Public–private partnerships (PPP or P3) are very particular contracts between two or more public and private entities. In this contract, the public partner (government) delegates some of its own responsibility to a private partner under a long-term agreement.
A P3 typically involves a private entity financing, constructing, and/or managing a project in return for a promised stream of payments directly from a governmental entity or indirectly from users over the projected life of the project or some other specified period of time.
P3s typically span 15 to 25 years and sometimes longer, depending on the nature of the project. In that period of time, technology, demographics, environment, and politics can all change, so contracts needs to be flexible to adjust to the project’s life cycle. The art of a PPPs lives in the allocation of risks of the project and in the definition of the framework, principles, and rules to deal with change, because it will inevitably occur.
P3s are an important tool for developing infrastructure and fostering economic development. The public and private sector act as partners to advance critical state and local infrastructure projects such as roads, airports, ports, power, water, and solid waste treatment. PPPs are also used in social infrastructure like health and education (construction and maintenance of hospital or school facilities, in addition to clinical or education services).
Partnerships allow agencies to leverage private-sector dollars (as well as private expertise and other resources), to tackle mandates and longstanding issues within their domain.
Government officials must carefully vet potential partners for any conflicts of interest or prior misconduct that could reflect poorly on the agency. Governments also must ensure that their authorizing statutes permit them to engage in activities related to the partnership and that they spend partnership-related funds in a manner consistent with both their appropriations statutes and government-wide authorities pertaining to grants and procurement.
The 2008 recession knocked the wind out of many state and local governments’ financial sails, which led to a surge in deferred maintenance causing highways and bridges to deteriorate further, adding greatly to the cost of the eventual repairs. Today, 36 states have enacted legislation to allow P3s, many out of dire need for funds in the slumping economy when the real estate bubble burst.
Despite spending $2.5 trillion a year on roads, railways, ports, water, and other public infrastructure projects, countries around the world are still falling far short of what they need to invest, according to one estimate. Thus, it’s no surprise that there is renewed interest in public-private partnership (P3) projects, where businesses supplement public investment in return for reaping rewards such as tolls and fees. The White House, for one, suggests using private investments to fund most of its proposed $1.5 trillion in U.S. infrastructure spending.
One of the main benefits of P3s is that they allow governments to undertake projects that they otherwise couldn’t afford because of debt constraints. And, of course, there is economic development through job creation. However, some critics argue that selling yourself to the private sector in long-term arrangements might be a shortsighted strategy – especially for taxpayers who could eventually get stiffed with the bill.
P3s are nothing new, especially internationally. However, they aren’t nearly as common-place as traditional municipal financing through the issuance of bonds. Partly for this reason, there is considerable public debate and scrutiny on public private partnerships. Some of the public debate can turn negative and heated resulting in public meetings riddled with shouting matches and misinformation disseminated. Fears of privatization, unrelenting toll increases and Wall Street meddling dominated the public discourse.
It’s crucial to have the right team in place not only technically, but on the advocacy and stakeholder engagement fronts as well. Minimizing risk of financial failures and political backlash will be essential to encouraging state and local governments to bring more projects for P3 procurement.