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The Green Sheet Online Edition

May 09, 2022 • Issue 22:05:01

Public-private partnerships : benefits and challenges

By Michael Leshinsky
Leshinksy Finance LLC

A public-private partnership, or PPP, is an alliance between a government agency and a private sector company to facilitate development of public service projects like parks, public transportation, hospitals, etc. Typically, these are projects neither party can afford to undertake alone—due to a lack of expertise and/or resources—and are long-term collaborations.

PPPs have become increasingly popular in developing and developed countries, as public and private entities realize the benefits of sharing finances, infrastructure, technology and risk. For payments enterprises interested in exploring this type of opportunity, there are several benefits and challenges to consider.

PPP benefits

Following are several benefits private sector companies can reap through PPPs:

  • Working on large-scale government projects provides a major brand-building opportunity for any private company. Any service provided by a government is usually utilized by the majority of the affected population. A job well done can build a private company's credibility to new heights and open avenues to subsequent projects.
  • Governments move slowly, and they recognize that. A private company can increase a project's operational efficiency, leading to quicker development and delivery of services. In such cases, a private company can highlight its innovative technology and expertise to potential clients, which can help generate business.
  • It's easier for a PPP to apply for federal grants than for a wholly private project. In PPPs, the grant applicant is the government agency, which makes grant allocation slightly easier. This becomes an added funding avenue for projects, which further reduces costs and helps private companies finish projects within budget.
  • Government agencies can provide incentives to private companies that can be exchanged for cash or equity in projects. Moreover, governments might also give responsibility for operating services to private entities after completion. Thus, private companies can end up making larger profits during the course of their partnerships.
  • Generally, PPP contracts include extra incentives and bonuses, which are paid out on a performance basis to private companies. These could be triggered by early completion of projects or by finishing below budget.
  • If a project requires specific expertise, like constructing a large-scale dam, there might be few companies providing the service. This reduces the pool of competitors and provides leverage to participating private entities to set their asking price.

PPP challenges

PPPs also come with challenges. They involve complex relationships without much freedom to make autonomous decisions, and it's necessary for companies to recognize where their expertise and resources would be most effective. Some challenges faced during PPPs are:

  • While a PPP is symbiotic, most risk tends to be on the private enterprise, as its remuneration depends on execution and performance. The private entity must be upfront about how much risk it is willing to handle and set the price accordingly, otherwise it risks underperforming.
  • The process of creating partnership bylaws is cumbersome. With involvement of the government, private entity and industry stakeholders, there is significant space for disagreements, which can affect a project's timeline.
  • Every organization has its own culture, objectives and morals by which it operates. These tend to be quite different between private and public sectors and can result in poor cooperation between the two. It's important to recognize and align the goals of both parties as much as possible to reduce friction.
  • Political instability can create barriers to launching PPPs. In such situations, stakeholders tend to bide their time and look out for their agencies' best interests, which can lead to postponement of partnerships. One such barrier is a poor legal framework, which can discourage PPPs in specific countries or industries.
  • Inadequate management of key performance indicators is one of the biggest reasons PPPs fail. Creating distinct guidelines for a partnership is of no use if there isn't proper enforcement of said guidelines. KPIs need to be defined clearly and in a manner that is relatively easy to monitor, and regular transparent performance audits must be conducted to ensure the project stays on track.
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Michael Leshinsky is the president of Leshinsky Finance, a boutique consulting firm focused on the importance of wise strategic and financial planning during all phases of the business cycle contemplation to maturation and possibly sale of the business. Contact him by email at info@leshinskyfinance.com or by phone at 715-529-5661.

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