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Evaluation of Public Private Partnership

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Evaluation of Public Private Partnership in Infrastructure Projects
Karthikeyan Loganathan, M.S., S.M. ASCE,1 Mohammad Najafi, Ph.D., P.E., F. ASCE,2
Vinayak Kaushal, Ph.D., PACP, M. ASCE,3 Pius Agyemang, M.S., M. ASCE4
1
Graduate Research Assistant, Center for Underground Infrastructure Research and Education
(CUIRE), Department of Civil Engineering, The University of Texas at Arlington, Box 19308,
Arlington, TX 76019. E-mail: karthikeyan.loganathan@mavs.uta.edu
2
Professor and Director, Center for Underground Infrastructure Research and Education
(CUIRE), Department of Civil Engineering, The University of Texas at Arlington, Box 19308,
Arlington, TX 76019, E-mail: najafi@uta.edu
3
Assistant Professor of Instruction and Researcher, Center for Underground Infrastructure
Research and Education (CUIRE), Department of Civil Engineering, The University of Texas at
Arlington, Box 19308, Arlington, TX 76019. E-mail: vinayak.kaushal@ uta.edu
4
Project Engineer at Stantec, Dallas, TX 75046. Email: pius.agyemang@mavs.uta.edu
ABSTRACT
Public Private Partnership (PPP) has over the years proven to be a good procurement method for
infrastructure projects. This partnership combines the efficiency, expertise, and innovation of the
private sector as well as appropriate risk allocation. PPP provides an alternate avenue for capital
needed for major engineering projects. The objectives of this paper are to: highlight the
effectiveness of implementing PPP by looking at past experiences in infrastructure projects, to
investigate the conditions under which PPP is appropriate and to identify the benefits, success and
difficulties of PPP. The results of this paper show that most experts in the infrastructure industry
are aware of the effectiveness of PPP but are unable to determine how to maximize its success.
This paper further identifies the various factors needed for a successful PPP, such as risk allocation,
and a good partnering plan for a successful execution of the project.
INTRODUCTION
Private sector involvement in the delivery of public services is not a new concept; Public Private
Partnerships (PPPs) have been in practice since 1970s (Kulkarni 2009). PPPs are used in housing,
health, energy, water, and waste treatment projects. PPP policy has evolved globally as budgetary
challenges in public sectors limit potential options (Lewis 2001 and Cui et al. 2018).
A Public-Private Partnership (PPP) is a contractual agreement between a public agency
and a private sector entity. The skills and assets of each sector are shared through this agreement
to deliver a service or facility for the use of public. PPPs are means of utilizing private sector
resources in a way that is a combination of outsourcing and privatization with government
partnership. Nations are increasingly relying on creative financing and asset management to
maintain and improve infrastructure because PPP provides a more efficient and cost-effective
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means of providing the same or better level of service to the public (FHWA 2008, FHWA 2012,
and Verweij 2020).
According to the Federal Highway Administration (FHWA), PPP is defined as:
“A contractual arrangement between public and private sector entities pursuant to
which the private sector is involved in multiple elements of public infrastructure
projects (FHWA 2008).”
Roadways were first developed in the eighteenth century by the private sector in the form
of toll ways and turnpikes. The private sector was also involved in the nineteenth century in the
development of canals and railroads (Abdel Aziz 2007). Through the PPP agreement/contract,
skills and assets of each party are shared within to deliver a quality service or facility for the use
of public. The following are various factors which made PPP a successful practice in the United
States (Trebilcock and Rosenstock 2015):
• Combination of outsourcing and privatization
• A better alternative for bonding and traditional financial methods
• Increased innovation and efficiency
• Risk transfer
In addition to the above-mentioned factors, American Reinvestment and Recovery Act
resulted PPPs to be increasingly relied in the US for fulfilling governmental requirements at the
Federal, State, and Local procurement in infrastructure projects (Deloitte 2010).
The public sector holds and executes larger projects, which highly attract private sector.
However, public sector is specialized in administrative aspects as well as safety and wellbeing of
its citizens. Whereas the private sector on other hand, can incorporate skill, innovation, well
assessed risks, and technology into infrastructure projects. Therefore, there is a constant need to
combine both public and private expertise as neither of the sectors would be able to deliver the
projects by themselves without collaboration. However, the initial motive for implementing a PPP
was found to be for financial needs.
BACKGROUND AND CURRENT PRACTICES
The construction industry is complex because it comprises of a number of professions,
occupations, and organizations (Kim et al. 2020). The performance measurement in a PPP project
is a more complicated process than a traditional procurement due to the complex relationship
between the stakeholders and the long-term concession periods (Kulkarni 2009). There are
currently 23 states in the United States as well as Puerto Rico which have passed legislation to
allow PPP application in transportation projects (FHWA 2008). Over the past years, there has been
an increased focus on the provision of infrastructure in the United States. The private sector over
the years has become progressively innovative in several developed countries, which had
influenced the United Kingdom to initiate the current private sector involvement with
infrastructure projects. As a result, the Private Finance Initiative (PFI) was introduced. PFIs
represent 10 to 13% of all UK ventures in public infrastructure. About 100 PFI projects are
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undertaken per year (European Commission. 2003). The Australian government utilized PPPs to
deliver numerous infrastructure projects. Ireland on the other hand has also used PPP for most of
its transport projects. In the Netherlands, PPP is used for social housing and urban redevelopment
programs (Agyemang 2011). Asian countries such as India have employed PPP in highway
projects. Canada has about 20% of all its new infrastructure projects designed, built or operated
by the private sector (Deloitte 2010).
It should be noted that governments will need to ensure strict regulatory conditions that are
necessary for the successful implementation of PPP projects. Since infrastructure projects provide
needed services that extends beyond the immediate users of that infrastructure, private players
need to be compensated adequately (Bradbury 2010). Therefore, it is necessary to identify and
allocate all risk factors associated with PPP projects. However, a limited amount of study had been
conducted to contemplate and measure all the various factors leading to an effective PPP project
execution. In addition, there exists a need for a widely applicable evaluation technique to analyze
effectiveness of public-private partnership projects as well.
Objectives of this paper are to (1) highlight the effectiveness of implementing PPP by
looking at past experiences in infrastructure projects and (2) investigate the best conditions under
which PPP can be appropriately employed.
METHODOLOGY
Partnering is defined by the U.S. Army Corps of Engineers as: “the development and sustainment
of a relationship that promotes achievement of mutually beneficial goals”. A critical issue in PPP
projects in infrastructure development is the selection of the right private-sector partner. Selection
of partners is often challenging and poses a great risk for conflict and PPP relationship failures.
Various important selection criteria have been identified through a literature review of previous
studies on critical success factors and lessons learned from international PPP practices. These
identified criteria are classified into four evaluation packages for PPP projects in general: (1)
financial, (2) technical, (3) safety, health, and environmental, and (4) managerial (Zhang 2005).
A report by federal highway administration (FHWA) stated that various types of risks are
associated in partnering public sector and private sector. Also, risks allocated in PPPs might differ
from project to project (Lewis 2001). In addition, the report described various factors that lead to
increased PPP investments by examining macro-economic factors. It was concluded that
governments which have high debts, high demand for goods and services, and well-established
institutions tend to have more PPP projects. Various studies were accomplished to determine the
effectiveness of the PPP model for infrastructure projects in the United States (Bosso and Garvin
2008). However, there is still a high demand and knowledge gap in identifying critical risks
associated with PPPs and effectiveness in implementing a PPP project.
Data Collection through Survey. This research was conducted through a survey of professionals.
Survey responses from a wide range of industrial professionals such as engineers, contractors,
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suppliers, and subcontractors, was considered for the study. Respondents with past experiences on
PPPs were selected from both public and private sectors. The survey questionnaire included
questions to address the risks in implementing PPP, suitable projects and reasons for
implementing, various factors leading to a successful project, and other issues associated with it.
Location and Experience of Respondents. Respondents opted for the survey were from all
various parts in the U.S. with current or former experience with PPP. Respondents belonged to
wide variety of fields such as private sector, public sector, and research centers. Figures 1 displays
the location of respondents whereas Figure 2 shows distribution of respondents based on their
service sectors and experiences in years.
Figure 1. Locations of Survey Respondents.
(a)
(b)
Figure 2. (a) Experiences of Survey Respondents in Years and (b) Respondents by Sector.
Inhouse Practice Guidelines and Procurement Methods. Survey questionnaire investigated
about present inhouse PPP practices in participating companies or agencies. Also, the survey
intended to get an insight on any guidelines the entities may have while implementing a PPP
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project. It is interesting to notice that few respondents weren’t sure whether their agency or
company has an inhouse practice or guidelines. Figure 3 shows the distribution on current inhouse
practices or guidelines and types of procurement methods followed in their agency or company. It
should be noted that only around a quarter of respondents have a current inhouse practice or
guidelines for PPPs. It can also be noted that the respondents are familiar with Build-Own-Operate
(BOO) and Design-Build-Finance-Operate (DBFO) compared to Build-Operate-Transfer (BOF).
(a)
(b)
Figure 3. (a) Inhouse Practice or Guidelines in Participating Entities and
(b) Procurement Methods.
Significant Factors for Selecting PPP. Six factors were listed for the respondents to better
understand their insight for moving towards PPP. Figure 4 illustrates the listed factors and their
respective weightages given by respondents. It was interesting that the factor “Value for money”
was selected as an important factor by majority of the responders. In addition, when respondents
were comparing PPP with traditional procurement methods, almost all of them stated that PPP
projects utilize more of the private sector expertise and skills.
Figure 4. Significant Factors for Opting PPP.
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Profound Problems and Key Performance Indicators (KPIs) of Successful PPP Project. This
section of the survey intended to gain information on commonly found challenges and key
performance indicators (KPIs) during PPP implementation. Respondents ranked the listed KPIs in
a scale of 1, 2, 3, and 4, referring to disagree, neutral, agree, and strongly agree, respectively.
Figure 5 represents the responses of respondents to various factors included in the questionnaire.
In addition, profound problems involved in PPP projects were also listed and ranked by the
respondents as well.
Common risks involved in any PPP project such as market and revenue risks, operating
risks, financial risks, political risks, legal risks, and environment risks, were identified. The
enlisted risk factors were then ranked by the respondents based on their criticalities. Based on the
survey responses, it was found that most of the respondents agreed that market and revenue risks,
financial risks, and political risks, were of high importance.
Mean Score Ranking Technique. Collected survey responses were analyzed using the mean
score (MS) technique as shown in Equation 1. Five-point scale was used to calculate the mean
score for each response factor and mean scores were then used to rank factors in descending order.
The mean score for each factor was calculated using the following equation (Agyemang 2011).
Mean score is the weighted average for responses received for each survey question.
MS= Σ (f*s) / N, (1≤MS ≤ 5)
(1)
Where s = score given to each factor by respondents, ranking from 1-5
f = frequency of each rating for each factor or option
N = Total number of responses for that factor or option
(a)
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(b)
Figure 5. (a) Profound Problems Involved with PPP Projects and (b) KPIs of
Successful PPP Projects
RESULTS AND DISCUSSION
The survey responses helped in gaining an insight into the PPP procurement method and provided
a basis for ensuring a successful project. Based on the survey results, it can be generally identified
that there is a huge difference in risk allocation between PPP and other traditional methods. Based
on mean score ranking technique, KPIs of a successful PPP project were identified and ranked
based on mean score of each considered factor (Figure 6). As it can be seen in Figure 6, cost, time,
and money are found to be the primarily interested key indicators of a successful PPP project. In
addition to the identified KPIs for a successful PPP project, few other factors such as public
consultation, competitive procurement processes, and appropriate risk allocation, were also found
to be significant during implementing a PPP project.
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Figure 6. Mean Scores of KPIs for a Successful PPP Project.
CONCLUSIONS
The study considered most of the challenges involved in PPPs and critical KPIs for a successful
PPP project implementation. Survey responses were utilized to understand the various factors
which must be considered to have an effective public private partnership in any infrastructure
project. Based on survey responses and analysis results, the following conclusions can be drawn:
• PPP projects are mostly used on large projects which incorporate modern and innovative
ideas.
• Due to their scale and technicalities involved, such projects tend to cost more and have a
higher risk associated.
• Risk allocation is an important factor and much emphasis is needed on the appropriate
allocation of resources in PPP projects.
• Public consultation and competitive procurement processes were identified to be the
critical factors leading to a successful PPP.
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