Significant infrastructure investment is also anticipated in many countries where climate change targets have been announced. As an example, the OECD forecast that US$6.9 trillion in global investment1 will be required in each year to 2030 to meet climate and development objectives.
The public-private partnership (PPP) model is an established procurement method whereby responsible capital provided by private sector investors – like BBGI – helps to fill the infrastructure spending gap in order to deliver reliable public services for local economies.
A PPP is the mechanism through which governments procure long-term private investment in new or existing infrastructure projects. In return for capital investment in a PPP, the private investor is granted exclusive rights to its ownership and operation for a set period, known as a concession. In return for investing in or developing the infrastructure project, the private sector will receive "availability payments" from government once the infrastructure is available for use and meets certain pre-agreed conditions.
These contracts may vary depending upon the region and the transaction in particular, but they generally include an obligation to design, build, finance, operate and maintain the infrastructure for a set period of time.
The public sector generally owns the infrastructure. The government determines when and where to build the project, its scope, and its budget. The public sector also uses a competitive process to select the best team of private sector companies to design, build, finance, maintain and/or operate the public infrastructure or service, while obtaining the best value for money. The private sector determines its team members in the consortium to deliver the PPP infrastructure project.
This alternative model is proving public infrastructure can be delivered sooner and more cost-effectively than in a conventional delivery model, providing better value for money.
Historically, public infrastructure projects have experienced cost overruns and delays. That is because the conventional arrangement leaves the government responsible for project risks that add time and money to an infrastructure project. Cost overruns are rare on PPP projects, as this approach allocates risks and responsibilities to the public and private sectors based on their areas of expertise. For example, the public sector bears the risk for changes in laws and the private sector bears the cost of construction delays.
PPPs also deliver better designed facilities that are well-maintained during the contract term, which could be from 15 to 30 or more years.
By offsetting the financial and technical risks associated with owning, operating and sometimes building public infrastructure, the public sector receives both economic and social value by delivering essential public services – hence the public-private partnership.
Long-term payments over the concession life awarded to the private investor are typically either demand-style or availability-style. Demand is where payments are received directly from a PPP’s user – for instance, drivers using a toll road. Availability is where the government – or government-backed entity such as a local authority – makes contracted payments to the private investor conditional upon pre-determined service levels being fulfilled.
With either structure, the private investor has skin in the game to ensure the public services that a PPP is designed to deliver, is done so with maximum operational efficiency. In demand-style assets, however, there is typically more risk: no guarantees can be provided that the forecast number of drivers may use a toll road, for instance – performance is more vulnerable to macroeconomic conditions impacting the road’s users. With availability-style assets, government-backed revenues are contracted and carry greater certainty, subject to the asset’s performance conditions being met. They are therefore typically lower-risk.
PPP is a universal term across continental Europe and Australia, but there are several localised variants of the procurement method in other developed markets where BBGI invests. In the United States and Canada, PPP is often referred to a P3. In the UK, the favoured policy for PPP investment has historically been the Project Finance Initiative (PFI). This was replaced with PF2 in 2012 but has since been discontinued as of November 2018. Existing PFI and PF2 contracts continue be unaffected thanks to the security of their respective long-term contracts, and the UK Government intends to consult on a replacement PPP procurement method.
1 OECD, "Financing Climate Futures"