Public-Private Partnership in Stadium Financing

In the previous articles, we have already seen that funding a stadium can be very difficult from a financial point of view. The financial aspects of stadium financing can be challenging regardless of whether the financing will be provided by the government or by private parties.

It is important to note that stadium financing can be taxing when it is done either by the government or by a private party. However, there is a third option that can be explored.

The public-private partnership (PPP) model has been explored by several businesses including the sporting industry. Over the years, many industry personnel have found the public-private partnership (PPP) model to be the solution to the woes of stadium funding.

In this article, we will try to understand the various models via which public-private partnerships can operate.

Why is there a Need for Public Private Partnership in Stadium Financing?

The public-private partnership (PPP) model is a partnership between two very different types of organizations. On the one hand, there are private organizations that are known for sticking to the schedule and being able to deliver a quality product within the promised timelines.

On the other hand, there are government organizations that are known for being able to obtain approvals at a faster pace. Also, government organizations have access to funding at a much lower rate of interest as compared to the overall market. Hence, both organizations have complementary strengths and weaknesses making them fit for a partnership.

How Does Public-Private Partnership Work?

As far as the sports industry is concerned, the public-private partnership (PPP) model operates through multiple models. In each of these models, the degree of responsibility which is passed on to the private sector increases. Let’s have a closer look at some of the models mentioned below:

1. Design and Build: As a part of this model, the design and build aspect of constructing a stadium is done by the private sector. It is common for a government organization to float tenders inviting bids from various organizations in order to execute the design and build phases of stadium management. The government can benefit from the expertise of the private sector in these areas.

   Also, it is common for the cash flows of the project to be linked to the completion. This provides a greater incentive for the private sector to complete the project at a faster pace. In this model, the private sector acts as a subcontractor that works for a fixed payment. They are not concerned with the overall success or failure of the project.

2. Design, Build, Finance, and Maintain: The next model of public-private partnership (PPP) is called the design, build, finance, and maintain model. In this model, the private sector is expected to perform all the tasks mentioned in the previous step i.e., design and build.

   However, the model also requires the private organization to finance the project. This may be the case because the private sector organization may have access to some innovative source of funding or it is possible that the government doesn’t want to undertake any further debt on their balance sheet.

   Also, in this format, the government expects the private sector to maintain the stadium. In this model, the rights to operate the stadium as well as the eventual ownership of the stadium lies with the government.

3. Design, Build, Operate, and Maintain: This model is quite similar to the previous one. Once again the design, build, and maintenance aspects are expected to be handled by the private sector.

   However, in this model, the government swaps the responsibility of financing the project with the responsibility for operating it. Hence, the private sector company is likely to be in charge of operations. The company may be given a fair degree of freedom in order to run the project. However, they may be required to fulfill certain minimum performance guarantees.

   It is quite likely that the remuneration of the private sector companies will not be fixed. Instead, it will most probably be variable in order to incentivize the private sector partner to better manage the stadium.

4. Design, Build, Finance, Obtain, and Maintain: The last type of model is wherein almost all the responsibility is given to the private sector. The government does not play an active role in the management or operations of the stadium in any way. However, the ownership of the stadium lies with the government.

   Hence, the private sector has to give a certain amount as rent to the government. This rent may not be a flat fee but can instead be a percentage of the overall revenues generated. This is done to ensure that the government does not benefit at the expense of the private sector.

   There are some other models where the ownership of the stadium may also temporarily lie with the private sector and may automatically be transferred to the government at a predetermined period of time.

Hence, the bottom line is that the public-private partnership (PPP) model is a viable financial model that can be used for the construction and maintenance of sporting stadiums. The pros and cons of this model will be discussed in future articles.