ppp project case study

The rising advantage of public-private partnerships

The World Economic Forum ranks US infrastructure behind that of most other comparable advanced nations such as Singapore, Germany, and the United Kingdom. 1 1. The global competitiveness report 2016–2017 , World Economic Forum, 2016, weforum.org. And it will get worse: from 2013 to 2020, cumulative US infrastructure needs are estimated to be nearly $3.5 trillion. Fiscal constraints limit how much governments can do on their own, and much has been written about how public-private partnerships (P3s) can be a viable option for filling this financing gap. But most overlook P3s’ ability to address many of the nonfinancing pain points in infrastructure development and delivery.

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A 2016 study by Syracuse University concluded through dozens of owner and concessionaire interviews for US-based projects that there is a significantly higher likelihood of meeting cost and schedule objectives under P3 models compared with traditional public sector project delivery where a project is owned, managed, and financed by government. 2 2. Public-private partnerships: Benefits and opportunities for improvement within the United States , Syracuse University, 2017, eng-cs.syr.edu. And yet when it comes to large, expensive public works projects, US elected officials have often struggled to develop and sustain the political will to partner with private investors on project delivery. The United States—which in 2015 accounted for roughly a quarter of nominal global GDP and 18 percent of global construction spending—accounted for just 9 percent of the world’s nominal total costs of P3 infrastructure in the same time period. 3 3. Emilia Istrate and Robert Puentes, Moving forward on public private partnerships: U.S. and international experience with PPP units , Brookings-Rockefeller Project on State and Metropolitan Innovation, December 2011, brookings.edu.

Elected officials’ reasons for hesitance are varied but often boil down to misplaced perceptions about enabling a private entity to finance, construct, and manage the long-term operation of public assets. Those who are singularly focused on the finance and ownership debate, however, can miss other tangible benefits arising from a P3 delivery model. P3s can address some of the key structural and operational reasons why traditional large infrastructure project delivery so often fails.

The pain points that P3s can address

A strategic P3 approach can potentially mitigate the overruns and schedule delays that plague traditional infrastructure project delivery by clearly delineating governance, allocating shared risk, integrating resources, applying best practices, and establishing a life cycle–long perspective of costs and accountability. In our experience, institutions face eight recurring challenges with their capital project portfolios, often unrelated to financing. P3s can potentially address each of these pain points to varying degrees depending on the project.

Unclear responsibilities. A lack of clarity about decision making and project governance often hinders effective project delivery. P3s address this challenge by requiring the owner to document and negotiate the performance standards, risk-allocation mechanisms, responsibilities, rewards, and penalties in a transparent and commercially realistic manner.

Poor alignment with strategy. Support can wane, or implementation can be delayed, when projects are not backed by a strategic and robust commitment. P3s, however, are thoroughly screened and vetted from a portfolio of potential investments with a high degree of public visibility, resulting in project commitments aligned with the strategy of the sponsor.

Insufficient optimization of project features. Sponsors are often constrained by existing standards, methodologies, and limited exposure to best practices under traditional approaches. But P3s encourage innovative problem solving by concessionaires during the bidding, design, construction, and long-term operational phases of the project.

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Lack of an ownership mind-set in the delivery team. Traditional project delivery often results in poor alignment between the contractor and owner. In P3s, concessionaires adopt the perspective of owners, sponsors, or both because of the performance incentives and obligation to ultimately transfer assets in a state of good repair.

Lack of discipline in execution. Large infrastructure projects often suffer from competing objectives, time frames, and resource commitments. P3s achieve clarity of delivery and operational accountability by defining and aligning contractual obligations and integrating project delivery functions, such as design, procurement, and supply chain management.

Poor project controls. Multiple participants and different systems can result in competing versions of progress, differing views of the truth, wasted effort on reconciliation, and a strained relationship among participants. P3 concessionaires typically deploy project-wide systems and considerable resources to identify, manage, and mitigate deviations from plan, resulting in better contingency planning and faster response to changes.

Low initial cost mind-set. Traditional procurement approaches frequently award contracts to the lowest construction bid without a mechanism to consider the full cost of life cycle operation and maintenance (O&M). P3s, by definition, focus on the long-term total cost of ownership, including O&M, at the time of contract award, thereby incentivizing the concessionaire to optimize not the minimum required capital, but the initial capital expenditure and ongoing operating expenditures that actually maximize value.

Poor resource optimization. Owners sometimes suffer from inadequate internal resources to ensure progress and daily decision making in a timely manner. P3s address this challenge by transferring delivery responsibility to highly capable and well-resourced teams incentivized to perform through the negotiated contract terms.

P3s consistently deliver better schedule and cost performance. Opinion or fact?

P3s will not tackle all of these challenges all the time—but a growing body of evidence supports the assertion that they can indeed solve many structural and operational problems that often cause budget and schedule overruns for large capital projects.

Based on published studies of the design, construction, and maintenance of social infrastructure projects, such as schools and clinics, in Europe, we find that the P3 approach can reduce life cycle cost up to 20 percent compared with the traditional approach. The UK Audit Office found a reduction of 70 percent of project budget overrun counts and 65 percent reduction in project schedule overruns deploying a P3 model. 4 4. PFI: Construction performance , report by the comptroller and auditor general, House of Commons, February 5, 2003, nao.org.uk; Performance of PFI construction , UK National Audit Office, October 2009, nao.org.uk. An Australian study of 54 projects showed that only 1 percent went over budget; they also beat the schedule on average by 3 percent, while traditional approaches were on average 24 percent late. 5 5. Public-private partnerships: Benefits and opportunities for improvement within the United States , Syracuse University, 2017, eng-cs.syr.edu; Performance of PPPs and traditional procurement in Australia , Allen Consulting Group and the University of Melbourne, November 30, 2007, irfnet.ch.

Like Australia, Canada boasts an impressive track record, with a mature P3 market that offers many lessons in best practices, including the establishment of an agency to oversee the growth and accountability of P3 opportunities to deliver infrastructure. A transparent procurement process and consistent approach drive Canada’s success.

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Success stories also exist in the United States. The largest availability payment–based social infrastructure project in US history, the George Deukmejian Courthouse in Long Beach, California, represents a successful P3 that accelerated replacement of an outdated and poorly functioning facility. The state of California awarded the project to a private consortium in a 35-year project agreement. The building was completed in 2013, on time and within budget, and it opened in May 2014. 6 6. Judicial Branch Report to the Legislature: Evaluation of Cost-Effectiveness of the Governor George Deukmejian Courthouse , California Administrative Office of the Courts, June 2014, courts.ca.gov. For its part, the private consortium gained low-risk cash flow payments on the lease for the full duration, protected by the clause that the consortium can evict the state if availability payments are not made. Today, the state of California continues to occupy the award-winning courthouse, with dramatically improved facilities and amenities, room to expand, and a performance-based agreement with the concessionaire to ensure satisfactory long-term operations. Transportation success stories, such as the I-595 reversible managed lanes in Broward County Florida and the I-495 lanes in Virginia, have proven the ability of properly conceived and managed P3 projects to provide tangible transportation benefits.

Of course, the P3 approach isn’t right for every project. In some cases, the advantages do not sufficiently offset the political, procurement, delivery, or revenue risks; value-for-money analyses clearly point out instances where this model is not applicable. Sophisticated financial investors place high hurdles on risk identification and mitigation before submitting proposals that satisfy their expected returns. And no matter the situation, a poorly executed contract can put a government in a risky position should the private partner fail to deliver.

However, public officials charged with shepherding the use of public funds are increasingly looking for better ways to deploy resources in the most efficient way possible. The P3 approach solves many root causes of poor project performance on large capital investments. And indeed, the current market suggests strong momentum. As of January 2016, the Federal Highway Administration had identified that 35 states, the District of Columbia, and Puerto Rico have statutes that enable the use of various P3 approaches for the development of transportation infrastructure, to provide another arrow in the project delivery quiver. 7 7. Kevin Pula, Public-private partnerships for transportation: Categorization and analysis of state statutes , National Conference of State Legislatures, January 2016, ncsl.org. And governments are validating this delivery approach through a documented portfolio of successful projects that offers many lessons about the circumstances, ingredients, and benefits of deploying a P3 approach that places project delivery excellence at the fore. We anticipate that as evidence of successful infrastructure P3s continues to mount, we’ll see the pace of P3 deployment increasing in the US market.

Michael Della Rocca  is a partner in McKinsey’s Philadelphia office.

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The Republic of Korea has rich experience in implementing public–(PPP) projects for almost a decade. This experience provides valuable lessons for most developing member countries (DMCs) and that merits wider dissemination. The two-volume report prepared by the Korea Development Institute (KDI) presents an in-depth assessment of the different components of PPP framework of the Republic of Korea, including comparing and contrasting the success factors of the Korean PPP model with the experience of other countries through invited presentations on PPP frameworks and multisector case studies.

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Gautrain Rapid Rail Link

• South Africa

Gauteng, South Africa

Transport - Rail

Procuring Authority

Gautrain Management Agency

Project Company

Bombela Concession Company (Pty) Ltd

Project Company Obligations

Design, Build, Finance, Operate and Maintain

Financial Close

25 January 2007

Capital Value

ZAR 24.5 billion (USD $3.4 Billion – 2007 exchange rate)

Contract Duration

19 years, 6 months

, land acquisition delays, design and construction changes

Summary Lessons Learned

Change processes need to be clearly defined, with incentives to respond in a timely manner to avoid unnecessary prolongation of change agreement and implementation., engage with stakeholders and address land access issues early to avoid the risk of failure to secure land access and delays while the construction is progressing., shared data and information management systems used by the project company and procuring authority must be compatible and meet each party’s respective requirements., periodic meetings should not be overcrowded such that they are unmanageable and ineffective., the timing of environmental impact assessments for linear projects is critical, so as not to cause delays on the project..

The case study was drafted based primarily on inputs received from the Gautrain Management Agency (GMA) (the Procuring Authority). 

The Gautrain Rapid Rail Link project is an 80km rail project developed to ease traffic congestion and facilitate travel in the Johannesburg-Pretoria corridor in South Africa. It is an ambitious undertaking, being the first PPP in South Africa of this scale. The project faced a range of challenges including some difficulties in land acquisition that led to delays during construction. A number of disputes also went to arbitration, however the parties negotiated a settlement and the project is currently operating successfully. The project was delivered in two phases on 8 June 2010 and 7 June 2012.

Project Inception

Goals and objectives of the partnership.

The goal of the project was to provide a rail-based commuter service in the Johannesburg-Tshwane corridor and provide relief to the road network, as well as providing a link between Sandton and O.R. Tambo International Airport. The 19.5-year project involves the design, construction, finance, operation and maintenance of a 77km long track, with the provision of 96 cars of rolling stock to transport passengers. In addition to the rolling stock, the Project Company is responsible for providing bus links to the train stations to facilitate access to the rail network, and with this, the responsibility for transporting people from their area of residence to the station and across the network falls to the Project Company. The Gautrain project was also considered to be part of South Africa’s efforts to create jobs and improve social mobility through job creation and skills development to disadvantaged populations.

The Economic and Political Environment during Inception

Public transport is widely available in South Africa, however the quality and reliability has not always met the required standard.  At the time of project development, the Passenger Rail Agency of South Africa through Metrorail (the South African operator of commuter rail services) delivered over one million trips per day during 2006 and all major cities had bus services.  However, the challenge was that the coverage of the public transport system did not keep pace with urban development and quality of services suffered as a result of under-investment.  The government, therefore, identified the need to ease traffic congestion within the Johannesburg-Tshwane corridor, which would allow for the provision of efficient transportation and facilitate movement of people. At the time, the upcoming 2010 FIFA World Cup added time pressure to have a reliable transport system in place in Gauteng.

There was significant concurrent activity in the construction market during the construction phase of the project, with a range of other major construction projects underway in preparation for the FIFA World Cup. Five stadia were built for the games, in addition to other transport and infrastructure developments to accommodate the mass inflow of people. This increased demand created a major shortage of skills, materials, and equipment during the time of construction of the project.

Management of the PPP Contract

Construction phase.

The 80km Gautrain rail line included the construction of 15km of tunnelling and a number of viaducts, stations, depots, and parking bays. The scope of the project also included supporting facilities, in addition to the rail track and rolling stock. The project was completed in two phases, with the first delivery date of 8 June 2010 and the second delivery date of 7 June 2012. Due to the upcoming FIFA World Cup, the first phase was accelerated and delivered three days ahead of schedule.

Phase 2 of the project runs from Midrand to Pretoria and Hatfield, and from Sandton to Park (Johannesburg). Phase 2 was delayed by five months due to delays associated with land acquisition and the dispute related to water ingress in one of the tunnels between Rosebank and Park. These challenges are detailed further below under the heading “Key Events”.

The Procuring Authority approached the transition from financial close to construction in a proactive way by commissioning the Project Company to undertake enabling works once the preferred bidder had been identified (prior to the start of the construction phase). This was also beneficial to the Project Company itself, as it already had a team in place when construction started.

There were many challenges in the construction of the project, including difficulties in obtaining land access. Because of the time pressure arising from the need to complete parts of the system before the FIFA World Cup, some approvals from local governments along the proposed route could not be obtained prior to financial close, and in some instances, these local governments capitalised on the urgency and pressured the Project Company to deliver additional works to improve some roads. There were other problems with engaging stakeholders, such as the requirement to relocate one of the stations to accommodate property developments along the route. While land acquisition risks were retained by the Procuring Authority, the costs of relocation of the utilities and road improvements around the stations were transferred to the Project Company.

An Environmental Impact Assessment (EIA) process was successfully concluded and the necessary environmental authorisations were obtained for the project by 2009.  Obtaining the necessary environmental authorisations took longer than envisaged. This delay was caused by the EIA process having to commence at the planning stage of the project and so it was based on preliminary designs. This resulted in amended EIA applications that had to be submitted to cover changes to many sections of the alignment, proposed by the Project Company.

During the construction period, some technical issues arose, including the tunnel not meeting the specifications for maximum water ingress. This resulted in a dispute that was settled along with all other disputes in an agreed settlement in 2016, which is detailed below under the heading “Key Events”.

Operations Phase

The service provided by the Project Company and the operations contractor met and exceeded targets of availability and punctuality at an average of 99.5% and 98.6% respectively for all trips scheduled for the 2016/17 financial year. Safety and security targets have also been met and exceeded, increasing customer confidence in the Gautrain and in public transport in general. The safety of passengers and of the system itself remains at excellent levels. Recently, there has also been an improvement in the general condition and cleanliness of the station buildings, resulting from the successful implementation of intensive cleaning operations by the Project Company.

The operations of the project have been broadly successful, and the 2016/17 financial year saw an overall increase of 1% in the number of passenger trips, with the number of passenger train trips reaching 15,612,070. However, the number of users from airport stations declined due to competition with app-based cab/taxi hailing services. Consequently, a freeze on airport service fares has been introduced for 2017 to keep up with the competition.

After six years of operation and close to 80 million passenger trips, the project has had a positive impact on the provincial economy, alleviated traffic congestion and rejuvenated several inner cities in Johannesburg and Tshwane. It has created jobs and helped to re-establish the rail sector in the province. Some studies on the wider benefits of the project indicate that between 2006 and 2011, over 122,000 jobs were created by the project. For every ZAR 1 spent on the project, ZAR 1.72 has been added to the Gauteng economy.  With the project’s 99 percent availability rate, less than 0.4 percent fare evasion and 98 percent punctuality of its trains, the system has generated strong demand for the expansion of the project  [1] .

Performance Monitoring and KPIs

For the construction phase, monitoring of performance was undertaken through milestone achievement. As part of the payment mechanism, this approach served as an effective indicator of performance during the construction phase. These milestones were monitored by the Procuring Authority and Project Company, as well as an independent certifier.

There were approximately 1,000 milestones on the project, covering over 25,000 individual activities, which made ongoing performance monitoring a challenge. There were 12 key milestones, which were spaced 4-5 months apart and were used as an indicator of integrated progress. They were also useful for judging how the civil works were progressing compared to the rolling stock and systems delivery. On completion, both parties would inspect the delivered works with an independent certifier who is the only party authorised to certify compliance and progress of the work and issue a payment certificate to the construction contractor for the completed works.

In the operations phase, there are 25 measurable criteria against which performance of the Project Company is monitored each month, with potential deductions to be applied in case of failure to meet the standards. The performance criteria are monitored by the Project Company and reported to the Procuring Authority on a monthly basis. The monitoring and recording system is as automated as possible and manual interventions are minimised, and the payment mechanism prescribes deductions to unavailability of service or poor performance.

One KPI is a social development criterion, which sets a range of monthly targets related to training and employment of male and female historically disadvantaged individuals and has related non-compliance payment deductions. This reflects the government’s objective to create jobs and improve social mobility of disadvantaged populations. 

Payment Mechanisms

The Procuring Authority provided financing in the form of a USD $3 billion grant, while the Project Company raised USD $360 million in debt, and USD $70 million in equity.

It was understood from the outset that the required capital for the project was far greater than what the private sector could invest and recover from user fees. As a result, government support was the main source of funding and it came in two forms. The first is a provincial contribution to fund the construction phase, which is the bulk of the government support, amounting to approximately USD $3 billion. The second financing contribution from the government came in the form of “a patronage guarantee” and is being provided during the operations phase.

During construction, where the first form of government contribution was provided, milestone payments were made to the Project Company, with an independent certifier commissioned by both the Procuring Authority and Project Company to monitor compliance and issue payment certificates for each payable milestone reached. This traditional milestone payment system was proven adequate for such a large project, with multiple heavy works undertaken at the same time.

For the operations phase, when revenues are above a certain threshold, profits are shared between the Project Company and the Procuring Authority, on the basis of the achievement of certain rates of return on equity by the Project Company. There is also a lower threshold, which is covered by a minimum revenue “patronage guarantee”. Demand risk is therefore taken by the Project Company up to a certain level, below which the patronage guarantee is given. User fees and ancillary revenues are the main source of income for the Project Company. There is an incentive payment scheme for the Project Company for revenue growth during the initial five years of the operations period.

As for performance deductions, since the majority of the KPIs cover operational excellence and performance, any abatements resulting from failure to meet operational KPIs are generally borne by the operations contractor and deducted from its fee. So, the risk of poor performance is transferred from the Project Company to the operations contractor. The Project Company is, however, exposed to a reduction in the patronage guarantee payable by the Procuring Authority in instances where train or bus availability falls below set thresholds.

To calculate the patronage guarantee, the minimum required total revenue (MRTR) financial metric is used, which was part of the Project Company’s bid submission. This metric is used to make two calculations to determine the amount of the patronage guarantee. The lesser amount of the difference between the MRTR and the actual revenue, and the difference between the MRTR and the revenue forecast is considered to be the patronage guarantee amount. As a result, the Project Company carries the risk of its revenue being below its forecast. Earning revenue above its forecast and below the MRTR reduces the guarantee payment from the Procuring Authority. Therefore, the Project Company is not incentivised to achieve revenue higher than its forecast once the initial five-year incentive scheme ended.

Change Management

The change management process in the PPP contract for scope changes proposed by the Procuring Authority was broadly structured as follows:

• The Procuring Authority would issue a change notice;
• The Project Company would respond with an outline cost within an agreed timeframe;
• The Procuring Authority would then make a decision to allow the Project Company to proceed with a fully developed response based on the initial outline cost; and
• If the Procuring Authority allowed the Project Company to proceed, the Project Company would submit a fully developed response.

However, there is no time limit on when the final response from the Project Company should be submitted. This proved to be a major flaw, as there was no time limit for the Project Company to respond with a fully developed solution. Each change had to be negotiated from first principles (with no base rates agreed prior to financial close), which added to the time required to complete the process.

In addition, there was a provision for the Project Company to refuse a change if the number of changes issued was over 15 during the construction period. As it happened, the Project Company did not enforce this right, as it became clear that more changes were needed for the project to proceed. In total, the variations implemented amounted to less than 5% of the initial capital cost.

[1] http://gma.gautrain.co.za/article/expansion-of-gautrain-rail-network

Role of Government

This project was the first PPP of its kind in South Africa, thus requiring a certain level of adaptation by the government. The government of South Africa formed a PPP unit to promote PPPs and provide advice to Procuring Authorities on contract management and team set-up. The Ministry of Finance and Treasury provided advice and support to the Procuring Authority on this project. Initially, the Procuring Authority was the Department of Roads and Transport of the Gauteng province government. Subsequently, Gautrain Management Agency was formed following the approval of the relevant legislation by the Provincial Executive Council in December 2006. The Procuring Authority (Gautrain Management Agency) provides the necessary capacity to fulfil the province’s contractual obligations and manage its relationship with the Project Company and all other stakeholders. The objectives of the Procuring Authority are defined by the Gautrain Management Agency Act. Overall, its objective is to manage, co-ordinate and oversee the project in the interest of the government as a whole and the province in particular. The Procuring Authority’s responsibilities include matters such as managing the relationship between the province and the Project Company in terms of the PPP contract, managing assets and finances, liaising with all relevant government institutions and interested parties promoting the project, promoting Broad Based Black Economic Empowerment, and integrating the project with other transport services.

Relationship between the Procuring Authority and Project Company

Team set-up and staffing.

The approach from the Procuring Authority in terms of giving the Project Company a head start on enabling works outside the PPP contract ensured a smooth transition from financial close to construction. Both the Procuring Authority’s team and the Project Company’s team were strengthened after financial close with new staff being brought in to manage the project. The Procuring Authority’s team was staffed with local experts and had extensive experience covering design, major programmes management and contract management. Contract management training was also provided to new staff after financial close.

Communications

The interviews conducted suggested that communication between the parties has been challenging to manage. Periodic meetings were the principal form of interaction between the parties, and while there were monthly meetings held for the project, these included up to 30 participants, which at times made it difficult to ensure sufficient focus due to the varied interests of the parties involved.

Weekly meetings were also held between the Procuring Authority and the Project Company’s representatives to discuss key issues, and these were more productive as they involved no more than eight people at a time. The meetings with the independent certifier were seen as beneficial, as they allowed for an objective discussion on the certifier’s findings and eventually evolved to being used to monitor the project’s milestones.

Informal strategic-level meetings were held on a quarterly basis, with the aim of allowing the parties to socialise and build stronger relationships. This was stopped two years after financial close.

In the operations period, formal contractual meetings as well as informal coordination meetings are held on a weekly, monthly and quarterly basis.

Information Management

A data and document management system was stipulated in the contract. The Procuring Authority selected a particular software system for all document and information management. However, the Project Company found that this was not suitable for its record keeping and internal management control, which resulted in the Project Company and its related parties using their own software for document and information management. The consequence was that the Project Company had to then convert their document and information management system to be compatible with the Procuring Authority’s in order to use it.

There were multiple disputes on the project, starting in 2008 when it became clear that the Procuring Authority would not be able to provide the land access as planned. The Project Company believed that it was entitled to relief in case of delays, however it was not until the delays on the critical path reached nine months that the construction contractor accelerated the works and claimed for compensation. There is a Dispute Resolution Board, but it was set up to deal with issues related to scope and specifications only. Any other issues can be quickly escalated to arbitration without going through the Dispute Resolution Board. In the case of this dispute, the matter went to arbitration as an amicable agreement could not be reached.

Another claim in the project was started by the Procuring Authority after it found that water was leaking into the tunnels, in excess of the maximum ingress permitted. The disagreement was escalated to arbitration. The Procuring Authority won the arbitration award for the water ingress in the tunnel and the Project Company was ordered to carry out remedial works.

In addition, a number of separate disputes had gone to arbitration, and on 18 November 2016, the Procuring Authority and the Project Company agreed to a comprehensive settlement of all disputes relating to the construction period of the project. The mutually agreed settlement brought to an end the protracted, costly and multiple legal and arbitration processes between the Procuring Authority and the Project Company.

The settlement resulted in: 1) the Procuring Authority paying the Project Company an amount of ZAR 980 million in full and final settlement; and 2) the Procuring Authority agreeing to forgo receipts of the railway usage fee in the amount of ZAR 266 million that would otherwise be payable by the Project Company.

Delays Related to the Environmental Impact Assessment

The initial EIA process began during the planning phase of the project from 2001 to 2003. As a result of various route re-alignments and design changes proposed by the Project Company, the EIA process had to be updated during the construction phase and was completed in 2009.

The protracted EIA process spanned eight years and had two major implications: the costs associated with the EIA process were much higher than originally anticipated and EIA consultants appointed by the Project Company left the project during the lengthy process, which led to a lack of knowledge continuity.

The timing of the EIA process posed a challenge, as detailed above under the sub-heading “Construction Phase”. The EIA regulation at the time did not provide for a seamless transfer of environmental compliance responsibility from the initial applicant (i.e. the Gauteng Department of Public Transport, Roads and Works) to the Project Company. This contributed to disputes between the Project Company and the Procuring Authority.

As a result of the requirement for the implementation of the EIA process by the Procuring Authority before the contract award and final design development, much of the process had to be redone by the Project Company to address changes to the route alignment and final design development completed. The risk for the detailed EIA is commonly transferred to the Project Company at the contract award.

There have been disagreements between the Procuring Authority and Project Company related to the responsibility for compliance with the conditions attached to the authorisation to proceed with the project, as part of the EIA process. This resulted in a dispute that was resolved in arbitration.

There have also been disputes between the Gauteng Department of Public Transport, Roads and Works (as the project proponent and applicant for EIA authorisations) and some public participants in relation to the route alignment of the project, following the comprehensive public consultation process.  Most of the disputes were solved by the Gauteng Department of Public Transport, Roads and Works accepting and implementing the proposals made by residents for alternative route alignments, but some disputes led to litigation which resulted in a decision in favour of the Procuring Authority.

Lessons Learned

The process for managing scope change on the project was slow, which led to delays and increased risk for all involved. Furthermore, the change process did not distinguish between major and minor variations. As there were no base rates agreed contractually for standard costing of small changes, they were all being negotiated and agreed separately. Every change, therefore, had to be negotiated from first principles, which added to the time required to complete the process. Furthermore, the change process did not specify a time limit for the Project Company to respond with a fully developed solution for a change requested. Change processes need to be clearly defined, with contractual mechanisms to require responses in a timely manner. Not having response deadlines can lead to unnecessary prolongation of change agreement and implementation.

Challenges faced in Gautrain’s land acquisition highlight potential complexities and consequent delays due to land acquisition. The work required in obtaining land access should not be underestimated, as any failure to secure land on time can either halt the project or lead to significant change. Challenges are not only due to non-supportive landowners; relevant stakeholders will also often have concerns over other issues, such as environmental impact.

Although work on land acquisition and access started before construction, this work could not be completed because of pressure to implement the project to meet the FIFA World Cup deadline. Delay on land acquisition gave local stakeholders leverage over the Procuring Authority and the Project Company, which, in this case, was evidenced through the pressure exerted by local stakeholders and landowners on the Project Company to build and refurbish some existing assets, e.g. roads near stations. Early land acquisition would reduce pressure on the construction programme and give more room for risk mitigation.

A data and document management system was stipulated in the contract. However, the Procuring Authority and the Project Company used their own software for document and information management. The consequence was that the Project Company had to then convert their document and information management system to be compatible with that of the Procuring Authority.

The type of data sharing and monitoring systems should be carefully selected. Unsuccessful planning on data sharing and monitoring platforms can lead to additional costs for both parties, and it is clearly inefficient for either party to keep converting data from one system to the other. A compatible platform should be developed as early as possible, and if that is unachievable, then compatibility issues need to be addressed before information and documents start to pile up.

Periodic meetings were the principal form of interaction between the parties.  Weekly meetings were also held between the Procuring Authority and the Project Company’s representatives to discuss key issues, and these were productive as they involved no more than eight people at a time.

In addition, there were monthly meetings held for the project, which included up to 30 participants, making it difficult to ensure focus.

Each of the parties represented at the meeting during the construction phase had their own interests in the project and attending to each of their issues and managing the interfaces was time-consuming. It is, however, the responsibility of the Project Company to manage the interests of its subcontractors.

The timing of the EIA posed a challenge for the project, as it was implemented at the planning stage of the project based on a preliminary design. Consequently, a large part of the EIA process had to be redone once the route alignments and detailed designs had been completed by the Project Company.

Related Case Studies by Sector

Brabo i light rail.

Brabo 1 Light Rail is the first PPP project for public transport in Flanders, Belgium. The project was procured by two Procuring Authorities under two separate contracts.

Intercity Express Programme

United Kingdom (UK)

The Intercity Express Programme project was initiated in 2005, with the Procuring Authority’s business case showing that, at that point in time, trains were only just providing sufficient capacity to meet demand, and that existing trains were approaching the end of their expected service life.

Zaragoza Tramway

The Zaragoza Tramway system is 12.8km long, has 25 stops, two inter-modal parking garages and two depots, one of which is used as a main central terminal building.

Developing Urban Rail Using Public-Private Partnership: A Case Study of the Gold Coast Light Rail Project

• First Online: 03 January 2022

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• Tingting Liu 7 &
• Suzanne J. Wilkinson 8  

Part of the book series: Competitive Government: Public Private Partnerships ((CGPPP))

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Urban rail development plays an important role in fostering a region’s social and economic development. PPPs as innovative procurement methodologies have been used for urban rail projects around the globe. Among the various PPP models, design-build-finance-operate (DBFO) is a commonly used model for urban rail projects. However, it remains unclear whether this model is suitable for urban rail development. This research aims to examine the application of DBFO model in the urban rail sector, analyze their suitability for urban rail transit projects, and recommend strategies for improved use of DBFO models. The Gold Coast Light Rail was selected as the case study. Document analysis was used as the main data collection method. This research shows that the use of PPP delivers good social and economic impacts. The use of the DBFO model exhibited both benefits and limitations. The research suggests that to better use the DBFO model, equitable risk allocation, flexible contract design, and extensive community engagement and public consultation are required. The results from this research will provide useful reference for the public sector on the selection of procurement model for urban rail projects. The research also offers practical guidance on how to plan and structure a PPP project in urban rail development.

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Liu, T., Wilkinson, S.J. (2022). Developing Urban Rail Using Public-Private Partnership: A Case Study of the Gold Coast Light Rail Project. In: Hakim, S., Clark, R.M., Blackstone, E.A. (eds) Handbook on Public Private Partnerships in Transportation, Vol I. Competitive Government: Public Private Partnerships. Springer, Cham. https://doi.org/10.1007/978-3-030-83484-5_13

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How countries should set up an effective ecosystem for public-private partnerships

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Public-private partnerships (PPPs) are an essential tool to satisfy and advance infrastructure needs worldwide. If planned, designed and implemented properly, PPPs can contribute to national development and growth across all socioeconomic sectors, benefiting private- and public-sector players. Creating high-performing and effective PPPs entails the consideration of specific requirements at the different stages of planning, structuring and implementation of such projects, at sector and country levels and across four main levers of the ecosystem: governance, strategy, transaction process and implementation/monitoring.

Private-sector participation approaches and PPPs

Infrastructure is critical for the world’s economic and social development, but there has been a growing gap between infrastructure spending and needs. To mitigate that gap and cope with spending limitations, governments often involve the private sector, which can offer financial support and introduce more efficiency, quality, know-how, timely delivery and optimal sharing of project risks with the public sector, creating long-term value for invested money. The private sector can also infuse and spur innovation, as seen mainly in Europe and Latin and Central America and illustrated by the Finnish Digital Cluster PPP ecosystem (DIMECC).

Multiple approaches to private-sector participation in the economy are distinguished by the degree of risk private parties assume. PPPs are one in a continuum of approaches involving, through a long-term contractual relationship, the private sector in public-service delivery and investment. Particular to PPPs is the significant sharing of risk between the public and private sectors in three main areas: financing, ownership and revenue.

PPPs can unlock significant financial and non-financial resources to foster the procurement of infrastructures and services in a way that is convenient for both the private and the public sector. This Viewpoint shares insights on establishing an effective ecosystem for governments and public entities to successfully deliver PPPs.

PPPs in infrastructure

While largely viewed as powerful tools, PPPs contribute to less than five percent of public infrastructure investments, leaving room for improvements to meet the expected rise in global public infrastructure financial needs. Adoption of PPPs has been limited for several reasons:

• High complexity , due to the interaction of several public and private players, potentially from different countries.
• High costs , requiring extensive legal expertise and monitoring due to the complex interaction of parties and the indexed nature of public repayments.
• Need for an enabling environment that can properly structure deals and monitor the work of the private parties and their remuneration.
• Availability of bankable projects to attract private parties and justify the transfer of risk.

Despite efforts to enable private-sector participation, countries often struggle to implement PPPs and structure projects properly. They face four key challenges:

• Striking the right balance between empowering sectors and maintaining quality.
• Ensuring the project pipeline is suitable and strong.
• Ensuring the project is structured in the right manner, protecting both public and private sectors.
• Optimizing implementation to maximize success of PPPs.

In the following sections, we share insights from our engagements in optimizing countries’ PPP ecosystems. Note that municipality-scale PPP projects may follow a different path.

1. Enabling success through effective governance

Empowering sector ministries

In any PPP ecosystem, the sector ministry should hold project ownership as the party ultimately responsible for implementing these projects and managing related contracts for the full project term (~30 years). The ministry’s buy-in and leadership of the full procurement effort, from project preparation to structuring and tendering, is essential to prevent future project failure.

Streamlining the approval authorities

Clearly defining stakeholders’ roles and responsibilities, streamlining decision-making, minimizing approval layers and ensuring the PPP unit is playing the right support role for line ministries to avoid paralyzing progress is key. It is also important to ensure:

• The highest level of approval is reached prior to tendering to ensure relevant comments are incorporated in due time.
• Delegation principles are used to ease the workload on the higher authorities while maintaining adequate levels of control.

The Ministry of Finance (MoF) is often tasked with steering the country’s PPP ecosystem and procurement process as gatekeeper of the country’s budget. The MoF is often the highest level of approval authority, except where an asset sale is included as part of the PPP process, which requires involving a higher decision-making body.

Creating “PPP catalyzers”

The role of PPP units can vary greatly depending on the country’s PPP ecosystem maturity:

• With strong ministerial capabilities running PPP projects, the PPP unit may take a backseat approach, focusing on guidance and support, and supporting the MoF in performing comprehensive control and checks across different sectors on key performance parameters.
• When ministries lack the capabilities to run PPP projects, the PPP unit assumes the role of sharing knowledge, building capabilities and actively supporting sectors in creating their project pipelines and assessing and ensuring end-to-end procurement of PPP projects.

While it is possible to execute a project without one, a PPP unit helps ensure consistency across sectors in approaching the private sector, overcoming the complexity of PPP processes and construing a solid framework (technical, legal and financial) through which to procure and execute projects. PPP units are vital in prioritizing projects according to need and in maintaining a good hold on project progress to avoid calling on contingent liabilities that could severely affect a country’s budget.

2. Building a strong project pipeline

Defining a private-sector participation plan

Sectors must prepare a private-sector participation plan aligned with overall strategic objectives and targets to eliminate roadblocks in private-sector participation and define a healthy pipeline of projects that can be procured through PPPs. Such a project pipeline should be constructed on a rolling basis and should consider the time to procure PPP projects (typically several years). Sectors also must increase their readiness, including but not limited to the governance, operational activities and resources required for effective strategy execution.

Conducting a thorough needs assessment analysis

Sectors should identify and select projects to satisfy their objectives and qualify for PPP, understand risks and develop a pre-feasibility analysis for each. A needs assessment is essential to understand the project’s importance and criticality, whether the project is needed (and at the size indicated), if costs are reasonable and if technical requirements are right. This can be validated within the PPP unit itself or outside if the country has a body that manages capital spending efficiency. A needs assessment is vital to ensure the right amount is spent on the right project, to provide a good basis for project approvals and to streamline the PPP procurement process by securing reassurance to the sector before fully detailing the business case, which is where costs start piling up.

Selecting PPP projects that matter

Due to the costly and time-consuming procurement process (about two years from preparation of business case through financial close), PPP agreements are more suitable for large, expensive projects. This is even more relevant for countries that are new to PPP procurement. One way to ensure economic viability for PPP procurement is to establish thresholds of eligibility. In this approach, a minimum threshold is needed to:

• From a public-sector view – justify procurement cost incurred and maintain value for money.
• From a private-sector view – secure project financing; typically, this is not economical for banks/borrowers below certain amounts, and bidders would have to give full recourse to raise financing/justify transaction costs incurred by bidder.

Once these initial sizeable projects are successfully delivered and a library of standardized procurement documents that would lower procurement costs is created, eligibility thresholds can be revisited and lowered, or removed, as necessary.

Another way to ensure economic viability is to bundle several similar smaller projects that would otherwise not be eligible for PPP procurement as standalone projects into one larger program that can use standardized procedures with minimal adjustments

3. Initiating transaction advisory on solid ground

Performing option analysis

Multiple PPP models and labels exist, which can be confusing for countries seeking the best solution for their projects. More important than the name of the model selected is the allocation of roles and risks among the parties along ownership, financing and revenue. Commonly, governments try to pass on most of the risks from the public sector to the private sector, even when the private sector has no control over that risk. A good philosophy is to have risks borne by the party most eligible to manage those risks, and at the least cost, optimizing overall project costs to obtain higher return and facilitate financing.

Each country/project has particularities that guide and shape the optimal structure. As such, an analysis that ranks options according to pre-agreed objectives (relative and absolute) will allow the selection of the most appropriate model, avoiding money and time spent on a suboptimal solution. Sample objectives include degree of risk transfer, project cost or time to execute. For complex projects such as in the transport sector, consider dividing the projects into sub-components if these entail completely different PPP models or if some parts will not consider a PPP model at all.

Performing soft market sounding for pathfinder projects

Soft market sounding might be perceived as giving competitive advantage to a few players, but if well construed with only necessary information, it should always be included in the initial phase of the PPP procurement to:

• Inform governments early on if there is enough market/ investor appetite, capacity and capability for this particular project.
• Allow you to gain valuable insights into private sector working practices, requirements, concerns and priorities as well as validate certain assumptions taken in the option assessment.
• Offer a potentially revised list of available and validated PPP contracting model options.

Market sounding will generally be an ongoing exercise conducted throughout the process up to the conclusion of the business case.

Protecting all interests

There are many examples of unsuccessful PPPs worldwide due to inflated numbers in the business cases, which can lead to potential project bankruptcies. These accuracy issues are not due only to transaction advisors inflating numbers to make a project look more attractive but are also due to ministries themselves that are biased towards rapid execution of an infrastructure that is required urgently.

The MoF or PPP unit can mitigate these risks by incorporating “duty of care,” which can incentivize the right behavior from advisors and protect the public party against unfair consultations. Duty of care should be applied towards the contracting entity as well as to the MoF or PPP unit to ensure impartial and unbiased advice. Private parties may also consider subscribing to insurance policies when project success is linked tightly with demand assumptions.

4. Ensuring success beyond financial close

Finally, a PPP project financial closure is not the end of the project. Several years of implementation and operation lie ahead, and the contracting entity must stay on top of progress. Monitoring PPP KPIs as well as associated contingent liabilities is often neglected while represents a vital part of the lifecycle of the project.

Performance data must be made available from the sector to the PPP unit to ensure close follow up on the initiative’s impact and controlling quality delivered in order to compensate appropriate performance levels per the contract. Often, PPP units complain they cannot track real performance of the project to confirm it has delivered the VFM per the signed contract. Monitoring is also useful to apply timely corrective actions when needed. In addition, through its PPP unit, the government should:

• Monitor contingent liabilities to timely flag contractor risks and avoid situations where contingent liabilities materialize.
• Monitor the project’s performance to manage risk of realization and exact amount to be disbursed.

The contract should also include clauses to ensure the private sector and the ministry report on the project’s performance.

Lastly, the government should carefully plan and actively monitor the country’s exposure to contingent and committed liabilities related to the PPP portfolio. This can be performed within the PPP unit or at the MoF level, following potential indexation mechanisms, the government’s net payment position and the performance of all PPP companies, safeguarding public balances against poor private-sector performance and hostile economic conditions.

Private-sector participation is essential to bridge the investment gap and satisfy infrastructure needs worldwide. PPPs are one of many arrangements to consider; but due to their complex, timely and costly procurement, governments often struggle to apply and leverage them. Governments can put in place mechanisms to nurture their PPPs and infuse efficiency and performance throughout their maturity journey. These mechanisms should be carefully crafted and ensure that actors are clear on their role and are empowered to execute it; that projects are suitable, structured in the right manner and optimally leverage public- and private-sector capabilities; and that implementation is monitored and guided to ensure success.

How Arthur D. Little can help

Arthur D. Little’s team of PPP strategy, governance and transaction advisory experts can help in all aspects of a country’s PPP programs (see figure below). We can help governments:

• Develop ecosystem governance to catalyze PPP programs.
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Public-private partnership in health care organizations. How to cope with complexity issues: a comparative case-study between Italy and the US

International Journal of Organizational Analysis

ISSN : 1934-8835

Article publication date: 13 August 2021

Issue publication date: 12 November 2021

Health-care systems around the globe share several pressing challenges – including increasing costs and patient outcomes. Innovative arrangements, such as public–private partnerships (PPP) can be adopted to help address these challenges. Although the promise of PPPs is great, so are its peril if the arrangements are not managed and regulated adequately through the contracting process. Yet, PPP arrangements can introduce their own unique set of problems. This paper aims to analyze how PPPs contracting accounts for three major problems identified reviewing the: performance measurement and audit; determination of compensation and risk management–related issues.

Design/methodology/approach

The authors used a case study approach to analyze contracting among health-care PPPs in two countries: Italy and the USA. With a structured review performed on Scopus database using a keywords Boolean research, the authors identified three recurring major issues to investigate in two selected cases, one per country. For each major issue, the authors defined several sub-issues retrieved from a widely used institutional framework. In each sub-issue, a documental analysis on all published information related to the signed contract has been performed identifying the approaches used by the two organizations.

The authors find that PPP contracting in the USA case seems to be oriented more toward managing institutional change as well as more flexibility in the deductibility and compensation determination for organizations and providers, suggesting this organization is more oriented to change in general. The authors find that PPP contracting in Italy more clearly delineate the allocation of risk between organizations that engage in PPPs, suggesting a more practical approach.

Practical implications

PPP is complex. Contracting helps manage the complexity of these arrangements. This case study approach to PPP contracting highlights the variation in contracting approaches across two different countries. Policymakers and health-care managers need to ensure that PPP contracting clearly delineates auditing and performance measurement, compensation and risk management.

Originality/value

The authors’ analysis sheds light on the different approaches to arranging health-care PPPs in two different country settings. More research should be done to connect these different approaches to important outcomes, such as patient and organizational finances, as well as expanding the scope of countries adopting PPP in health care.

• Health care
• United States
• Risk allocation

Performance measurement and auditing

Determination of compensation.

• Compensation determination

Pratici, L. and Singer, P.M. (2021), "Public-private partnership in health care organizations. How to cope with complexity issues: a comparative case-study between Italy and the US", International Journal of Organizational Analysis , Vol. 29 No. 6, pp. 1467-1482. https://doi.org/10.1108/IJOA-10-2020-2452

Emerald Publishing Limited

Copyright © 2021, Lorenzo Pratici and Phillip McMinn Singer.

Published by Emerald Publishing Limited. This article is published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/legalcode

Introduction

Health-care systems around the globe face cost and quality pressure. Health-care systems and policymakers have several options at their disposal to address these challenges – including privatization. Nearly all health-care systems involve a mixture of public and private providers ( Brekke and Sørgard, 2007 ). In countries with National Health Service (NHS) systems, in which health care is generally financed by general taxation revenues ( Propper, 2000 ), the private sector still exists alongside the public. Indeed, in NHS systems, the role of the private sector represents a growing phenomenon ( Brekke and Sørgard, 2007 ; Propper, 2000 ), particularly as governments grapple with rising costs and limited resources ( Mehl et al. , 2014 ), as well as public demand for improved quality of care ( Goh and Marimuthu, 2016 ).

Yet, privatization is not without risks and can lead to a variety of suboptimal consequences ( Duggan et al. , 2015 ), including drifting from the core tenets of the public health sector system and raise concerns over equity ( Thomson and Mossialos, 2006 ). Indeed, the issue of equity is often contested in NHS countries where the wealthy can purchase private insurance that supplies access to more timely care, more robust benefit plans, higher quality providers ( Del Vecchio et al. , 2015 ; Hullegie and Klein, 2010 ) and private facilities ( Herr et al. , 2011 ; Tiemann and Schreyögg, 2009 ).

One potential arrangement to manage these competing challenges is public–private partnership (PPP). Although the promise of PPPs is great, so are its peril if the arrangements are not managed and regulated adequately, through the contracting process. Managing the competing and complementary aspects of public and private organizations has generated well-established literature ( Propper, 2000 ; Meleddu et al. , 2019 ). Policymakers need to balance the conflicting needs of reducing financial responsibilities for the state, improving the efficiency of privatization, all while ensuring the principles of equity. To manage these competing challenges, contracting is an essential process, though it has been understudied.

In this article, we analyze how two health-care organizations account for three central problems, which can undermine the effectiveness of the PPP arrangement. We use case studies and textual analysis of contract sources as well as other officially published agreements to understand whether and how PPP arrangements vary across health-care organizations in the USA and Italy and how they address the main issues occurring in a PPP contract.

Problems with public–private partnerships. How to cope with complexity

PPP is conceptually any arrangement between public and private entities in a given domain. Several academic disciplines have conceptualized and studied PPP, including organizational economics, public administration and project management ( Hodge and Greve, 2017 ). For example, scholars of managerial studies ( Bovaird, 2007 ; Brinkerhoff and Brinkerhoff, 2011 ; Osbourne, 2000 ; Torchia and Calabrò, 2018 ) proposed an inclusive definition of PPPs, arising from the New Public Management approach. The use of PPP in our analysis follows from Kivleniece and Quelin (2012 , p. 273), which classifies PPPs as a project-based organization involving collaborators from the public and the private sector in a long-term collaborative relationship – at least 10 years – between one or more firms and public bodies that combine public sector management.

Considering the length of the time frame, as well as the collaboration between two entities with very different structures and scopes, PPPs are subject to a complex framework of laws and regulations ( Kivleniece and Quelin, 2012 ; Torchia and Calabrò, 2018 ; Shrestha et al. , 2019 ). Prior research highlights the potential problems in the use of PPPs. Torchia and Calabrò (2018) argue that measuring and auditing PPPs performances is challenging. Kivleniece and Quelin (2012) focus on the problem of risk allocation, which sometimes represents a strong barrier for this market. Shrestha et al. (2019) argues that the effectiveness of PPPs can be limited by principal–agent theory the importance of the determination of compensation. Robinson and Scott (2009) included in their work the sum of these challenges to be faced by PPPs.

So, although essential to the success of a PPP arrangement, contracting is a complex and an overlooked aspect of prior research. In this paper, we address three potential problems that can impair the PPP process and the ways which contracting in the USA and Italy do, or do not, address these complications. We selected two cases which have different political, social, regulatory and policy contexts to help understand different PPP approaches in health care. In the methodology section, we better explain how those issues have been selected.

One of the key arguments for the adoption of PPP in health care is the demand for higher quality of care ( Du Toit, 2003 ; Robinson and Scott, 2009 ). Developing a robust and effective performance measurement and audit system is complementary to this objective and has been associated with higher efficiency and positive outcomes (Partnership UK, 2006). For PPP arrangements, this is a crucial issue, as the private performer can have different objectives, such as profit generation ( Ke et al. , 2011 ). Therefore, it is essential that the public component of the PPP is able to audit and identify problems that may emerge through the PPP arrangement. At the same time, the private contractor has to be able to measure the performance to check on the economic sustainability of the undergoing activity.

PPPs can be costly arrangements. Both the public and private organizations take on financial risk. PPPs have many moving parts, with different organizations coming together in unique ways. This risk is heightened by having different stakeholders that do not all share the same goals. For example, the private entity seeks to maximize their profit, potentially at the expense of quality. The public organization, on the other hand, has asymmetrical information about the financial health of their organization. PPPs are typically structured to have private entities bear financial risk and setting remuneration linked to the achievement of predetermined performance standards ( An et al. , 2018 ). Determining compensation needs to occur at two levels when constructing PPP relationships. First, contracts need to delineate how the separate organizations share financial resources ( Garen, 1994 ). Second, compensation needs to be delineated at the staff and provider level (Klingour et al. , 2015). In both cases, PPP contracting needs to clearly explicate the payment mechanisms and performance metrics for the different organizations and staff in a PPP.

Risk management–related issues

PPPs are practical tools used by the public sector, among other things, to transfer a part of the whole risk to another entity. This type of contract often seeks to combine the advantages of competitive tender and flexible negotiation with a general reduction of risk for the public sector ( Bing et al. , 2005 ).

Transparency is critical for the success of a PPP ( Jefferies et al. , 2002 ; Shrestha et al. , 2017 ); it is important that risk allocation is clearly communicated and understood by both parties ( Bing et al. , 2005 ). However, this often creates complexity in managing a PPP. Therefore, it is essential to clearly identify the risks that are shared and taken on by each component of a PPP. A strong and consolidated contractual structure prevents mismanagement of risk. The risk identification process then becomes important to avoid possible litigations during the contract implementation. Prior literature has proposed different methods of risk identification, but there is a widespread consensus on the checklist methodology as a frequently used framework (Italian Ministry of Economy, 2017).

To analyze how health-care organizations manage the problems of PPPs, we use a comparative case study approach. We adopted the method proposed by Villani et al. (2017) , identifying single areas of analysis for a documental study of available sources (contracts and published agreements in our case), using the framework identified by Robinson and Scott (2009) .

To identify the areas of complexity, which we outlined above, we conducted a literature review. Using the Scopus database, with more than 20,000 peer-reviewed scientific journals listed ( Brown, 2020 ; Fanelli et al. , 2020 ; Mishra et al. , 2017 ), we collected related literature. We conducted a Boolean research based on keywords: “Public Private Partnership” OR “PPP” AND Healthcare* OR “Health Care” OR “Hospitals.” To identify the area of major concerns, we defined what were the most recurrent keywords present in the literature, excluding keywords on non-related issues (e.g. name of countries, the same keywords used in the Boolean research process, fields of research, such as “Health Policy” or “Economics” and strictly medical-related issues). We also excluded all papers not listed as “Business Administration,” “Management,” “Economics” and “Political Science” related. We also excluded all the “grey literature,” considering only indexed journals’ publications ( Fanelli et al. , 2020 ). This lead to an overall output consisted in 151 papers from the year 1982 to the year 2019 (the year 2020 has been excluded because it would have created a bias, having the keyword “Covid-19” and other keywords related to the pandemic crisis as outliers).

performance measurement;

determination of compensation of contractors; and

risk management–related issues.

In light of this, we compared this literature with a framework, supported also by institutional entities regulating PPPs internationally and focused the work on the three main issues identified. For each issue identified, several sub-issues emerged from the framework, and we relied on them to assess the organizations taken into analysis.

Our case selection methodology sought to maximize variation along several dimensions. We selected two countries – Italy and the USA – which met several key criteria. First, we wanted to maximize variation in the level of privatization in the health-care contexts. As discussed below, Italy adopted an NHS system more than 40 years ago, whereas the USA is largely privatized. Second, we wanted to analyze country settings which regulate health care in different ways. Italy is highly structured in regulations of health-care organizations, whereas the USA has minimal public oversight of health-care organizations. By looking at countries with different regulatory scope, we can help identify the benefits and drawbacks to these different approaches on how PPP arrangements address the core problems we outlined above. Third, we sought cases which were in different timelines of PPP development, to understand whether there had been changes in PPP arrangements over time. Finally, we sought to select countries that faced similar challenges, namely, quality and cost control, which would lead to the adoption of PPP arrangements. Both Italy and the USA have seen health-care costs increasing, whereas government financial support has been decreasing. Additionally, concern over the quality of care and outcomes has increased in both countries.

Once we selected the case countries of interest, we selected two health-care organizations to analyze how they address the core problems related to PPPs. Italy has proactively adopted PPPs in the health-care setting. In that country, we selected one of the first-generation PPP projects. The project selected is well representative of a complete PPP, managing the construction of the building as well as all the non-sanitary-related services. The USA has a much smaller footprint in the PPP market for health-care organizations. We assessed all PPP projects undertaken in the USA and selected the most typical example of PPP arrangements – which in this instance was a PPP project, which would require the private entity to maintain and manage a public health-care organization which was facing dire financial challenges. Table 1 represents the main characteristics of the selected cases.

Furthermore, the methodology of case studies has been selected, as it provides the possibility of an in-depth investigation ( Feagin et al. , 1991 ). PPPs are generally very complex contracts, hardly conformable. So, although our case study approach is not generalizable, it does allow greater detail and the identification and comparison of themes across the two case studies. Furthermore, an international comparative case study makes it possible to sketch the main differences arising from the two systems in which the analyzed cases are operating and the complexities which govern their use and operation ( Tellis, 1997 ).

To compare how these health-care organizations address the core problems with PPP, the framework identified points out for the first two areas analyzed (audit and performance measurement and determination of compensation) a list of key issues. Analyzing available contracts as well as secondary document consisting in any officially published agreement between the two parties available on the organizations’ websites, we analyze how the two organizations addressed those issues. Additionally, to improve the model identified by Robinson and Scott (2009) , adapting it to the purpose of this work, we included aspects on risk allocation, found to strongly affect the complexity of PPPs relations. The institutional framework used has been retrieved by Italian Ministry of Economy (2017), which classified the risk allocation into different areas. This choice finds its roots in the fact that it seems to be the most complete institutional framework between the two countries, and it is based on previous literature ( Bing et al. , 2005 ; Xu et al. , 2010 ; Carbonara et al. , 2015 ). Additionally, the framework has been applied in a variety of different fields (statistics, epidemiology, administrative law, etc.).

Before we provide an overview of the main results of our case studies, we describe the characteristics of the countries in our case study.

Public–private partnetship in different contexts

The italian context..

The Italian NHS (I-NHS) in 2018 celebrated its 40th anniversary: it is one of the few countries in the world which is still providing Universal Health Coverage ( Signorelli et al. , 2020 ) and has been ranked by international organizations as one of the best NHS systems worldwide ( WHO , 2000, 2019 ). The I-NHS was founded with the guiding principles of universality, equity and solidarity ( Signorelli et al. , 2017 ).

Yet, in the wake of the 2008 financial crisis, the I-NHS had to make cuts to public health expenditure across each subsequent government ( Ferrario and Zanardi, 2011 ; Neri, 2019 ) and raised concerns over the quality of care provided ( Falco, 2019 ). Furthermore, the COVID-19 – currently ongoing – pandemics revealed the weaknesses of the system, suggesting potential issues to be faced ( Fanelli et al. , 2020 ). These stresses have provided an opening for greater involvement of the private sector ( Torchia and Calabrò, 2018 ). Privatization concerns have forced the government to encourage and manage the formation of PPPs ( Golinelli et al. , 2017 ). The I-NHS, therefore, has developed the first PPP market inside the European Union (Osservatorio Finlombarda, 2011 ) and the second in Europe, after the UK ( Torchia and Calabrò, 2018 ).

However, PPPs in Italy are often subject to a series of challenges. The general requirement for a PPP in Italy is to meet the principles expressed by the “Value for Money” theory. This theory evaluates costs and quality ( Grimsey and Lewis, 2004 ) over different determinants ( Torchia and Calabrò, 2018 ), including: risk allocation–related issues and auditing and performance measurement. Our case study will assess how the Italian health-care organization dealt with those issues and how it contractually managed the intrinsic complexity of the PPP.

The USA context.

The USA is the leading country in the volume of and the value of PPP projects globally, with more than $81bn in value over 326 PPP projects in 2018. Yet, the health-care market for PPP is not as well developed as Italy, nor many other developed countries. The majority of PPP in the USA is focused on technology, energy and transport sectors, which have traditionally had sizeable public spending. Indeed, the roots of the PPP in the USA started several hundred years ago as a mechanism to build roads after the country was formed.

PPP and health care in the USA is limited by several factors. First, the

Second, there is very little coordination in the US health-care system. Rather, regulatory power is fragmented across local, subnational and national levels. The responsibility for providing public health is divided among 50 states, five territories and 90,000 local governments ( United States Census Bureau, 2020 ). The laws and regulations that govern PPP usage are largely the responsibility of the states, with some input from the national government. But with states as the regulatory body, there is substantial variation in laws and regulations that limit the ability of PPP to be used everywhere.

PPPs have grown in popularity in the USA over the past 30 years, when California enacted the first piece of legislation governing these organizational arrangements. The trend in PPP in the health care, as well as other areas, has been predominantly driven by cost crisis in the USA, as well as quality concerns. Public sector health-care providers are challenged by the increasing costs of care, the patient populations they serve, which are more likely to be low-income and uninsured ( Fraze et al. , 2006 ), operating older health-care facilities ( King et al. , 2018 ) and diminished financial support from their state governments ( Krein et al. , 2010 ).

Findings and discussion

Case study a.

The case study A is a PPP contracted in a central Italian region for the provision of four hospitals and its relative maintenance services. All hospitals have been completed in 2006, and since then, there has not been any litigation between the two parts. The private contractor is the concessionaire and is a joint-stock company, whereas the public contractor, named provider, is the regional authority itself. The asset and capital manager acted out as project manager during the realization of the structure and throughout the whole construction phase. The role of intermediary has been fulfilled by the same project manager, who was technically not part of the PPP contract.

Case study B

The case study B is a PPP that was contracted in the USA between a public health-care organization (provider) and a private entity (concessionaire) to manage clinical operations to ensure long-term financial stability, to address the challenges of hospital consolidation in the region, and to enhance funding for the organizations academic and research mission. The hospital has more than 200 hospital beds, several outpatient clinics and a medical group of providers. The PPP arrangement began in earnest in 2017, though financial strain over the prior years had led to public officials encouraging hospital officials to pursue private financial backing. The PPP was arranged by a global financial consulting firm with expertise in facilitating and coordinating the process, though they were not part of the PPP contract.

The major findings emerging from this work over the two said cases are schematically represented in the Tables 2 , 3 and 4.

Issue 1: auditing and performance measurement

The first issue analyzed over the two selected organizations consists in the auditing and performance measurement activity. The assessment of contracts found that, although they rely on the same framework, the two PPPs use a different approach for auditing and performance measurement ( Table 2 ).

Following the framework analyzed by Robinson and Scott (2009) , the first sub-issue taken into account is the existence and the function of a monitoring system. Case study B identifies in the contract a detailed scheme of performance monitoring, institutionalizing a specific independent body in charge of this task. Furthermore, this body is due to provide a monthly report touching every aspect of the relation (financial, organizational and output and outcome assessment) and to limit as much as possible subjectivity in the analysis, requiring the report has to be blind reviewed during each assessment. While in case study A, the contract does not specify the methodology to be adopted and does not institutionalize an independent body to take charge of this aspect, leading to possible conflict of interests.

Customer satisfaction is the second aspect taken into account. The case study A does not provide any specification in the contract, whereas case study B uses it to base determination of deductions in the contract.

As for the third element of this issue, consisting in the performance reporting, the case study B does not require any specific transparent output, whereas case study A is required by public authorities to justify its performance each year. Furthermore, the public authority specifies the formula to use in this determination.

The last aspect taken into analysis consisted in the presence of a fault reporting procedure that is found to be present only in case study B with the specific purpose, according to secondary sources viewed, to promote the culture of change in the organizations.

Issue 2: determination of compensation

The second issue retrieved from the analysis of Robinson and Scott (2009) concerns the determination of compensation ( Table 3 ). This aspect is strongly related to the risk taken by the two entities, which is deeper analyzed in the next paragraph ( Table 4 ). In case study A, the performance compensation is weighted to each area defined in the contract. Each area is defined in the contract, and the same contract provides the formula to calculate the compensation as well as any possible adaptation in price changing. However, no performance deduction is directly specified in the document. Case study B does not report any specific remuneration formula. One area where case study B clearly delineates compensation is in addressing staff and management pay. Case study A does not include any specific determination of pay changes for staff and management in their contracting.

Issue 3: risk management

To analyse risk management, we compare PPP contracting to a matrix developed by the Ministry of Economy of Italy (2017). Twelve major types of risks are defined in the matrix. We find that PPP contracts differ in several respects in how they account for and manage their risks. Case study A generally provides a more robust framework in their contracting to manage and allocate risk. For example, if delays are incurred during the PPP, case study A delineates how the financial risk is divided between the provider and the concessionaire. In only one category of risk did case study A not specifically outline the contractual obligations of the parties involved in a PPP – that of risk of execution. In the case of that risk, case study B did include contracting language proportionally sharing the risk between the provider and the concessionaire.

Table 4 defines to which entity the risk is allocated to. Furthermore, Table 5 describes the type of risks selected.

Conclusions

The use of PPP is not a recent phenomenon. In both Italy and the USA, it has long been used as a policy tool. In both settings, there has been consistent growth in the use of PPP over the past 20 years ( Torchia and Calabrò, 2018 ).

Yet, in the specific case of health care, our cases analysis shows the divergences between Italy and the USA in the use of PPP. Indeed, in Italy, where the public sector is more pronounced and prevalent in the health-care setting, our case confirms find a more substantial and robust use of contracting in PPPs; although because of its complexity, the saturation of the market reached and the issues to which this type of agreement is subject to, it has experienced a general decrease in 2010s ( Soecipto and Verhoest, 2018 ).

The different historical, social and economic contexts between Italy and the USA has led to the different use of PPPs and shaped the contracting of these relationships. Yet, in both cases, even with the different factors that have shaped their use and history, PPPs represent a challenge for the private sector as well as an opportunity for the public sector to modernize the provision of care ( Robinson and Scott, 2009 ).

One of the core challenges associated with adopting PPPs is the innate complexity with the arrangements. It is difficult to standardize across different scenarios and arrangements. Yet, there are three themes that have emerged from our case studies and seem to confirm the general trend identified by scholars. First, the case study B is more oriented to the culture of change rather than Case study A, sustaining theory according to which the US context may affect organizations to be more prone to the change rather than an organization located in Italy ( Hofstede et al. , 2005 ; Fey and Denison, 2003; Brewster, 2004 ). This emerged from the fact that the American contract analyzed is more flexible and opened to possible drift in the management of the relation. A wide literature has emerged on the topic of organizations orientation to change, and indeed the conclusions do not differ much when it comes to formulating judgments on geographical predisposition to change. American organizations, according to several authors ( Ongaro, 2009 ; Goodstein and Burke, 1991 ), tend to be more flexible and oriented to a rapid change in organizational culture rather than European counterparts. In these cases, we found the same trend: a clear orientation to the management of staff and a general encouragement of researching different positions of the staff within the contractual agreement made by the two public and private entities seem to reflect this trend.

Second, the public contractor, namely the provider, detains more risk in the Case study A, rather than Case study B. This implies that Italian public organizations share more risks with private counterparts rather than American public organizations. According to Decressin (2002) , countries that have equal access to public services, namely health, are thus subject to an increased risk.

It is also true that the risk in complex relations such as PPPs should be handled on a case-by-case basis ( Bing et al. , 2005 ), and several other authors reached the opposite conclusion, stating that the public party in Italy is the harassed and weak part of the contract ( Carbonara and Pellegrino, 2014 ). Indeed, this has historical reasons. PPPs in Italy represented a new way of accessing funds for the public sector in early 2000s, which have suffered from a general decrease of resources over time (Torchia and Calabrò, 2015). PPPs were seen as a possible solution ( Carnis and Yuliawati, 2013 ), but in that circumstances, the public counterpart had less contractual power and has been subject to harder conditions ( Vecchi et al. , 2020 ). The analyzed case does not confirm this trend. Further studies are needed to better understand this phenomenon.

Finally, there is way more flexibility in the deductibility and compensation determination in the American agreement. Cases seem to confirm the evidence and suggest that the public sector pursue deductions in the “spirit of partnership” ( Robinson and Scott, 2009 ) in exchange for less accountability, and therefore less risk, within the contract. The creation of a partnership with mutually agreed objectives is an essential aspect to be researched to minimize opportunistic behaviors associated with incomplete contractual fulfillment required. The complexity of this type of relation, which well represents the principal–agent theory dilemma, needs to be regulated and defined in the contract, providing a higher grade of flexibility. This issue seems to be addressed more in the American organization analyzed rather than the Italian organization, as flexibility in risk sharing and determination of compensation is indeed greater.

Therefore, PPP despite representing an innovative alternative to privatization surely has to deal with a certain number of issues. This may undermine the effectiveness of the common purposes, exposing PPPs to unforeseeable risks. This paper aims to detect what might be the most recurrent issue to be faced in PPPs agreement and how two independent organizations face these issues in two completely different contexts. We indeed find that differences in the contexts strongly affect also the type of relations as well as the way the involved entities face the problematics. Every organization has its own path dependence.

Limitations

The results we have presented here should be considered in several limitations. First, we have selected case study countries that vary substantially across several key dimensions. Yet, there are a variety of different dimensions we could have analyzed in our selection. Second, we have analyzed only primary document consisting in contracts and published agreements related to the arrangement and contracting of PPPs. In-depth interviews may be a future challenge to understand the promise and peril of PPPs.

Understanding the problems that PPPs face and the current mechanisms in place to account for them goes beyond just an academic exercise. Rather, a suboptimal PPP arrangement can endanger patient lives and the financial stability of governments and health-care organizations. Our analysis is merely the first attempt to understand how health-care organizations structure their PPP arrangements. There is a rich area of future research to better quantify and understand PPP arrangement in health-care settings.

Descriptive information of the two hospitals analyzed