Innovative Financing models for Public Private Partnerships (PPPs) in Real Estate Development
A Public Private Partnership (PPP) is a public service or private business venture that is funded and operated through a partnership between the public sector (either central or local government) and one or more private sector companies. In a PPP, the private sector is given a greater role in financing, real estate and maintaining public sector facilities, although the government retains a stake in the PPP Company. Under public private partnership arrangements, the government is not liable to a fixed stream of annual payments. PPP is therefore an arrangement that can be financed via both public sector and private company sources. For instance, a partnership contract can be drawn up that recognises agreed government funding as well as private developer contributions to a project.
PPPs are recognised as a key element in government strategies for delivering modern, high quality public services, and for promoting competitiveness by international agencies such as UN Habitat and the World Bank. The use of private financing in public projects is just one element of PPP business structures and partnership arrangements. Others include joint ventures, outsourcing, and the sale of equity stakes in state-owned businesses. The introduction of private sector ownership into state-owned businesses can have a full range of possible structures. The structure could for instance be brought into existence through floatation or the introduction of a strategic partner. Either public or private sector interests can hold major or minor stakes in the PPP. The importance of PPPs to development finance is seen in the amount of funds and policy support directed at the real estate industry through using this model of partnership.
Effective utilisation of financing real estate development for PPPs is integral to successful outcomes, particularly in the present climate of limited resources where investors are likely to be cautious. To deal with a more complex economic condition, the reality in financing real estate development has typically been a blending of loans and grants. Innovative finance, in part by blending grants and loans, is intended to share risk, and potentially provides greater flexibility and innovation. This is not always realised, for example the inflexibility of the original contracts during the operational period can result in one sector being burdened with a greater share of risk, potentially resulting in the public sector paying a higher risk premium.