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Building stadiums or other sporting venues is an essential activity that plays a crucial role in the success or failure of sporting leagues as well as sporting franchises. However, as we have seen in the past articles, the financing of such stadiums is not an easy task and requires committing huge amount of money as well as other resources.
However, governments, sporting franchises, and other private parties around the world continue to collaborate in order to build such stadiums.
The popularity of the public-private partnership (PPP) model in constructing and maintaining public stadiums is steadily increasing. This is because this model offers some key benefits as compared to other similar models.
The details of these advantages which accrue to both the government as well as the private parties have been explained in the article.
For instance, there are more avenues available for raising funds in the case of a public-private partnership (PPP) instead of a purely public or a purely private endeavor. Also, governments have noticed that if they invest the entire sum required for building the stadium, then they are not able to generate a commensurate rate of return. However, if the government invests only a small part of the investment, let’s say 40%, then their return on investment increases drastically.
There are many different forms of public-private partnership (PPP) contracts where the sporting franchise tries to address this concern on behalf of the government. Such contracts ensure that the first cash flows which accrue to the project are paid to the government.
Only after a certain required rate of return has been achieved by the government, the balance earnings can be taken over by the private party i.e. the sporting franchise.
There are many different models available whereby the interests of different parties can be given priority. This helps in alleviating the concerns of some parties and helps improve the overall financial viability of the project.
The end result is that the interest component increases drastically and the project becomes unviable. However, this is not the case when investors know that the government is involved in the project.
Investors are aware of the fact that funding projects that are backed by the government are a much less risky proposition. Hence, when sporting franchises try to raise funds in conjunction with the government, they are able to do so at a much lower rate of interest. This difference between a high rate of interest and a low rate of interest can be the difference between a viable proposition and an unviable one.
For example, the government does not have to invest all the money required to build a stadium. They just need to do a partial investment and may even be promised a better rate of return.
Hence, when the government is internally evaluating the project vis-a-vis other investment opportunities, they find this project to be more attractive. Also, there is money left over for the government to invest in other projects that are more aligned with their societal responsibilities.
For instance, the government is more capable of raising finances and obtaining the required permissions from the relevant authorities. On the other hand, the private sector has more capability when it comes to efficiency.
The private sector companies are better at designing more cost-effective and efficient solutions that improve the overall experience of the stadium. Also, private companies can be relied upon to execute the agreed-upon project within the given timelines.
A public-private partnership (PPP) model allows both parties to pick up roles where their core competency lies. The end result is that the collaboration is able to produce a robust project that is better equipped to handle the various risks.
When a project of such scale is executed, risks cannot be completely avoided. Instead, they must be managed and this arrangement allows the team to do just that.
Hence, in conclusion, it can be said that the public-private partnership (PPP) model helps convert an unviable investment plan into an investment project that can be pursued by both sides without compromising on their financial objectives.
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