How It Works
Public-private partnerships (PPPs) bring together, for mutual benefit, a public entity or agency and a private company in a long-term joint venture for the delivery of high-quality public infrastructure.
PPPs are chosen when the public sector finds it difficult or impractical to deliver major investment projects or is seeking a value for money solution over the duration of a contract period, typically 20 years or more.
A private company plans, designs, constructs, finances, operates and maintains the public facility. When it does, the private company assumes more risks and responsibilities for the work and success of the project. PPPs work because this higher level of responsibility provided by the private company results in a shared public-private risk for project success.
Different models of PPPs
PPPs come in many varieties, depending on the needs of the public entity or agency and the amount of risk transfer and responsibility undertaken by the private company. Balfour Beatty Capital is able to offer all of the following solutions as described below and stated by the National Council for Public-Private Partnerships (NCPPP).
The various forms include: Design/Build/Finance (DBF), Build/Operate/Transfer (BOT) or Build/Transfer/Operate (BTO), Design/Build/Maintain or Operate (DBM or DBO), Lease/Develop/Operate (LDO) or Build/Develop/Operate (BDO), Lease/Purchase, Turnkey Construction-At-Risk. Details of how all these various forms operate are included on the National Council for Public-Private Partnerships website.
Private Finance Initiative (PFI)
Developed in the UK, PFI is a method developed to provide private company financial support for public-private partnerships (PPPs) between the two parties. This model has now been adapted in many countries (including Europe, Australia and Canada) seeking alternative delivery methods for key public entity or agency infrastructure.
PFI projects transfer the delivery risk from the public entity or agency to the private company, with a clear link to the public entity’s or agency’s payment for an asset to its ongoing usage, availability, and condition or facility maintenance services over its lifetime. Under the PFI method, the private company will finance the creation of an asset and accept financial and technical responsibility for construction and its subsequent operation and maintenance. The public entity or agency pays for the capital asset and facility management services over an extended period, typically 30 years.
PFI projects deliver operational services for the public entity or agency and the private company receives payment. Capital investments are made by the private company and the public entity or agency provides services agreed upon in a contractual obligation. In most cases, the private company forms a project company to use in the contract with the public entity or agency. The project company will enter other principal subcontracts. One is usually with a construction company and the other is a facilities manager to build and maintain the project asset. They fund construction through an equity/subordinated debt from promoters and also long-term debt raised from the banking or the bond markets. The project company is compensated when the asset is available for use by payments, indexed to inflation, over the 30-year period to cover service of capital and all operating, maintenance and ancillary service costs.
At the end of the contract period the properties revert to public ownership free of charge. Because of the life cycle investment carried out by the private company, the properties are relinquished to the public entity or agency in “good as new” condition. The private company provides guarantees for all elements of the buildings for extended periods, typically ten years for mechanical and electrical systems and a further 30 years for the structural aspects of the building or assets.
Both the public entity or agency and private company have an interest in attracting cost-effective financing. Cost effective financing is typically achieved by the entity demonstrating the credit worthiness. Financing through the use of long-term bank debt or bonds is often cheaper than the equity alternative; however, the risk transfer is much greater on PFI projects, thereby providing value for money for the public entity or agency over a long-term contract period. As the income from PFI projects is received from the public entity or agency, the best method of financing is using the income to raise private senior debt funding. Project financing, based upon the project's cash flow, is also known as non-recourse financing.
Structuring a PFI project involves a contractual structure that insulates the repayments to debt providers from project risks, while providing the optimal amount of true risk capital in the form of equity shareholder funding.
Balfour Beatty Capital has expert personnel and is able to provide more information on any of the above delivery models. Further information is provided in the resources section or you can read our case study on the Royal Infirmary of Edinburgh.
Houston School Districts delivered two high schools one year earlier saving $20 million.
Washington, DC, built a new elementary school allowing adjacent land to be developed privately with the proceeds earmarked for debt payment.
Georgia Tech used PPP to build a research facility when the demand was there, but not state funding.
University of Central Florida was able to build a convocation center where state funding was not available for such projects.
Florida Atlantic University is using PPP to develop a football stadium, dorms, and retail center where funds would not be available for years if at all.