Public-Private Partnerships
How PPP concessions are structured, priced and argued over.
Summary
Edward Yescombe applies the project finance framework of his earlier book to public-private partnerships, in which a private consortium finances, builds and operates public infrastructure under a long-term contract with a government authority.
The book covers the policy arguments for and against these structures, and Yescombe is more sceptical than most practitioner authors. He examines the value for money case, which holds that the private sector bears risks it manages better and delivers projects on time and to budget, and the accounting motivation, which is that these structures keep capital spending off the public balance sheet. He is direct that the second has driven adoption more than the first in several countries, and that the higher cost of private finance relative to government borrowing must be justified by genuine risk transfer, which frequently does not occur.
The technical chapters cover the contract structures, including availability-based payments where the authority pays for the asset being available and usage-based payments where demand risk sits with the private party; the tender process and its costs; the financial structure and its sensitivity to the payment mechanism; the treatment of refinancing gains; and the arrangements on termination and handback. Yescombe covers the British Private Finance Initiative, the Australian, Canadian, European and American models. Later editions address the post-crisis funding environment. The book was published before the collapse of Carillion and before the British government ended the Private Finance Initiative, developments that support his scepticism.
Key takeaways 7
- Private finance costs more than government borrowing, so a partnership creates value only through genuine risk transfer that offsets the difference.
- Keeping capital spending off the public balance sheet has driven adoption of these structures more than value for money has.
- Availability-based payment structures leave demand risk with the public authority, which removes much of the claimed risk transfer.
- Long tender processes impose bid costs that reduce competition and are ultimately recovered from the public purchaser.
- Refinancing gains after construction risk has passed accrue to the private consortium unless the contract shares them explicitly.
- Contracts running twenty-five years or more cannot anticipate service requirement changes, and variations are priced without competition.
- Yescombe argues that the value for money comparison is usually constructed to produce the answer the sponsoring authority requires.
Who should read it
Public sector officials and investors in infrastructure partnerships who want a sceptical practitioner's treatment of when these structures create value and when they do not.
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