Frequently Asked Questions

What is a PPP?

How do PPPs work?

What are the benefits of PPPs?

What are the disadvantages of PPPs?

Why PPPs?

What is the difference between outsourcing, privatization, and PPPs?

What is a "traditional" procurement as opposed to a PPP?

What is value for money?

When are PPPs the right choice?

What is "risk transfer?

Why should the private sector be interested in PPPs?

What is a PPP?

The World Bank defines a PPP as "a long-term contract between a private party and a government entity for providing a public asset or service, in which the private party bears significant risk and management responsibility, and remuneration is linked to performance."

Essentially, a public-private partnership is a long-term, performance output-based approach to procuring goods and services. The private sector assumes a major share of the risks in terms of financing and construction and ensures effective performance of the good or service, from design and planning, to long-term maintenance and support.

In practical terms, this means that:

  • The government does not need to pay for the asset until it is completed;
  • A substantial portion of the cost is paid over the life of the asset and only if it is properly maintained and performs according to specifications;
  • The costs are known up front and span the life of the asset. Taxpayers are not financially responsible for cost overruns, delays, or any performance issues over the asset’s life.

For more information on PPPs, watch this informational video produced by the World Bank.

 

How do PPPs work?

How do PPPs work?

The private sector assumes responsibility for all or many of the phases of a project’s life-cycle, resulting in a shared balance of risk between the government and the private sector partner. The private sector partner is fully accountable for whether the project is successful and has an incentive to produce the most effective result over the lifespan of the asset. The problems of poor design or construction and inadequate maintenance all become the responsibility of the private sector.

The private sector partner is judged and paid purely based on performance. This ensures that the private sector is financially incentivized for on-time, on-budget project completion. The private sector partner must raise significant financing for the construction of the asset. Lenders and equity participants provide a level of due diligence and oversight that brings discipline to the process.

The government specifies its requirements in terms of services provided and leaves as much scope as possible to the private sector partner to come up with the best solution.

 

What are the benefits of PPPs?

  • PPPs introduce private sector financing, technology and innovation and provide better public services through improved efficiency
  • PPPs create budgetary certainty by setting present and future costs of projects.
  • PPPs help develop local private sector capabilities through joint ventures with large international firms, as well as sub-contracting opportunities for local firms in various different support functions.
  • PPPs are a way of gradually exposing government services to increasing levels of private sector participation in a responsible way.
  • PPPs can result in a more efficient use of limited public sector resources.
  • Because many projects rely on up-front capital from the private sector, projects are able to proceed at times when public capital may be constrained (either by public spending limits or budget cycles)..
  • By allocating the responsibility for design and construction to the private sector, there is more incentive for the private sector to deliver projects within shorter timeframes.
  • Risk is allocated to the party best able to manage it at the least cost
  • Private sector partners are sometimes able to generate additional revenue from third parties, offsetting the cost to the public sector.
  • Public sector officials are free to turn their focus to service planning and performance monitoring rather than the day-to-day management of the public service. This allows the public sector to maintain a long-term perspective in planning and budget-setting..
  • The government can require that important social protections be incorporated into a project. These can be in the form of quality standards, such as the frequency of services to be provided, and safety criteria. It can also specify that projects be tailored to the specific needs of local communities.

 

What are the disadvantages of PPPs?

  • Sometimes, individual PPP projects require a longer preparation period, which may require many months depending on the size of the project and the quality standards.
  • PPP project implementers sometimes favor the “bottom line” of the contract and disregard social, environmental, or other factors. The government must prepare adequate contracts and ensure that a strong oversight mechanism in place to guard against this.
  • Some projects may be more politically or socially challenging to introduce and implement than others.
  • The private sector is averse to excessive risk and is cautious about accepting risks beyond their control. Acceptance of risks will be reflected in prices and private sector partners may also demand a significant level of control over operations in exchange for accepting high risks.
  • While the private sector partner is responsible for construction and, in some cases, for service delivery, citizens will still hold government accountable for quality and cost..
  • PPPs are often long-term and complex. It is difficult to foresee all possible contingencies at the signing of a contract. Contracts may have to be renegotiated over time and the government must be prepared for this contingency.

 

Why PPPs?

PPPs are simply one method of delivering the public infrastructure investments Jordanians need. They are not a “silver bullet” to solve every problem, but when PPPs are utilized responsibly and are applied to the right types of projects, they can provide real benefits. PPPs work because they leverage the expertise and creativity of the private sector and are able to rely on incentives of capital markets to deliver complex projects.

It is extremely difficult for the Government of Jordan to meet the continually growing demand for goods and services, increased budgetary constraints, and shortfall of expertise. It cannot continue to act alone, but must rely on other sectors of society.

Government revenues are sometimes not sufficient to meet demand, resulting in either service cuts or tax increases. PPPs can help government avoid this “either-or” problem and can provide a continued or improved level of service, often at a reduced cost. By developing partnerships with private-sector partners, the government can maintain quality services despite budget limitations.

PPPs are based on the recognition that both the public and private sectors can mutually benefit by combining their resources and knowledge.

 

What is the difference between outsourcing, privatization, and PPPs?

Unlike outsourcing, a PPP assigns the private sector partner substantial risk and the responsibility for financing a project's capital and operating costs and managing its operations over a specific period of time. Privatization means the divestiture of government ownership in a company’s or service’s property and functions—including all the assets and liabilities associated.

 

What is a "traditional" procurement as opposed to a PPP?

In a traditional procurement, the government provides detailed specifications and tenders its project to a contractor. The government prepares detailed specifications that describe the needed service. The specifications are then published in order to get the most competitively priced tender.

Once the contract is awarded, the government closely supervises the works carried out by the contractor in order to ensure compliance. In this way, the government takes responsibility for the design and planning of the project, all legal issues, and any unforeseen costs or emergencies. The government is responsible for the contractor going over budget or committing construction errors and has very little control over the timeframe of completion.

When the asset or service becomes operational, the government is responsible for performance. The private sector partner is responsible only for the delivery of the service according to the contract.

In a PPP, the government outlines the service that is required. Should the PPP option be the preferred method of procurement, the government leaves it to the private sector partner to develop a proposal to meet the needed service. The private sector partner will be selected through a bidding process. This approach ensures that projects are driven substantially by the private partner and thereby results in greater value for money.

 

What is value for money?

 

Value for money is the optimum combination of overall project costs and is measured against the quality of services provided, i.e. how well does a project achieve set objectives with the available resources. PPPs should only be used in situations where they can offer value for money superior to traditional procurement methods. Value for money can be thought of as another measure of efficiency and cost effectiveness.

Value for money is determined through a comparative analysis of the benefits, costs, and risks of all procurement methods available and is re-evaluated throughout the project lifecycle. 


When are PPPs the right choice?

PPPs are most appropriate when:

  • The government is procuring a project that requires risk management throughout its lifetime;
  • The private sector is more experienced with the project type;
  • The project allows for clearly identified and contractually assigned risk allocation between the public and private sector parties;
  • Projects should not be overly dependent on technology or require technology that is not available in a competitive market;
  • Project assets are usually intended to be used over long periods and are capable of being financed on the basis of a long lifecycle;
  • The government is able to specify the output or outcome of the project over the project’s lifetime;
  • The project proposal includes a strong justification, a detailed needs analysis, and an argument for the suitability of the project to be framed as a PPP.


What is "risk transfer"?

Risks are a part of all projects, regardless of the procurement method used. In a PPP project, risks are transferred to the party that is best able to manage them, either the government or the private sector partner. Making the private sector responsible for managing the majority of risk allows the government to reduce its financial burden.
It should be noted, however, that even after risks have been apportioned both the private sector party and the government should both look upon the agreement as a “win-win” situation. Dissatisfaction of either party can lead to major project disruptions over the project’s lifetime.

 

Why should the private sector be interested in PPPs?

 

PPPs provide private sector partners an opportunity to work with stable partners and provide a long-term revenue stream.

PPPs provide the private sector with a greater role in the design, building, financing, and/or operation of public infrastructure than with traditional procurement contracts.