Public infrastructure requirements have driven PPPs to new prominence in recent years. Are U.S. businesses ready for these partnerships’ increased role in infrastructure development?

As an alternative to public sector procurement, a public-private partnership (PPP) combines privately owned capital with public funds or initiatives to improve public services, better meet public needs or offer more efficient management of public finances. Signing PPP contracts impels public organizations to outline their overall goals, such as long-term transportation or construction services, while ensuring that private capital will not be deployed until the private sector is satisfied with the risks and feasibility of the partnership’s long-term objectives.

Unlike traditional business relationships, a public-private partnership has its operations and profit potential delineated by contractual limits rather than market forces or external regulations. The International Monetary Fund (IMF) explains that the incentive to earn a satisfactory return on a capital investment remains, but business is conducted according to contract stipulations and the public sector establishes the scope of the project, including schedules, priorities and targeted output.

Although public-private partnerships have been used to a modest degree for many years, the concept of applying them on a sustained scale is relatively new in the United States. In recent years, public infrastructure requirements, particularly for transportation, urban construction and water and waste management, have driven PPPs to new prominence.

According to the National Council for Public-Private Partnerships (NCPPP), today the average U.S. city contracts with private partners to perform roughly 23 out of every 65 municipal services.

“The use of partnerships is increasing because they provide an effective tool in meeting public needs, maintaining a high level of public control, improving the quality of services, and are more cost effective than traditional delivery methods,” the NCPPP asserts.

As infrastructure maintenance becomes a greater public concern, the role of PPPs may expand further on both state and federal levels. A report from the Pew Center for the States notes there is a $47 billion gap between America’s needed spending and its budget for nationwide projects in the transportation field alone, despite the $27.5 billion of stimulus spending allocated for bridge and road work.

“Given the gap, state policy makers across the country are considering more seriously the idea of turning to the private sector for help,” the study states. “Public-private partnerships, whereby a private company or consortium finances, designs, constructs or operates government-owned infrastructure, represent one such funding mechanism.”

The greatest growth in PPPs (sometimes referred to as “P3s”) is expected to derive from state-sponsored initiatives. According to Real Estate and Construction Law, a blog published by law firm Sheppard Mullin, “P3 structures for the financing of public infrastructure projects are authorized by statute in at least sixteen states, and the use of P3s is under evaluation in several others.”

The U.S. General Accounting Office provides a list of common types of public-private partnerships. Some examples include: Operations and Maintenance, in which a private partner maintains a facility or service but the public partner retains ownership and general management of it; Build-Operate-Transfer, in which a private partner finances the building of a facility and operates it for a given time before transferring it to a public owner; and Lease/Purchase, in which the private sector pays for and constructs a new facility and then leases it to a public agency.

According to the IMF, PPPs are a sound choice for governments because they shift certain risks to the private sector, thus improving value for money and establishing incentives for private firms to deliver reliable, long-term service. “These benefits are sufficient to ensure that PPPs often become the favored means of procurement, even where public sector capital constraints do not apply,” the IMF claims.

However, some worry that shifting risk may create problems further down the line. “Often, risks that are typically held by a public entity are transferred to the consortium in a PPP,” Constructor Magazine warns. “In many cases, these risks are then passed on to the contractor.”

Under these circumstances, contractors become responsible for added factors, such as delays from previously unknown site conditions or environmental effects, and could face penalties from resulting work loss.

Moreover, U.S. manufacturing and construction businesses may be unprepared to make use of PPP arrangements. “There’s no centralized process, and there have not been many precedents here in the U.S. so far,” Jesse Phillips, vice president for U.S. infrastructure and project finance at RBC Capital Markets, tells Constructor.

“Once we start to see some well-structured, commercially realistic deals come to market and reach financial close quickly, people will have something from which to work,” Phillips adds.

Despite the risks and challenges of public-private partnerships, a gap remains between needed infrastructure spending and affordability. Without raising taxes to pay for public projects, where will the funding come from if not private enterprises?

Resources

Public-Private Partnerships
by Michael B. Gerrard
Finance and Development (International Monetary Fund), September 2001

Top Ten Facts About PPPs
National Council for Public-Private Partnerships

What States Should Know When Considering Public-Private Partnerships to Fund Transportation
by Susan Urahn, et al.
Pew Center on the States, March 2009

Public-Private Partnerships: A Growing Trend (Part I)
by Edward B. Lozowicki
Real Estate and Construction Law (Sheppard Mullin), Feb. 26, 2009

Public-Private Partnerships: Terms Related to Building and Facility Partnerships
United States General Accounting Office, April 1999

New Alignments, New Risks
by Bruce Buckley
Constructor Magazine, May/June 2009