Meeting the Infrastructure Challenge with Public-Private Partnerships

Related Expertise: Public Sector, Cities of the Future

Meeting the Infrastructure Challenge with Public-Private Partnerships

Bridging the Gap

By Marco AiroldiJeffrey ChuaPhilipp GerbertRafael Rilo, and Jan Justus

The need for infrastructure investment around the globe is climbing. In emerging markets, population growth, increasing urbanization, and rising per capita incomes are driving the demand for new roads, power stations, schools, and water delivery systems. In the developed world, including the United States, significant reinvestment in aging infrastructures is becoming urgent. But this need for infrastructure investment comes in the wake of a financial crisis that has severely constrained public budgets in many countries. The result: a staggering gap of approximately $1 trillion to $1.5 trillion annually between demand and investment in infrastructure.

Public-private partnerships (PPPs) will increasingly play a crucial role in bridging the gap. These partnerships—in which the private sector builds, controls, and operates infrastructure projects subject to strict government oversight and regulation—tap private sources of financing and expertise to deliver large infrastructure improvements. When managed effectively, PPPs not only provide much needed new sources of capital, but also bring significant discipline to project selection, construction, and operation.

Successfully forming and managing PPPs, however, is no small feat. For one thing, governments, accustomed to focusing on delivering services, need to change their mindset and begin viewing these partnerships as a product that they must develop, market, and sell to potential private-sector partners. At the same time, both the public and private sectors must overcome the challenges created by an inherent conflict between their respective objectives: the public sector wants to minimize total or overall economic costs and ensure the delivery of high-quality service, while the private sector aims to maximize returns.

If not managed properly, that conflict can wreak havoc. In Latin America, for example, many PPPs have had to be renegotiated, a development that often results in greater costs to taxpayers. And in the United Kingdom, the government’s first private-finance initiative was criticized for, among other things, failing to deliver good value for taxpayers’ money.

Such stumbles, however, are not inevitable. Drawing on ten years of experience in advising both governments and private-sector companies, The Boston Consulting Group has identified a series of best practices that underlie successful PPPs.

The best practices for the public sector apply to every stage in the formation and implementation of a PPP, from selecting and designing the project, to developing a regulatory structure and a transaction process, to supervising the concessionaire (the private company entitled to temporarily own and operate the asset) throughout the project’s life cycle. In addition, public-sector leaders must take concrete steps to cultivate an environment in which PPP projects can flourish, such as securing the right project-management expertise within the government and employing policies that support a vibrant industry of engineering and construction companies as well as other private-sector partners, such as financiers.

Meanwhile, the private sector needs to develop a sophisticated approach to managing the myriad risks that PPPs present, from the political risks associated with a change in government policy to the risk of setbacks in financing or construction delays.

Leaders in both the public sector and the private sector who follow the steps outlined in this report will significantly increase the odds of making PPP projects a success. And as the demand for infrastructure investments rises while public funding remains constrained, well-designed PPPs will emerge as a critical tool for helping countries around the world advance their growth prospects and raise the standard of living for their citizens.