A public-private partnership is a mechanism through which governments can enter into contracts with a private company in order to develop infrastructure or service projects. They're also known as "PPP" or "P3". The contract itself contemplates a complex, long-term relationship between the public and private parties, where the latter usually takes charge of providing a certain public service or investing in public infrastructure, in exchange for payment. In this scheme, the private sector takes on an important part of the inherent risk of the project, as well as responsibility for the provision of services.
The "traditional" conception of the provision of public services is that the government itself is who provides the services, and builds the necessary infrastructure to do so. These services can be of a varied nature, depending on each country's public policy. Common public services can include the provision of water, electricity, health services, education, public transportation and transport infrastructure. Now, the traditional system presents quite a few challenges. To begin with, the government will need to generate enough income to finance these projects, generally through the creation and collection of taxes. The government will also take on the responsibility of actually providing the service, and will thus need efficient and capable human resources and an effective and competitive procurement process. Lastly, the traditional system places the entire risk of operation on the government, with private parties involved only being responsible of supplying necessary elements or building certain infrastructure (in virtue of contracts entered via the means of public procurement). It's understood that government agencies are not naturally competent or efficient in providing public services, given the bureaucratic processes involved and high potential of corruption. Also, the need to finance an important number of projects affects directly any country's balance sheet and public debt.
PPP's are thought to bring solutions to a few of these problems, by taking advantage of the private sector's capacity and efficiency in building and operating infrastructure to improve the quality of public services. Additionally, having a private company in charge of providing the services means that public servants are no longer interacting with users, and this can help reduce the risk of corruption in countries where this is a very persistent problem. Finally, the private party is usually also required to finance the project's capital and operative expenditures, which presents an important relief in the national balance sheet.
PPPs can be structured in very different ways depending on the project and the business model. We could be talking about a concession project, where a private company is required to build and operate an airport terminal. This contract could contemplate that the private company receives payment directly from users, from which it gets its profit and also pays a percentage of it to the government as compensation for the right to provide the service. Another type of project could be one where a private company is required to build and operate a public hospital, and the payment is made by the government. Thousands of other projects could be structured in the same fashion, although there are some elements that are common to all of them.
Type of asset involved
Some projects could require the construction of brand new infrastructure, and are usually known as "greenfield" projects. Other projects involve already existing infrastructure, which the private party is responsible for operating, maintaining, and sometimes making important reforms or upgrades. These are called "brownfield" projects. Generally, a condition of PPP contracts is that the asset is transferred to the government once the contract is finished.
Role of the private party
This is another defining element, and it refers to the responsibility taken by the private party. These responsibilities could involve the design of the project, building or rehabilitation of a new or existing asset, operating and maintaining it, and also providing financing. While traditionally part of the government's role in providing public services, in PPP contracts these functions are transferred to private party.
But... what's in it for me?
The element that helps close the economic model is the project's payment mechanism. Since the private party is required to do an important investment in public assets, operating and maintaining it, and also finding proper financing to execute it, the payment mechanism will define whether the project is profitable or not, and whether it is of the interest of any private company. Payment could come from two main sources, or a combination of both: payment made by users (think toll roads), or payment made by the government. Some projects might require both, since the volume of income generated by users is not enough to cover expenditures and the profit margin. In these cases, the government might supplement a periodic payment.
Value for money
As I've mentioned before, the traditional system has the government take responsibility of providing and financing public services. I've also mentioned that while some PPP projects might be financed by user payments, in other cases the government is required to provide some additional subsidies to make the economic model attractive. A question I've asked myself while pondering these two ideas was: if the government is going to have to pay for it in the end, why not just go through the traditional system?
This is where "Value for Money" comes in handy. This analysis helps determine the most cost-efficient alternative. Basically, VfM analyzes whether public funds are more efficient when invested in a traditionally-managed project, or via a PPP contract. For a more accurate comparison, usual risks that come with the traditional system (overcosts, inefficiency, poor planning) are given values and added as "costs".
A final thought
While PPPs might seem like interesting choices for improving the quality of public services and incrementing public investment in infrastructure, it has often been chosen for the wrong reasons. Via some accounting maneuvers, payments owed in virtue of PPP contracts are not included in public balance sheets, allowing the government to accrue debt irresponsibly. Also, PPPs were widely popular in places like the UK in the 70's, while Latin American countries are just starting to try their luck with it. Some regions have moved past the initial PPP idea as new ways of providing services are being developed.