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Are public-private partnerships a successful model?

February 23, 2021

reading time: 8 minutes

by Ursula Finsterwald, LGT

May settlements

Public-private partnerships have received a broad range of media coverage, sometimes being praised as a form of funding that can produce miracles, and other times taking the  blame for failed projects. Here is an honest look beyond the headlines.

The first public-private partnerships date back to the 1920s. For the city of Frankfurt’s urban planning program, which was to address the acute housing shortage at the time, the city entered into a public-private partnership with private investors. Under the leadership of architect Ernst May, 12 000 apartments were built as part of this project. They are still known today as the “May settlements” - see photo above.

In the 1980s, public-private partnerships began to boom again, and have done so ever since. At that time, Keynesian economics and the role of the state were being called into question. New neoliberal ideas were becoming increasingly popular.

The modern model of a lean state has resulted in the continuous reassessment of the scope of such a state’s responsibilities and the way in which these are performed. When the purely public sector performance of responsibilities is not expedient, but privatization is also out of the question, public-private partnerships can offer a solution.

Public-private partnerships: The foundations of cooperation

A public-private partnership is a contractually governed cooperation between the public sector and private companies. Public-private partnerships are mainly used to finance infrastructure or public services, for example to build and operate roads, telecommunications networks, prisons, hospitals, schools and universities.

The aim of public-private partnerships is to carry out projects more efficiently and cost-effectively than the public sector could do on its own. To achieve this, public and private partners must define common project goals and develop ways to achieve them, despite their usually differing interests. This can include joint ventures or licenses.

Ernst May
The so-called grandfather of public-private partnerships: Ernst May showing his plans for the May settlements in Frankfurt in 1926. © Signal Photos / Alamy

Another possibility is a public-private partnership investment vehicle that allocates equity and debt capital to projects. In this case, the type of projects that are to be supported must be specified in a binding manner. Under this model, the state and private companies pay capital into a fund with different expected returns. Having the state as a partner reduces the risks, but also the costs of a bond for private investors.

In order to also make the public-private partnership investment vehicle attractive for the private sector and investors who are not active in lending, the state can, for example, issue a green bond or a social bond that is easy for a private investor to invest in. This further minimizes the risk for the private investor. LGT also invests in green bonds and in doing so, is financing the transition to a low-carbon world.

The pros and cons of public-private partnerships

Public-private partnerships can provide a platform where private parties can deploy financial resources, as well as business and technological expertise, which an administration does not have. Furthermore, the risks that arise in the case of especially big or innovative projects can be distributed among various partners. Such projects often also have positive effects for the regional economy. An example thereof is the Biozentrum Basel.

Classic stumbling blocks for public-private partnerships include a lack of clear agreements between the partners, of methodological guidelines and of binding regulatory frameworks. The partners must clearly define the strategic objectives as well as the operational level during the decision-making phase. The fact that the operation of a PPP can also have negative repercussions for an administration is underscored in the example of a tunnel in northern Germany. Here, incorrect assumptions were made when the concept for the project was being developed. Also, as is so often the case, the costs were underestimated and the benefits overestimated when calculating the costs and the benefits that were to be generated.

PPPs in practice: Chances of success in the infrastructure sector

The Warnow Tunnel in Rostock, a tunnel that runs under the Dirnow river, was supposed to reduce traffic in downtown Rostock and guarantee faster highway access. Due to insufficient funds, the city brought an Australian investor and a group of international banks on board in the 1990s. Part of the deal was that the investor would operate the tunnel for 30 years. In return, it would be allowed to collect a toll for use of the tunnel.

Warnow Tunnel
An example of an unsuccessful PPP: The Warnow Tunnel in Rostock. © Ricarda Schulz

But due to very low traffic volumes, the tunnel faced insolvency in 2005. The city of Rostock had to extend the contract with the operator by 20 years. The operator now has 50 years to refinance its investments through tolls before the tunnel is transferred to the city of Rostock. The Warnow PPP therefore developed in a way that was opposite to the original intention.

A good example of a public-private partnership is the SBB Green Class. SBB Green Class is a combined package of the Swiss Federal Railways, which includes a comprehensive mobility offer. A study by the ETH proved that if people have a choice in terms of mobility, they travel in a more environmentally friendly way. SBB Green Class combines products and services for commuters and private and business travelers so that they can travel flexibly and sustainably from door to door. The offering consists of a “public transport” module for public transport travel passes (such as the one-year Switzerland-wide travelcard) and a vehicle module for electric cars. Additional modules for e-bikes or Park & Ride at a train station near a person’s place of residence can also be added.

These examples provide an insight into the broad range as well as the opportunities and risks of PPPs. A good plan and the involvement of experienced partners are key success factors. Studies show that PPPs can be particularly effective for infrastructure projects, but are not suitable for operating hospitals, prisons or schools.

So what became of the May settlements in Frankfurt? According to a report in the Frankfurter Allgemeine Zeitung from the beginning of 2021, the city of Frankfurt is making another attempt at having the settlements recognized as a Unesco World Heritage Site. However, for this to be successful, a coherent overall plan for the settlements must be in place.

Title picture: Germanisches Nationalmuseum, Deutsches Kunstarchiv, NL May, Ernst, I,B-35  

Committed to sustainability

Ursula Finsterwald is Head Group Sustainability Management at LGT. Her articles deal with the topic of sustainability from all sides: the aspect of resource efficiency as well as innovations and thinking in terms of generations. In her free time, she can be found in nature: on the lake, in the mountains and on her bike.

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