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PPPs help a state-owned leisure corporation to thrive

A government monopoly taps new capital and drives business modernization through innovative PPP contracts

Challenge

A state-owned operator of leisure businesses faced declining revenues as customers, particularly younger ones, defected to private hospitality and entertainment players with fresher offerings and savvy marketing campaigns. The corporation's inbuilt advantages—including a monopoly in some parts of its business and the authority to regulate its own activities—were not enough to keep it afloat in the long run.

The corporation was under pressure from the government to turn around its financial performance and safeguard the jobs of its many thousands of employees. Yet modernization would require major investment in new facilities and technology. What’s more, the organization lacked the skills to innovate its offering, as talented managers and marketers had more attractive career prospects in the private sector.

The corporation's leaders recognized that a radical change in operating model was required—and they saw the potential of partnering with private companies to draw in the resources and expertise needed. They asked McKinsey to help them develop a modernization plan for a complete transformation through public-private partnerships (PPPs).

Discovery

A quick assessment showed that this would be a PPP effort of unusual size and complexity. Multiple PPPs would have to be specified, designed, and delivered—one for each of the corporation's many business units. What's more, these PPPs would need to be structured to take into account several non-negotiable regulatory requirements, including protection of existing jobs and pension rights, with ongoing oversight and revenue-collection roles preserved for the public sector.

Working with the corporation's leaders, we began by defining a bold and specific vision of what successful modernization would look like—and how this would attract a broader demographic and boost revenues. The vision made it clear that the know-how and investment of private partners would be critical in upgrading operations, launching new products, redesigning marketing campaigns, and harnessing social media to appeal to younger customers.

Next, we helped shape a process to attract maximum interest, investment, and innovation from private players. A wide range of potential partners from around the world might be approached, including private-equity firms, infrastructure and pension funds, operators, and technology companies. But the regulatory obligations—not least the government’s requirement that no jobs be cut and that investors pay an up-front fee before taking over a concession—posed a barrier to adoption. As such, we orchestrated a comprehensive outreach effort, sharing the draft procurement process with potential bidders and engaging them in dialogue. One key change resulting from this was the introduction of minimum levels of compensation to cover concessionaires’ operating costs, reducing investor risk.

We then set out to craft a bespoke PPP for each business unit. The service agreements we designed covered investment requirements, revenue expectations, employment contracts, regulatory obligations, and a host of other issues such as access to land and management of plant and buildings. In each case, expertise from a range of industries and functions had to be brought together in a tightly integrated solution.

Alongside this effort, we redesigned the corporation’s structure to prepare for divestment of all its cash-generating activities and to strengthen its regulatory functions, which would remain in the public sector. We sequenced the implementation of the transformation, staging the outsourcing of the business units over a 15-month period.

With all the building blocks in place, the corporation was confident it could launch the PPP effort with clear outcomes in mind, well-informed private investors ready to bid, and a robust execution plan.

Impact

When the PPP procurement effort was formally kicked off, there was an enthusiastic response from investors, operators, and other interested parties from around the world. Despite the complex combination of assets packaged into concessions and the indirect nature of revenue collection, the concession proposition was well understood and accepted as bankable. Moreover, the fees demanded of the concessionaires were widely accepted as representing market value.

The PPP transformation is now well under way, and it's on track to bring in considerable private investment and top-performing private operators to reinvent the corporation's hospitality and entertainment offering and reposition its customer outreach. We estimate that the concessions will generate several billion dollars in new revenue for the corporation over the next decade.

FEATURED EXPERTS

Stefano Napoletano

Senior Partner, Milan

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