Public Private Partnership

MARCH 2013

Public private partnership the challenge of collaboration. Without confusion

Giovanni Castellucci

written by:

Giovanni Castellucci
Chief Executive Officer of Atlantia and Autostrade per l'Italia.

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Public private partnership the challenge of collaboration. Without confusion

The acronym PPP, which stands for Public- Private Partnership, has become a widely used term. If I daresay so, it has become almost “fashionable.” Work groups, conferences, and publications on the subject abound. But, as it often happens, when a concept becomes public, it is likely to be utilized by interested parties.
In particular, the concept of “partner” is very elusive. It has been emphasized by financiers to make the public party “coresponsible and co-obligated” in financing a new initiative. It has been emphasized by the public party to unload the responsibility of “conception” onto the private party, and by the private party to unload the project risks onto the community, especially those risks concerning finance, trade and construction.
And so the misunderstandings, disappointments and controversies abound. Because, besides the names and slogans, each concession contract (or PPP) is neither more nor less than a contract for the allocation of risk between the parties, which has nothing to do with partnership. Indeed, the greater the risk-sharing between the parties, the greater the inefficiency in their management.
Essentially, each infrastructure project has risks that are sufficiently coded:

  • demand risk: the risk that, due to the evolution of the aggregate demand and competitiveness of the new infrastructure, the demand evolves differently from the plans;
  • construction risk: the cost and time of construction exceed what is the expected;
  • authorization risk: the cost and time of the work evolve as a result of the authorization processes;
  • operative risk: related to the management;
  • regulatory risk: the evolution of contract rules and remuneration;
  • financial risk: related to the financing.

The experience of successes and failures leads to clear conclusions: the word “partnership” is very dangerous. A productive partnership is usually the result of a clear allocation of the risks involved. Each sharing or admixture thereof is always fraught with inefficiencies or, worse, improper transfer of obligations.
The most efficient systems are those in which the concessionaire bears the risk (of volumes, operational, investments) and the public party renounces any unilateral regulatory changes. Of course this is not always possible, especially where market exchanges or technological characteristics can change dramatically. In such cases, one can resort to total risk-sharing mechanisms, based on the market return, however, guaranteed to the private operator on the capital investment (Regulated Asset Base). The latter is the extreme remedy to an objective impossibility of defining certain conditions for the entire duration of the contract.
In essence, the word “partnership” is more than a contractually agreed sharing of risks; it should also refer to the “drive” of collaboration between the public and private sectors, the knowledge and acceptance of their respective constraints and needs. And that of the private sector cannot and should not be a guarantee of return on capital investment (what kind of an entrepreneur would that be?), but that of the certainty of being able to earn (and why not, even fail!) in their respective capabilities and their own vision. But on the basis of certain and unchangeable rules.

 

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