The Public-Private Paradox: How Conflicting Mindsets Impact PPPs

Forbes

01-04-2025

Majeed Javdani is a Principal of Mercator Group and an internationally recognized practitioner in law and business.
A public-private partnership is a long-term collaborative business relationship between public agencies, meaning those using public budgets are responsible for developing public-inclusive services on one hand and private business organizations on the other.
Here, I am going to explore PPP from the perspective of the private sector, the contrasting purposes it has compared to public organizations and the intrinsic risks associated with this business model.
When different parties enter into a joint endeavor with a specific purpose, although the purpose of such a partnership is the same for them, what drives each party to enter into this collaborative relationship is different. In the case of a public-private partnership, these driving factors are fundamentally different.
The main purpose of public services is inclusion, meaning that governments, through their agencies, are responsible for securing the fundamental rights that their citizens are entitled to, including healthcare, fundamental education, justice and law enforcement, and possibly more, depending on the constitution of each country and its economic situation.
When we see words like inclusion, responsibility, constitution and rights, it indicates that securing and maintaining citizens' access to certain services is a mandatory duty of the government. These are services that all citizens are entitled to, regardless of their individual characteristics.
The public sector needs both financial resources and technical expertise from the private sector to manage public programs and projects more effectively and efficiently.
The conflicting issue arises because, while the public sector seeks the expertise of the private sector to reduce uncertainties in the outcomes of public programs and projects, their governance mindsets are fundamentally contrasting.
Governance from the perspective of the private sector consists of business processes designed for optimal performance, while these practices may seem harsh or rigid from the perspective of the public sector. Executives in the private sector are profit-oriented, while directors in the public sector are expense-driven.
What is critical and merits thorough consideration in collaborative business relationships like PPP is the mapping and allocation of associated risks.
PPP is a form of joint venture where one party in the contract is a public entity. Joint ventures, including PPP, initiate and govern their programs, projects and operations through a special purpose vehicle (SPV). SPVs are legal entities that operate independently of the parties that establish them. An SPV serves as a platform for the joint governance and operations of a PPP.
PPP partners delegate their responsibilities to their representatives in the SPV governance body, and these representatives serve as the interface between the SPV and their respective organizations. Risk mapping means that risks associated with the purpose of the PPP are allocated to each party according to the PPP contract that governs the SPV.
Notwithstanding the constraints in governance and decision-making, which are intrinsic to the contrasting mindsets of the public and private sectors—and which limit the private sector's ability to implement its best practices for optimal performance—the private sector remains accountable for the risks allocated to it.
While in a joint venture between private business organizations the parties' ultimate goal is monetary gain or benefits with the potential for monetization, the goals of the parties forming a PPP are fundamentally different. Balancing these completely different mindsets is what makes PPPs complicated.
Let's explore some real-world conflicting issues that most public-private partnerships (PPPs) face.
One of the main stakeholders of public services is the citizens, who typically demand improvements in the quality of public services that are accessible and affordable. Therefore, the success of any public-private partnership heavily relies on public satisfaction.
Public agencies measure success based on the impact of the PPP's resulting service on the public. On the other hand, private business organizations must also satisfy their own shareholders, as their existence depends on them.
One common gap in PPPs arises when the private party's mindset for service pricing is based on free-market principles, such as supply and demand and industry benchmarks, which may result in pricing that is not affordable for service users.
In such cases, where the public sector's success factor is measured through inclusion, the appropriate strategy is to allow the PPP SPV to sell its service at the real market price while the government covers the margin up to a capped price as a direct subsidy to the citizens.
Another potential conflicting issue in public-private partnerships arises in procurements required to meet the objectives of the SPV. These procurements span across human resources, raw materials, machinery and subcontractors.
Public and private organizations have completely different mindsets regarding procurement. While the public sector follows administrative regulations on procurement, these regulations may conflict with the best performance approach of private businesses.
These are examples of conflict scenarios that the private sector typically faces in the governance of SPVs when partnering with the public sector. Conflict points are unlimited because the governance mindset in the public sector and private sector exists at opposite ends of the corporate governance continuum.
To reduce uncertainties regarding the success of a PPP—meaning satisfying the public as the end users of the resulting service while still maintaining the financial realities of the private businesses—the PPP agreement, as the governing instrument of the PPP and its SPV, must allocate risks to each party in alignment with their respective success measures, ultimately leading to the overall success of the PPP.
The critical point is that private businesses, when evaluating a partnership with public entities, must identify potential risks arising from the public administration mindset, which often conflicts with a profit-driven, market-oriented approach.
Risk controls should be designed to address these potential conflicts and must be implemented in the PPP agreement, which serves as the governance instrument of the SPV.
Almost all PPP-associated risks revolve around governance, so the private sector should focus on the governance structure and map it to the allocated risks for each party.
Forbes Communications Council is an invitation-only community for executives in successful public relations, media strategy, creative and advertising agencies. Do I qualify?