In my last post, I discussed urbanization in developing nations and how our industry can contribute leadership and guidance on a broad scale. I also mentioned the importance of public-private partnership (PPP) as a mechanism to accomplish some of these goals, particularly in the emerging market economies. We’ll look at the what and why of PPP, and see how it can be an engine of innovation.
When we talk about PPPs in the context of global development, we mean government collaboration with the private sector to provide infrastructure or basic services. In other contexts, you may have heard it applied to a wide variety of partnerships, from philanthropy to government subsidy of businesses.
Exact definitions vary, but generally the key feature of PPP in infrastructure is that the government splits the financial risk with a private-sector partner or consortium that is responsible for two or more phases of the project. This is a long-term relationship and may encompasses the asset’s entire lifecycle.
The private partner is compensated on performance or:
In terms of the quality delivered, rather than how assets or services are provided. Emphasis on outputs also encourages innovation to take place by motivating the private partner to develop new methods and approaches for project delivery that meets requirements at lower costs. (UN-HABITAT, PPPs in Housing and Urban Development)
Our industry has certainly taken notice of the potential of PPP. The Infrastructure 2014 survey of global civic and real estate leaders by the Urban Land Institute (ULI) reported that 75 percent of both private and public-sector respondents identified PPP as the most important funding source for infrastructure projects in the coming decade.
PPP differs from privatization in that the government retains oversight, a portion of the financial risk, and final responsibility for delivery. Each party does what it does best: Government can focus on its administrative and regulatory role, representing the public good; the private sector can focus on the operational and execution aspects. Both partners manage and mitigate their share of the project’s financial risk in ways that are appropriate for them–which can itself be a significant source of cost savings.
But PPP’s effective division of roles is only part of the story: it also drives innovation. Rather than the government specifying the “best” solution and hiring a private sector partner to deliver it, the government can present the problem to businesses for development in a competitive environment. Traditionally, if a government engages the private sector as a subcontractor, the focus is, understandably, on delivering under budget and on time. But in a long-term PPP framework — especially one based on quality of service — you encourage partners to offer new solutions and ideas.
As an example, we can look at the work that the World Economic Forum’s Future of Urban Development & Services (FUDS) Initiative has been doing since 2013 with Tianjin, China, which was the inaugural Champion City. Tianjin’s leadership approached FUDS to discuss several urban development goals, including easing traffic congestion.
Congestion is a common problem faced by growing urban areas around the world, and Tianjin has made a strong and admirable commitment to address it. Nonetheless, the number of cars on the road in Tianjin is expected to reach 3 million this year (twice as many as in 2010), and construction of new roads can only address a fraction of increased traffic.
What’s clear is that more roads aren’t enough; Tianjin needs to use its existing roads better. This can be done through intelligent transportation system (ITS) technology: from sensors and communications that supply information to drivers about road conditions in the vicinity, systems for real-time centralized traffic management, dynamic usage tolling and “smart cars” that are equipped with adaptive cruise control — or are entirely driverless.
There are myriad possibilities, which is why FUDS made a key recommendation that Tianjin develop its solution in collaboration with the private sector, specifically under a PPP delivery model. Tianjin is fortunate to have a wide community of interested technology companies that could fund small-scale pilot projects; successful pilots could then be resourced and scaled by the city government.
Long-term public-private partnerships are a vital tool to build innovative urban solutions that improve growing cities around the world. Fortunately, as the commercial real estate industry shifts from the transactional to the strategic, people in our industry have begun to take on the advisory mindset and emphasis on consistent quality service that makes such partnerships so effective.
For a good in-depth discussion of advantages and best practices, see Public-Private Partnerships in Housing and Urban Development, published by UN-HABITAT as part of its Global Urban Economic Dialogue series. Also, see the World Bank’s Public-Private Partnerships Reference Guide for different uses of the term in the current literature and for an in-depth understanding the many different ways PPPs can be approached and configured.
Also, the World Bank maintains sector and project-specific data on PPP infrastructure projects around the world.
Dylan Taylor is President & COO of Colliers International. He leads more than 16,300 professionals in 502 offices in 67 countries. In 2011, Dylan was named one of the top Young Global Leaders in the World by World Economic Forum. Connect with Dylan on LinkedIn.