There is no consensus about how to define a PPP. PPPs can be understood of both as a governance mechanism and a language game. When understood as a language game, or brand, the PPP phrase can cover hundreds of different types of long term contracts with a wide range of risk allocations, funding arrangements and transparency requirements. And as a brand, the PPP concept is also closely related to concepts such as privatization and the contracting out of government services. When understood as a governance mechanism the PPP concept encompasses at least five families of potential arrangements, one of which is the long term infrastructure contract in the model of the UK's Private Finance Initiative (PFI). Particular types of arrangements have been favored in different countries at different times.
Infrastructure PPPs as a phenomenon can be understood at five different levels: as a particular project or activity, as a form of project delivery, as a statement of government policy, as a tool of government, or as a wider cultural phenomenon. Different disciplines commonly emphasize different aspects of the PPP phenomena. The engineering and economics professions primarily take a utilitarian, functional focus emphasising concerns such as project delivery and relative value-for-money (VfM) compared to the traditional ways of delivering large infrastructure projects. In contrast, public administrators and political scientists tend to view PPPs more as a policy brand, and as a useful tool for governments to achieve their objectives.
Common themes of PPPs are the sharing of risk and the development of innovative, long-term relationships between the public and private sectors. The use of private finance is another key dimension of many PPPs, particularly those influenced by the UK PFI model, although this aspect has waned since the global financial crisis of 2008. The PPP phenomenon has been controversial. The lack of a shared understanding of what a PPP is makes the process of evaluating whether PPPs have been successful complex. Evidence of PPP performance in terms of VfM and efficiency, for example, is mixed and often unavailable.
According to Weimer and Vining, "A P3 typically involves a private entity financing, constructing, or managing a project in return for a promised stream of payments directly from government or indirectly from users over the projected life of the project or some other specified period of time". Because P3s are directly responsible for a variety of activities, as indicated by Weimer and Vining, P3s can evolve into monopolies motivated by rent-seeking behavior(s).
PPPs often involve a contract between a public sector authority and a private party, in which the private party provides a public service or project and assumes substantial financial, technical and operational risk in the project. In some types of PPP, the cost of using the service is borne exclusively by the users of the service and not by the taxpayer. In other types (notably the PFI), capital investment is made by the private sector on the basis of a contract with government to provide agreed services and the cost of providing the service is borne wholly or in part by the government. Government contributions to a PPP may also be in kind (notably the transfer of existing assets). In projects that are aimed at creating public goods like in the infrastructure sector, the government may provide a capital subsidy in the form of a one-time grant, so as to make the project economically viable. In some other cases, the government may support the project by providing revenue subsidies, including tax breaks or by guaranteed annual revenues for a fixed time period. In all cases, the partnerships include a transfer of significant risks to the private sector, generally in an integrated and holistic way, minimizing interfaces for the public entity. An optimal risk allocation is the main value generator for this model of delivering public service.
There are many drivers for PPPs. One common driver involves the claim that PPPs enable the public sector to harness the expertise and efficiencies that the private sector can bring to the delivery of certain facilities and services traditionally procured and delivered by the public sector. Another common driver is that PPPs may be structured so that the public sector body seeking to make a capital investment does not incur any borrowing. Rather, the PPP borrowing is incurred by the private sector vehicle implementing the project. On PPP projects where the cost of using the service is intended to be borne exclusively by the end user, the PPP is, from the public sector's perspective, an "off-balance sheet" method of financing the delivery of new or refurbished public sector assets. On PPP projects where the public sector intends to compensate the private sector through availability payments once the facility is established or renewed, the financing is, from the public sector's perspective, "on-balance sheet"; however, the public sector will regularly benefit from significantly deferred cash flows. Generally, financing costs will be higher for a PPP than for a traditional public financing, because of the private sector higher cost of capital. However, extra financing costs can be offset by private sector efficiency, savings resulting from a holistic approach to delivering the project or service, and from the better risk allocation in the long run.
Typically, a private sector consortium forms a special company called a "special purpose vehicle" (SPV) to develop, build, maintain and operate the asset for the contracted period. In cases where the government has invested in the project, it is typically (but not always) allotted an equity share in the SPV. The consortium is usually made up of a building contractor, a maintenance company and equity investor(s). It is the SPV that signs the contract with the government and with subcontractors to build the facility and then maintain it. In the infrastructure sector, complex arrangements and contracts that guarantee and secure the cash flows make PPP projects prime candidates for project financing. A typical PPP example would be a hospital building financed and constructed by a private developer and then leased to the hospital authority. The private developer then acts as landlord, providing housekeeping and other non-medical services while the hospital itself provides medical services.