What is a public-private partnership?
For centuries, the United States government has refined its relationship with the private sector to propel its economy and improve the welfare of its citizens. This article will discuss what this collaboration entails and its role in driving national growth.
Public-private partnerships: How it all began
Public-private partnerships (PPPs or P3) are arrangements between a government agency and a private-sector company made for funding public infrastructure projects.
In the United States, the earliest form of PPPs came into being during the colonial period. Back then, the early colonial charters depended on the partnership between the British Crown and companies overseeing colonization.
Some of the projects that were birthed from the earliest PPPs include Philadelphia and Lancaster Turnpike roads in Pennsylvania (1792), a steamboat line between New Jersey and New York (1808), the nation’s first railroad chartered in New Jersey (1815), and most of the electric grids making of the US’s energy policy.
The prevalence of public-private partnerships increased internationally around the 1990s and 2000s. That said, the United States didn’t participate in that global shift, as its federal and state governments played minor roles in these areas. Added to that, the majority of the states’ infrastructure projects were bankrolled through municipal bond systems.
By the second term of former President Barack Obama, the USA began to implement PPPs for more significant and high-profile projects. This gave way for the Department of Transportation to establish the Build America Transportation Investment Center (BATIC) Institute to help P3s have access to federal credit and support their operations.
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What happens between public-private partnerships?
Public-private partnerships may seem like contracts or agreements between a federal agency and a private sector firm, but a lot of work goes into forging these collaborations.
Outlined below are some of the critical elements that enable the government to push through with its public-private partnerships:
Funding – Given that proposing and executing infrastructure projects require hefty financial support, government agencies alone may not be able to fully invest in all the requirements for the effort to succeed. In turn, the private sector funding the federal enterprise may receive operating profits once the project is completed.
Contract – a PPP contract typically lasts 20 to 30 years, although some may last shorter or longer. The duration of a public-private agreement depends on the type of project and policy considerations.
P3 contracts are usually lengthy in order to enable the private party to integrate its service delivery cost considerations into the project’s design. The considerations encompass the optimization of trade-offs between investment and future maintenance and operations costs.
Responsibilities – Other than funding, the private sector oversees the design, implementation, and completion of the contract. On the other hand, the public partner is responsible for defining and monitoring compliance with the contract’s objectives.
Risk management – While each partner is assigned different contractual responsibilities, both are accountable for risk management tasks throughout the duration of the project. Distribution of risk management responsibilities is done through negotiation, with the assignment anchoring on the sectors’ capacity to assess, control, and handle predicaments.
The risks designated for the private partner encompass cost overruns, technical errors, and incompetence in meeting quality standards. For the public partner, they may deal with include not getting support for agreed-upon fees and ensuring the provision of incentives to private partners to complete the project within budget and the given time frame.
What are the different types of PPP project delivery models?
Another reason public-private partnership contracts are lengthy is because they cover several phases and functions of the project. These functions also vary, depending on assets and work involved in the contract.
With infrastructure projects requiring various assets and functions to be correctly implemented, public and private partners need to adopt a suitable contract or project delivery model. Here are some of them:
- Design-build (DB) – The private partner oversees the designing and building operations to meet the public partner’s specifications. This contract is often executed with a fixed price, with the private partner assuming all the risk.
- Finance only – In this contract, the private partner finances all or parts of the necessary capital expenditure, and then charges the public entity with the interests.
- Operation and maintenance (O&M) – In this arrangement, the private firm operates publicly owned assets for a period of time. After the contract is completed, the public entity regains ownership of the assets.
- Rehabilitate – PPPs covering existing structures entail the private party rehabilitating or extending the assets.
- Build-own-operate (BOO) – Under this contract, the private partner builds, owns, and operates the assets and projects perpetually, then sells the assets to its beneficiaries.
- Build-own-operate-transfer (BOOT) – In this arrangement, the private partner is responsible for designing, financing, constructing, and operating the project. After the contract is completed, ownership is returned to the public partner.
- Buy-build-operate – In this agreement, a government sector sells a pre-existing project that isn’t government-operated to a private partner for a short period. After rehabilitating or building the project, the project’s ownership transfers back to the public sector entity.
- Build-lease-operate-transfer (BLOT) – The private partner finances, designs, and builds the project on a leased public property. The ownership then transfers to the public sector partner after the lease expires.
Sectors Involved in Public-private Partnerships
Public-private partnerships cover a wide range of federal projects. That said, listed below are the sectors that utilize PPPs the most:
- Power and energy
- Social infrastructure
- Water and wastewater
What validates public-private partnerships?
With PPPs being hefty, lengthy, and risky projects, these arrangements don’t come without challenges. On a brighter note, federal authorities continue to implement public-private partnerships for their impact on civilians, the economy, and the nation.
Here are some of the justifications the government uses to validate PPPs:
- Value for money – With most infrastructure projects costing billions of dollars, private partners provide value for money for the projects. They’ll be investing in the operations without compromising the quality or requirements of their public partners.
- Innovation – PPPs usher in innovation as the private sector has more acumen and experience in harnessing new technologies and methods to build than the public sector.
- Risk delegation – Public-private partnerships are often justified based on the capacity of private partners to use their incentives to minimize risks and complete the contract.
- Off-balance-sheet accounting – PPPs allow the execution of infrastructure projects while keeping them off of the public-sector balance sheet, thus avoiding additional costs.