Public Procurement

Public Private Partnership Model

Article Review

A Fiscal Evaluation of the Public-Private Partnership (PPP) Model[1]

In this article, PPP model has been defined and evaluated through various perspectives but mainly from fiscal point of view. Article states that, “PPP model is in use at the United Kingdom (UK) since 1992 as an investment and service production model, in which financing has been provided by private sector but risks of the awarded contracts have been shared by public and private sectors”. In Turkey PPP model has roots from Ottoman era as a principal and there is legal document, namely Public Concession Contracts, sets the frame work for it. However, modern applications have been initiated at the energy, transport and health sectors, and it is expected to reach out to education and other public services, too.

PPP model than has been analysed in the article under five bullet points as following:

– Characteristics of the model
– Costs of the PPP model
– Public guarantees
– Out-of-budget effect
– Increasing dependence to private consulting companies

Build on it article indicates that, expertise of the private sector comes from its ability to manage time and financing risks. On the other hand, expertise of public sector is based on faculty of making macro scale plans. Therefore, it is expected to decrease total cost of a project. Partnership relation is established by long-term contracts, and this term usually extends from 20 to 49 years. As an example it is given that, “In the last 15 years, almost all of the major public projects have been implemented through this model at the UK. According to HM Treasury data, these projects are around £56 billion value and 600 in number… They mostly cover hospital, school and transportation projects”.

When it comes to costs, article presents a comparison of borrowing rates and credit ratings for the private and public sector at UK. This is roughly between 5,5% and 7,5% for private sector and 2,5% for public sector; BBB+ and AAA for the latter. Moreover, article provides further comments for the aftermath of global economic and financial crisis.

Another dimension of the model as “public guarantees” also has been explained in detail. As the aims of these guarantees are to provide insurance and raise financing capabilities at the market as well as ensure continuity of the public projects regardless of failures at the market or by the private sector partner. Three types of guarantees exemplified are “credit payback, demand and price guarantees”.

It is also indicated in the article that, PPP model creates off the budget problem and off-off accounting due to private sector. As final remarks, a special part is left to increasing dependency to consulting companies. Consulting firms are involved in process at the both sides of the table. This in return may create a conflict of interest and dependence of public sector to them because of asymmetric information. Loss of competition at the market due to economies of scale for huge projects is another problem inherited in the system for the PPP model.

Ergun UNUTMAZ, 28/01/2013

[1] Ankara Üniversitesi SBF Dergisi, Cilt 67, No.2, 2012, s. 95-125.