What about funding/revenue?
How does the private sector fund Public Private Partnerships (PPP) Projects?
It borrows the money from banks or other financial institutions or issues bonds. The investment is recovered through the service charges, known as the unitary payment, paid over the life of the contract.
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What happens if the PPP operator gets into financial difficulties?
The PPP contract includes funder step in rights which allow it to take over the operation of the contract. If this is not possible then delivery of services may revert to the public sector.
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Why can the public sector not borrow the money?
The Department of Education (the Department), like all government departments, has a spending limit placed on it each year called a Departmental Expenditure Limit (DEL) so even if the Department was able to borrow money more cheaply than the private sector, it would not be permitted to spend above that limit.
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Will the private sector try to maximise profit and charge schools as much as they can?
The private sector is in business to make a profit whether through conventional or PPP procurement routes. The project will not however be allowed to proceed by the public sector, unless it demonstrates that the use of PPP offers a value for money solution to the capital requirements of the school(s). This is tested by the development of a shadow bid model.
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How is payment made to the Private Sector?
The PPP operator receives payment for the provision of services through a unitary payment. Payment is the responsibility of the relevant school authority.The three elements that make up the unitary payment are:
- capital grant from the Department of Education;
- grant from the school authority in respect of services it would have previously supplied; and
- from the Local Management of Schools (LMS) budget in respect of other services.
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PPP must cost more than public procurement because private companies have to make a profit for shareholders?
The Department only pursues PPP where it offers better value for money than the public sector alternative, using well-tried and tested techniques. Private sector firms always look to make a profit, and this applies whether it is conventional procurement or PPP.
PPP, however, differs in that the private sector partner puts its own capital at risk. It is paid and makes a profit only if it delivers the services it is contracted to provide throughout the length of the contract. If costs overrun, or if the service is not provided, the private sector operator and its shareholders bear the financial consequences. In this way, the private sector’s need to make a profit is properly aligned with the public sector’s need for quality services and facilities.
Under PPP, the public sector only pays to the extent that the services it contracts for are delivered, whereas under traditional public sector procurement, the public sector pays whether or not the services are delivered. The desire to make a profit and recover its capital is what drives the private sector to:
- Innovate and look for ways to enhance the service offered to customers;
- Invest in the quality of assets to reduce long term maintenance and operating costs; and
- Manage the risk associated with completing investment projects to time and budget.
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Who keeps 3rd party income?
Using school premises outside school hours and term time may enable the PPP operator to generate commercial income, although this does include an element of risk. New facilities can provide a good opportunity for additional income and this should be shared between the school and the PPP operator. Arrangements for sharing such revenue are detailed in individual PPP contracts.
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What about inflation?
All current PPP contracts allow for indexation at a yearly review date.
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