Public-Private Partnerships’ Significance for the Public Sector

These specialized contracts can be a boon to cash-strapped government agencies

There is no universally accepted definition for “public-private partnership,” but in general terms, it’s a long-term agreement between a public entity and a private entity to deliver public infrastructure or services. The private entity typically assumes all or a significant share of risk and continuing management, operations, and maintenance. Public-private partnerships, also known as PPPs or P3s, generally tie payment to performance. Structures include:

  • Build-own-operate (BOO)
  • Build-own-operate-transfer (BOOT)
  • Build-operate-transfer (BOT)
  • Design-build-operate (DBO)
  • Buy-build-operate (BBO)

Public-private partnerships are used in many applications, including building airports, schools and dormitories, prisons, convention centers, and arenas, as well as for projects such as transportation networks, parks, highways, bridges, tunnels, and water and wastewater treatment systems.

History of Public-Private Partnerships

Although public-private partnerships have recently gained popularity, they’ve been around for a long time. For example, in 1785, Massachusetts allowed a company to build a bridge across the Charles River and collect tolls for 70 years. The investors got rich, but the public tired of paying tolls. The state granted another company a charter to build a new bridge in 1828, but the existing bridge investors filed suit and blocked construction. The legislature granted the owners another 30 years of toll collecting, causing public discontent.

Today, however, state and national governments are stepping in to create legal frameworks that standardize the contracts within their jurisdictions, requiring strong performance standards and precluding exploitative behavior.

One example of a modern public-private project is in Alice, Texas. The municipality was paying elevated rates for water pumped from 20 miles away, and wanted to desalinate its brackish groundwater. The cost of the plant, however, was millions of dollars the city didn’t have. A public-private partnership is set to build a desalination plant at no initial cost, saving millions upfront and delivering raw water at a set price lower than current rates.

Benefits for Public Agencies

The recent rise of public-private partnerships is generally a positive for cash-poor public entities. If a drinking water treatment plant fails, a city needs a new plant yesterday, not at the end a long process of levying millages or issuing bonds. Another benefit is the private company’s technical expertise and resources.

Governments may also have insufficient organizational resources to operate and maintain complex assets. Regular elections may incentivize artificially low rates, fares, taxes, or tolls, leaving coffers empty when repairs are needed.

Public-private partnerships set rates and the standard of service upfront, so there is less potential for costs to become a political football. Because public projects tend to be very costly, long-term continuity of management is key to keeping assets from falling into disrepair.

For the public sector, these specialized contracts can be a lifeline, especially in the midst of the infrastructure crisis. They shift risk to private companies and financial institutions that are better able to handle it, and turn operations and maintenance over to companies that know what they’re doing. As always, there may be devils in the details, so it’s important to take care in selecting the company you’ll be working with the next few decades.