To PPP or Not to PPP, That is the Question

Query: What do LaGuardia, Santiago International, Chicago Midway, Gary/Chicago International and Iqaluit Airport have in common?

Answer: They are all contemplating some form of private/public partnership (PPP).

PPPs are a radical departure from conventional procurement that involve contracts between a public sector authority and a private entity. The private entity designs, builds and operates the project for a given period and accepts financial, technical and operational risk in exchange for a return on its investment. For many years, countries including the United Kingdom, Australia and Canada have used various PPP models to deliver airports, hospitals and other buildings and infrastructure.

Although it is rare for two virtually identical projects - one conventional, the other a PPP - to proceed in parallel, a fascinating real-world case study of that very nature is currently under way. Two bridges are being built to connect southern Indiana and Louisville, KY. One is being financed the traditional way, the other through a PPP. Early indications suggest that the PPP model has delivered significant capital cost savings and, more importantly, has incorporated a number of innovations intended to reduce operating costs over the 35-year term of the PPP concession.

What are the main reasons for the emergence of such PPPs?

There was a time when PPPs were used by governments to play a "build-now-pay-later" accounting game known as "off-book" financing. But that rationale has largely disappeared, because government auditors have required long-term obligations to be accounted for as debt.

The following are more current reasons for the rise of PPPs. Some are more hotly debated than others:

Greater value for money. Proponents of PPPs assert that they deliver better value than traditional procurement, because the government seldom seeks to maximize profit and rarely faces competition as an owner, which creates fewer incentives to encourage efficiency and cost-effectiveness. While direct comparisons are uncommon, an Australian study found that eight PPP projects achieved average savings of 9% against traditional procurement. In a UK study of 29 projects, the average savings was close to 17%. It is reasonable to conclude that the competitive nature of PPPs drives bidders to find value for money in order to win.

Greater cost and schedule certainty. Construction projects are notorious for cost overruns, schedule delays or both. The most powerful and least contentious argument in favor of PPPs is that they can deliver greater cost and schedule certainty. Transferring the schedule and budget risk to the private sector creates powerful incentives. In the P3 model, cost overruns are absorbed by the private sector, and completion delays typically result in penalties.

Greater innovation. PPP proponents are driven to innovate in order to reduce capital and operating costs. In a well-designed PPP, innovation need not compromise functionality or maintenance, because annual payments to the selected proponent will typically reference functional and maintenance performance standards, with penalties for failure to comply.

Better control of stakeholder requirements. Changing stakeholder requirements, particularly when they occur late in the design process or during construction, can significantly affect cost and schedule. In the PPP process, once the winning bid has been accepted and the financial transaction has been completed, the consequences of stakeholders or end-users revising performance standards or design are both visible and onerous.

Our firm has been involved in many airport and other projects around the world that have been successfully delivered both traditionally and via PPPs, and it is fair to say that both procurement strategies have pros and cons. In a well-run PPP process, where the performance standards are clear and the participants have the freedom to innovate, many of the PPP advantages cited above can be realized. And for that very reason, a PPP may be coming to an airport near you.