A public private partnership is an alternative to procurement of the facility by the public sector, using funding from tax revenues or public borrowing. In a typical public sector procurement, the public authority sets out the specifications and design of the facility, calls for bids on the basis if this detailed design, and pays for construction of the facility by a private sector contractor.
The public authority has to fund the full cost of construction, including cost overruns. Operation and maintenance of the facility are handled by the public authority and the contractor takes no responsibility for the long term performance of the facility after the construction warranty period has expired.
In a public private partnership, on the other hand, the authority specifies its requirements in terms of outputs, which set out the public services which the facility is intended to provide, but which do not specify how these are to be provided. It is then left to the private sector to design, finance, build and operate the facility to meet the long-term output specifications. The project company receives payments over the life of the PPP contract, which are supposed to repay the financing costs and give a return to investors. The payments are subject to deductions for failure to meet output specifications, and there is no extra allowance for cost overruns which happen during construction or in operation of the facility.
Source: Mälardalen University
Author: Bakhteyari, Karim