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This is one in a series of blogs by Jeff Delmon using the metaphor of marriage (or divorce) to explore the dynamics of public-private partnerships (PPPs) as relationships created between two parties.
I can cook, but my wife is a culinary artist. Not only is she a great cook, but she loves doing it; the kitchen is her zen space. So, while she cooks I play with the kids. After dinner, I clean up. Each of us does what we do best—a partnership. PPPs are the same: public and private, each stakeholder doing what they do best for the benefit of the project.
One thing that the private sector does pretty well, often better than the public sector, is find and improve revenue streams. The private sector is often very good at collecting tariffs from users and they’re also good at using available space and opportunities to create additional commercial activities. For example, the public sector generally looks at building a bus terminal only in terms of space for buses and collecting transport fees. The private sector sees a space that attracts a huge number of customers, who might want to buy other goods and services.
So here is my new dictum: PPPs should maximize sustainable revenues from all potential beneficiaries.
Here’s the proposed revenue cascade:
First, PPPs should maximize sustainable revenues from service beneficiaries. Those who receive a service, or a better service, should pay for it. By “sustainable” I mean that the cost is affordable and people demonstrate a willingness to pay. Sustainable also should mean a progressive sharing of costs based on ability to pay—industry should pay at least its fair share. Beneficiaries include those with adjacent land that will increase in value: land value capture can be achieved through property taxes, development fees and other forms of contribution.
Second, PPPs should maximize sustainable commercial revenues. Infrastructure should be used to create additional new economic opportunities and improve those that already exist. When the government funds a new public market, stalls are rented at low cost. Yet, the private land around the public market often sees rental rates soar. Shouldn’t a project to develop or expand a market also include land to exploit some of these higher-value services so that the public market capex can be cross-subsidized by these additional revenues? Similarly, an affordable housing project can include higher-priced residential and mixed-use facilities to attract more revenues (and create more opportunities for the residents of the affordable housing). Another example is a public parking structure that includes office or residential space above it.
Finally, and only then, should public money be used as project revenue, and only where that public money represents value for money for the government, the community, and the economy—for example, where some of the above kinds of revenues are too uncertain. In that case, the government can provide a guarantee of revenues. In this case, it may be best for the government to collect those revenues and simply pay an availability payment to the project. In this way the government takes project revenue risk, but it also keeps any upside where project revenues are better than anticipated.
Allow me to bring this back home.
As we celebrate Valentine’s Day, if you’re in a special relationship how might you enable that person to do what they do best? Where can you pitch in more—or better—to keep the partnership alive? Like a PPP, a good partnership, a sustainable partnership, means working every day to achieve together what you could not achieve apart.
This topic will be explored more in the upcoming municipal PPP framework under development by the World Bank with the Global Platform for Sustainable Cities – watch this space!
We look forward to hearing from you: The draft updated Guidance on PPP Contractual Provisions is open for public consultation to capture inputs and recommendations by all relevant stakeholders to feed into the new edition. Submit your feedback here by April 30, 2019.
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