method. For that, the government prepares a draft PPP contract that details the outcomes and the specifications of the project and then calls for tenders form the private sector (Willems 2014). A project that is implemented with a PPP contract generally requires a counterparty to design and construct the needed infrastructure facility associated with a project. Followed by this, the bidding process for the PP contract will start. The composition of this bidding process mainly depends on the nature of the project and the skills required for design and construction of the project. Followed by this step, the PPP is finalised. 

It is essential to evaluate how common is PPP in Australia. Researches show that less than 10 percent of the government infrastructure projects represent PPP. The use of PPP is much greater in New South Wales and in Victoria. The percentage of the social infrastructure projects that are making use of PPP varies year to year (Tsamboulas, Verma and Moraiti 2013). The proportion of PPP projects is acceptable since the use of traditional procurement methods in smaller infrastructure project proves to be cost efficient in comparison to PPP. However, for suitable project, PPP method can be proved to be better value for money. PPP helps in delivering the public infrastructure projects that can become difficult for the government to afford. Furthermore, the projects that are implemented with PPP methods enjoy good reputations of delivering projects within the set time and within the budget. Furthermore, the use of PPP provides contractual certainty, which is another significant benefit of making use of PPP. 

Types of PPP in Australia

There are mainly two PPP project types prevalent in Australia. This includes social infrastructure PPP and economic infrastructure PPP. According to the Australian policy guidelines, the type of projects in which the primary revenue stream of private sector takes the form of service payment from public partner or the government is known as social infrastructure PPP (De Schepper, Dooms and Haezendonck 2014). The social infrastructure model in PPP is mainly used in construction of schools, hospitals and other social infrastructure. This model of PP is therefore known as service payment PPP.

In economic infrastructure PPP, the primary source of revenue associated with a project takes the form of the charges paid by the users for availing the services associated with that infrastructure (Sclar 2015). The economic infrastructure PPP is mainly used for construction of roads, economic infrastructure like railways and others. This model of PPP is therefore known as user-charge PPP.

Both social infrastructure and economic models of PPP that are followed in Australia share certain common features (Hoppe and Schmitz 2013). In Australia, majority of the recent PPP projects are user-charge PPP, for example, Peninsula Link road project in Victoria, Waratah train project and Sydney train projects.

PPP in United States

The market size of Public Private Partnership is not only growing in Australia, but also growing in US as well. Private investors are interested in this type of partnership and the federal government is increasingly involved. This is because certain appropriate projects can be best handled with the PPP method. The current rate of project implementation with PPP proves that the positive trends associated with the use and implementation of PPP is expected to continue. There are a number of public infrastructure projects in United States that are interested in PPP. In the recent years, the number of PPP project in US has increased as well. This is mainly because of the different benefits offered by PPP (Liu and Wilkinson 2014). A PPP project can cost a government as much as 20% less than a traditional design bi build model. A PPP project can be delivered faster than the traditional procurement methods. With the increasing demand of the resources the government need to redefine the role and leveraging the partnerships.

The public private partnership has the potential for addressing a range of urban economic issues. PPP enabling laws addresses certain issues associated with the PPP proposals. In United States, the US government is increasingly turning to the public private partnership for implementing public infrastructural works (Trebilcock and Rosenstock 2015). The use of PPP has increased in the recent years as it addresses certain limitations of traditional project delivery methods. A strategic approach of PPP can possibly mitigate the overruns and schedule delays (Bel, Brown and Marques 2013). The risk of unclear responsibilities is eliminated with the PPP project delivery method.

PPP in large Construction/Infrastructure Projects

Public Private Partnership is an approach that is generally adopted for enhancing the economic value of a construction or an infrastructure project. Many contractors have explored the use and application of PPP in increasing the effectiveness and efficiency of a large sized project. Public private partnership was introduced in UK in the year 1990 with an aim of increasing the efficiency of private sector companies. PPP are used for delivering different services which include construction of buildings, hospital and other similar projects (Liu et al. 2014). The use of PP is expected to increase as well since the government of majority of the developing countries face the challenge of meeting growing demands and the services. However, it is essentially important to emphasize that PPP is not a solution for all types of project.

For making use of PPP in construction and infrastructure project, it is essential to structure the PPP (Calabrò and Della Spina 2014). The PPP structuring deals with the entire development process of the project. In the initiation stage of PPP structuring, the concept and the specifications of the project is identified. This helps in identifying whether the particular project can be easily executed by PPP. It is important for understanding the concept of project in order to ensure whether it can be implemented with the PPP method. The next stage of PPP implementation is designing of the PPP contracts (Sharma and Bindal 2014). The structuring of PPP is associated with the identification and allocation of the risks. Majority of the risks in the project is allocated to private party in a PPP. Therefore, the private party is given the right to make all the construction related decisions in the project.

It is important to access the key performance indicators that indicate the key success factors of PPP projects (????? and ?????? 2016). This is needed as PPP is a new approach of gathering certain skills, knowledge and technologies that are needed to implementation of PPP projects. The success indicators are identified from the success factors associated with the management of projects.

The complex and large construction projects needed to be executed in planned manner or else it may lead to huge and ineffective delays (FASO 2016). Agreement between a private company and government might help in implementation of the project in a planned manner. This is possible since majority of the risks is taken by the private partner and the responsibility of completing the project on time is on the private partner. It is to be noted that PPP agreement is generally a funding model in a public infrastructure project (Wojewnik-Filipkowska and Trojanowski 2013). Most of the PPP construction projects in Australia have been successful in the past years. This is not the case for every PPP projects around the world. Like in UK, the idea of PPP had not been successful. The main reason behind this is that the investment from the private parties has been considerably small in comparison to the government parties (Osei-Kyei and Chan 2015). The public private partnership has been an example of a cautionary tale from the UK since, the private sector’s involvement in that type was contract was significantly low. The public private partnership entails an agreement between the government and the private sector. The main problem that can be identified is that private business counterpart is unwilling to take the risk. 

Thus it can be said that public private partnership can be helpful for large construction projects only if both the public and private partnership takes an equal responsibility of implementing this project in a planned manner (Delmon 2017). This process of procurement can be of more benefit in comparison to the traditional procurement methods. The PPP is being used in developed countries from its inception while it is increasingly being adopted by the developing countries as well. Public Private Partnership is successful in many European countries. Although it has gotten off to a relatively slow start in US, it in being used in different large scale infrastructure project in Australia and United States.

One of the most significant advantages of public private partnership is that, this PPP model increases the efficiency of government’s investment (Reissner and Pagan 2013.). Furthermore, since both public and private agency works together, a high quality of project standard is obtained. However each and every public private partnership involves certain amount of risks that are needed to be mitigated. There are a limited number of private entities having the capability of project completion on time.

PPP in global construction projects

The public private partnership has become a popular global strategy that can be used for delivering a new infrastructure. PPP benefits the implementation of the global projects. There is no single global PPP model as it differs in the approaches that are undertaken by a particular country (Hwang Zhao and Gay 2013). The leading countries in use of PPP such as Australia and Canada do not have any single method of PPP. In a global context, there are many ways for structuring a PPP project. At the delivery level of the project, the PPP are often examined in the point of view of the government. Corporations find a global reach in spearheading a PPP project. Thus the strategies of implementing PPP in the global context differ as well. However, the global PPP market actors associated with private corporations is needed to be examined on basis of its potential influence (Greve and Hodge 2013). The International organisations have their own strategies for implementation of project with the PPP method. However, the developing countries need a proper guidance for implementing project with PPP. PPPs bring about a better possibility of easier management of financial operations associated with a project.

Risks in PPP

There are certain risks associated with the use of public private partnership that are needed to be addressed. The most significant risks are discussed in the following paragraphs.

1. The entire process of PPP is quite lengthy and therefore, the development, bidding and the ongoing cost of PPP projects can be greater than the traditional and government procurement process. Thus the idea of implementation of projects with the PPP method is needed to be determined by the government. A number of PPP and the implementation units in the world work for making the PPP more effective and efficient.

2. Another most prominent risk of making use of a Public Private Partnership is getting the investment. Only a positive return of investment can accelerate the investment.

3. There are certain projects that can be politically as well as socially challenging to implement.  In this type of projects, the presence of public sector workforce makes the implementation easier.

4.  There is no unlimited risk bearing as the private firm who is in partnership will be cautious in accepting the major risks associated with the project.

5. Early completion of a project in a PPP involves certain incentives and bonus. It is therefore important to set out the incentives limit in the contract clearly.

6. Although PPP works in partnership of government and a private party, the citizens of the state will hold the government accountable for the quality of the utility services that are delivered to them (Haufler 2013). Thus in this type of project, the government responsibility continues even after the completion of the project.

7. Having a clear legal and regulatory framework is essential for achieving an effective and sustainable solution or project.

8. Considering the long time nature of PPP type projects and the complexities associated with the project, it is difficult to identify the contingencies in development of project using PPP method.

9. A PPP project is generally a long term project. Therefore, it is possible that the project might fail or that the project is terminated prior to the completion. There can be a number of reasons behind the failure of a PPP project. This can include changes in government policy, private operator’s inefficiency in performing their obligations due to number external circumstances.

10. Another most significant disadvantage is that the private sector will not do anything more than what it is paid for. Therefore it is essential to set out clear requirement specifications.

The above discussed points give an idea of the major risks associated with a project being implemented with a public private partnership model (Chen et al. 2013).  Addressing these risks is essential in order to ensure successful project completion with public private partnership (Siemiatycki 2013). The idea of public private partnership and its use in projects is emerging and therefore its application is expected to increase in due course of time. Australia has been making use of PPP over the years and has been able to successfully implement it.

Conclusion and Recommendations

The purpose of this report is to discuss the concept of PPP and its use in implementation of complex project. PPP is a long term contract between public and private sector. It is a funding model that is used for public infrastructure project. The majority of the risks in this project is borne by the private partner. There are certain models associated with public private partnership. PPP works on the principle that both of the parties are needed to invest in the project. A number of problems can be faced while acquiring investment from the private party. There are a number of issues and risks with Public Private Partnership as well. Higher quality and timely provisioning of the public services is however, one significant advantage of public private procurement. The report discuses and evaluates the concept of public private partnership and the processes by which this method can be advantageous for implementation of complex projects. Since the project is implemented on a partnership basis, the project is executed within the schedule. The efficiency in project implementation process increases as well. However, there are certain risks associated with PPP that are needed to be addressed. The recommendations for the use of PPP include accurate planning of the entire project implementation process.

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