How to Build Today: Public-Private Partnership
Originally published on February 5, 2014
Updated on November 10th, 2022
Considering the state of today’s economy, public institutions look to public-private partnerships (P3s) to provide financing for needed facilities. This is especially true for large capital projects that require significant upfront costs.
P3s can also be used for projects that don’t have a clear revenue source and for facilities that require ongoing maintenance.
What is a public-private partnership?
A P3 is an arrangement between a federal, state or local (public) agency and one or more private sector entities for the provision of assets and the delivery of services. P3s can be beneficial for public institutions such as higher education, judicial and corrections, transportation, and not-for-profit hospitals that lack the necessary funds to build facilities.
A P3 helps with the financing of a project, but it can also result in more efficient and effective use of public funds and provide greater access to private sector expertise.
What are the benefits of public-private partnerships?
The main benefit of P3s is that they allow governments to leverage the private sector’s strengths (such as financing and experience) with greater efficiency than if they were trying to do so alone. But there are other benefits as well.
Private companies working in a P3 arrangement have partial ownership of a public project. Therefore, they are more likely to ensure the project is completed on time and within budget.
Private companies have a better track record of innovation than government agencies, which can lead to more efficient solutions for public problems. Since they have a profit incentive to make money, private companies are more likely than government agencies to succeed.
When a country builds its infrastructure in a P3 arrangement, its economy becomes more diverse, giving it a competitive edge over other countries. With a variety of industries, the country is able to create more jobs and provide more opportunities for its citizens.
Transfer of skills to government employees
In a public-private partnership, government and private employees (sometimes foreign) work in collaboration. This allows the transfer of skills to the national workers.
What are the disadvantages of public-private partnerships?
Burden of risk
With construction, there’s always a risk of going over budget or experiencing issues like technical errors and delays. In a P3, the private partner typically bears the risk of cost overruns, delays and technical problems. The project may fail due to political instability or policy changes in the country.
If a project doesn’t meet quality standards regarding safety or fulfilling public requirements, the private party is held accountable. For example, what happens if the demand is not up to the estimations? In that case, the public party must agree to pay a minimum fee regardless of whether the demand is lower than estimated.
In cases of natural disasters, the public party is not held accountable for any damages or loss incurred by the private party.
Possible immunity from accountability
In a P3 arrangement, if the private party provides substandard service, the public party may resist holding them accountable because it could draw governmental criticism from the general public. This creates a “virtual immunity from accountability” for the private parties.
Another concern is the possibility of private parties engaging in collusion with each other. This could result in them abusing their monopoly power or engaging in price fixing—hurting consumers and businesses alike.
How does a public-private partnership arrangement work?
P3s cannot exist unless the public sector has a need. The public institution provides an existing or obtainable annual operating cash source and existing land it can lease long term. The private sector finances and builds the desired facility and obtains a long-term operating lease from the public institution. Such a lease can range from 20 to 50 years.
At the end of the operating lease, ownership of the entire development reverts to the public. So if the public institution owns land and can afford the monthly payment under a long-term lease, it can obtain needed facilities custom built to its specifications.
The terms of the agreement between the public institution, developer, finance provider, contractor and other parties will vary and are project specific.
What is the status of public-private partnerships in Florida?
P3 arrangements are currently allowed by Florida Statute, but the rules are restrictive. The present administration tends to favor privatization, which includes P3 projects. And currently proposed legislation would streamline the process and better accommodate P3 projects that meet certain guidelines.
Viable partnerships are only as good as the parties involved. Done right, a P3 project will benefit all parties and deliver needed facilities to the community. The partnership generates a solution for the public entity’s facility needs, the financier earns a rate of return, and the developer and contractor earn fees for services.
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