What is a public-private partnership?
A public-private partnership (PPP) is an arrangement in which a public body and one or more private companies deliver a project together, sharing tasks, costs, revenues and risks between them. In construction and infrastructure, PPP is best known as a contract form for large projects: motorways, tunnels, locks, prisons, courts, schools and barracks.
The underlying idea is that a private party which not only builds but then maintains the asset for decades has its own interest in building durably and with low maintenance. Under a traditional contract the contractor leaves after handover and the client carries all the running costs.
The contract models
What matters is which letters the contractor takes on:
| Letter | Stands for | Meaning |
|---|---|---|
| D | Design | Designing |
| B | Build | Building |
| F | Finance | Financing |
| M | Maintain | Maintaining |
| O | Operate | Operating |
- DBM — design, build and maintain with one party; the public body finances
- DBFM — the standard for Dutch infrastructure projects: the contractor also finances up front and receives an availability payment over a long term, often 20 to 30 years
- DBFMO — including operation, used for buildings where the services are outsourced as well
The availability payment is the key mechanism: the contractor is only paid when the asset is available and performing as agreed. A closed lane or a failing installation results in a deduction.
Why it is used
- Whole-life thinking. Capital and maintenance costs are weighed in a single decision.
- Risk to whoever can carry it best. Design and construction risks go to the market; political and consenting risks usually stay with the public body.
- A performance incentive. Payment linked to availability rather than to activities carried out.
Criticism and points to watch
- Expensive to procure. A DBFM tender costs a great deal of time and money, for bidders as well. For smaller projects it does not pay.
- Cost of finance. Private finance is generally dearer than government borrowing; that penalty has to be recovered through efficiency gains. National audit offices have been critical of several schemes on exactly this point.
- Contractual rigidity. Fixing a contract for thirty years means later changes are complicated and costly.
- Specifying is a skill. The client has to describe the required performance without prescribing the solution. That calls for different expertise than a traditional bill of quantities.
- Not only a contract. PPP can also take the form of a joint development company, in which a municipality and a developer both hold a stake.
Related terms
- Procurement
- Contract form
- Performance contract
- Design and build
- Area development
- Construction costs
Want to learn more about construction terms? Visit our knowledge base at fredsdiyplans.com.