1: A public-private partnership (PPP) is an agreement where a private company provides funding or services for a public sector project in return for financial benefits. 2: In the example economy, most projects with acceptable returns (>15%) are undertaken by private companies, but some socially beneficial projects have returns too low for private investment. 3: To implement important but less profitable projects, the government uses PPPs, improving returns through support to attract private partners who provide management expertise, while the government maintains control and ensures social goals.

1. Why
PPP 1,2
?
1: Public-private partnership, an arrangement
whereby a public project or service is partially
financed or run by a private company (Oxford)
2: Private-public partnership: an agreement in
which a private company commits skills or
capital to a public-sector project for a financial
return (Dictionary.com)

2. Suppose there are nine projects (A to I) in an economy across sectors with
varying financial returns
25
20
Financial return
15
10
5
0
A B C D E F G H I

3. The markets in the economy are efficient. All projects with acceptable rate
of return (currently 15%) are inevitably taken up by the market.
25
20
Financial return
15
10
5
0
A B C D E F G H I

4. Therefore project B, C and I have been taken up by the market which
consists of mainly private companies except E. Projects B is in real
estate, C in education in urban areas, I in mobile telephony. E is in airport
sector which is considered a sector of strategic importance nationally and is
hence under govt. control
25
20 . .
.
Financial return
x
15
10
5
0
A B C D E F G H I

5. But what about the rest of the projects?
25
20 . .
. x
Financial return
15 ? ?
?
10 ?
5
?
0
A B C D E F G H I

6. They are not being taken up by the market as they have low rate of
returns (< 15%) or are under government control. The government knows
that many of these projects have high social benefit and therefore a return
for the overall economy
Social benefit
35
30
25
20
15
10
5
0
A B C D E F G H I

7. For e.g. Project D in rural education sector is very beneficial for the overall economy
but doesn’t provides enough return for private investors (<15%)
Therefore the government decides to invest heavily into Project A and D. However
also uses up most of its income in these projects
Rural education
Rural health 35
30
25
20
. .
15
10
5
0
A B C D E F G H I

8. For e.g. Project D in rural education sector is very beneficial for the overall economy
but doesn’t provides enough return for private investors (<15%)
Therefore the government decides to invest heavily into Project A and D. However
also exhausts up most of its income in these projects
35
30
25
20
15
10
5
0
A B C D E F G H I

9. And project E inspite of good profit potential is not open to private investment due
to its strategic nature and the govt. is not able to tap the project because of
either lack of managerial expertise or lack of funds or a mix of both
Airport
35
30
25
20
15
10
5
0
A B C D E F G H I

10. Yet projects E,F,G and H are also important sectors for the economy
however the government lacks on both enough managerial capacity and the
funds to invest in these projects. But the govt. realises that these projects
have the potential to be profitable and acceptable to the private investors
if these projects are supported by the government a little
35
30
25
20
15
10
5
0
A B C D E F G H I

11. And therefore to take up the remaining projects the govt. decides on a
new plan called PPP i.e. public private partnership
35
30
25
20
15
10
5
0
A B C D E F G H I

12. Government takes steps to improve the profitability of the projects by
providing exclusive rights/partial funding/policy support. These projects thus
become acceptable to the private investors
Also opens up some strategic sector project for private developers under
PPP format which still keeps the project under govt. control
Improved returns
40 due to government
35 . . efforts
30
25 . .
20
15
10
5
0
A B C D E F G H I

13. Private investors bring in their efficient management to achieve good
returns which they also share with the government. Meanwhile govt. is
able to ensure that vital projects with social benefit are implemented
in the economy
share

14. Why do
PPPs
fail?

15. The fundamental concept of PPP is to leverage government’s partnership in
the project to boost returns
You got to get
right this part Improved returns
35
30
25
20
15
10
5
0
F G

16. Mostly the mistakes are made here:
•The profit potential is overestimated i.e. the size of this!
•The private entity is unable to make expected/promised profits
•This leads to either service quality degradation or reduction in Social
benefits of the project (e.g. Higher toll taxes for toll roads)
•Either of which is deemed unacceptable by the government; legal issues can
arise
•But ultimately leads to government bailout
and disbanding of PPP as such projects are
vital for public and hence have to be serviced
irrespective of the project

17. Possible solutions are:
•Plan as meticulously as possible this stage to
structure PPP
•Forecast reasonable revenues and estimate the project cost
meticulously. Project cost over-runs is a major bone of
contention in PPP projects
•Prepare for macro-economic risks e.g. Recessions