Governments and local authorities are under pressure to provide services of greater quantity and quality, but in most cases, they cannot do so independently. Many governments turn to public-private partnerships (PPPs), hoping that the private sector will finance public infrastructure and services affected by financial crises.
Public-private partnerships involve collaboration between the government, government agencies on one side, and companies from the private sector on the other side, aiming to finance and manage projects such as infrastructure construction, transportation systems, communication networks, healthcare, education, and social services. These partnerships work well when private sector technology and innovation are combined with public sector incentives.
The basic motives for joint investment are the sharing of financial risk and the economic profitability of the investment, while the greatest risk is that a particular project may not be supported by demand. The most commonly used model of public-private partnership is a concession, where a private company renovates state-owned infrastructure and makes it functional again. However, there are models of public-private partnerships in which the public and private sectors collaborate on projects that are not exclusively of an infrastructure nature, such as the construction of production facilities, sports and cultural arenas, and similar projects. The third model of public-private partnership involves joint entrepreneurial activities.
Disadvantages of Public-Private Partnerships
A company that acts as an investor may face a range of risks. Physical infrastructure, such as roads or railways, involves construction risks. If the product is not delivered on time, exceeds planned costs, or has technical deficiencies, the company usually bears the consequences. Additionally, the investor faces the risk of availability if the company fails to meet safety or other quality standards, for example, in the operation of a hospital or school.
Demand risk arises in the case of fewer users than planned for the corresponding service or the use of infrastructure, such as highways, bridges, and tunnels. The public partner also bears this risk due to a misjudgment of demand.
Furthermore, the private partner-investor may be in a position to increase tolls, rates, and fees for consumers who may be compelled by law or natural monopoly to pay for these services.
Examples of PPP Implementation
Public-private partnership is a widely adopted economic model of joint investment that is extensively applied globally, as evidenced by examples from Australia, Canada, and China. Western Europe is slowly catching on to this upward trend in economic collaboration.
The Western Balkans region and Bosnia and Herzegovina lag behind in implementing this “financial model of the future.” A strong motivation for a more intensive use of PPP is to improve the way infrastructure projects are prepared, designed, and built. Considering the significance of this type of investment, Bosnia and Herzegovina is establishing a functional system of public-private partnerships, in line with European Union standards. Although there are not yet many implemented projects of this type, there are relevant PPP laws and valid sublegal regulations, one each in the Republic of Srpska and Brčko District, and individually in each canton of the Federation of Bosnia and Herzegovina. In order to provide additional education, a project called “Public-Private Partnership” has been formed in Bosnia and Herzegovina, offering developmental ideas and support in implementing the practice. This model could be significant for the development of Bosnia and Herzegovina, as necessary investments in infrastructure, health, education, and social projects cannot be financed solely from the budget. Budgets in Bosnia and Herzegovina are limited, as a result of the economic situation and increased public debt.
Conclusion
The private sector could better identify and manage key risks of large projects. While the public sector focuses on “what it does best,” the private sector concurrently supports implementation and provides inputs, often more cost-effectively than the public sector. We conclude that allocating certain risks to the private sector can increase overall efficiency in providing better infrastructure and uninterrupted public services.
