A public-private partnership (PPP) is a long-term agreement between the government and a private firm. In many cases, the private partner will take on the responsibility for financing, designing, and building a new facility or facility component on public land. The private sector will also bear the risk of cost overruns and shortfalls in demand. However, unlike traditional private contracts, the government retains control over the facility and guarantees minimum levels of revenues for the private firm.
Generally, the federal government subsidizes borrowing through tax-exempt bonds. Likewise, state and local governments typically pay higher legal fees and monitor costs when choosing private financing. While some governments believe that partnerships are the best way to finance projects, others have found other solutions.
Private firms have become an important part of the infrastructure industry, providing natural gas pipelines and broadband Internet connections to communities. Some local electric utilities are also privately owned. Although state and local governments typically use these facilities, there are instances when private companies are called in to provide services. This allows for more efficient use of taxpayers’ money and can lower overall cost.
There are several types of PPPs, including design-build, construction, and operation-and-maintenance. Many are based on existing facilities, while other include new-capacity facilities. Research has shown that some partnerships have produced positive effects, especially in the transportation sector.
The first major distinction between a public-private partnership and a traditional private contract is the transfer of risk. A risk-transfer clause in a contract does not make it a partnership, however. An example of a risk-transfer clause is a management contract that transfers more risk to the private partner.
The second difference is the source of revenue designated to repay the private partner. Private investors are expected to earn a return comparable to other projects with similar risks. Governments, however, do not typically include this cost in the total cost of the project. They may decide to rely on the income generated by a facility for repayment, or they may choose to borrow funds from the private sector instead.
As a result, a public-private partnership has certain risks, particularly when a project is poorly written and the private partner loses control over the project. This could result in unfavorable outcomes, such as cancellations or bankruptcies. For the public-private partnership to produce a good outcome, policy makers must align on risk pricing. It can be challenging for all parties involved.
Despite the risks of a public-private partnership, research has shown that it can be a beneficial option for some public-sector projects. In some cases, it has helped state and local governments to accelerate funding for their projects. These partnerships have been used for transit facilities, airports, commuter rail facilities, and water systems. According to data gathered by the IRS in 2010, the value of major public-private partnerships reached $700 billion.
Because a public-private partnership has some of the same advantages as a traditional private contract, some analysts are speculating that it will become more common in the future. However, while a growing number of potential projects could translate to an increase in the use of public-private partnerships, there are some limitations.