What are Public-Private Partnerships?

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What are Public-Private Partnerships?

At the end of the last century, researchers were looking for innovative project delivery methods for the public sector, and they defined several approaches, such as build-operate-transfer and design-build-maintain-finance, among others. Now, they are defined as Public-Private Partnerships (P3s) in several jurisdictions. P3s are another tool when it comes for the government to deliver new or improve existing infrastructure; now more than ever with the necessity of new funds they gather special importance.

There is evidence of some modality of P3 since the time of Rome in which, for example, private individuals were commissioned to develop port facilities. But a big resurgence has started since the 1990’s with the Private Finance Initiative (PFI) in the United Kingdom (UK) as a project delivery method. For example, Miller et al. (2000) explained the delivery method as “a system for organizing and financing design, construction, operations and maintenance activities that facilitates the delivery of a good or service” and emphasized the importance of the analysis of the project considering the complete life cycle and not just the construction phase. This is especially important, since typically P3 contracts are long term contracts and a considerable cost would come from the operation and maintenance of the asset.

Garvin and Bosso (2008) define a P3 as “a long-term contractual arrangement between the public and private sectors where mutual benefits are sought and where ultimately (a) the private sector provides management and operating services and/or (b) puts private [equity] at risk”. The World Bank (2012) says P3s “combine the skills and resources of both the public and private sectors in new ways through sharing of risks and responsibilities.” The efficient allocation of risks is clearly one of the key tenets of P3s; transferring risks to the partner with the better knowledge to handle them and then sharing the others is of the utmost importance.

The allocation of risks will depend in part to the structure of the project. P3s can be used for existing assets (brownfields) or new infrastructure (greenfields). The magnitude of risks and which risks are going to be present vary by project and its life cycle stage. For example; a brownfield project does not have design and construction risk for the private parties, however, it could have a low cash flow risk during its operation, if the utilization history is reliable. In contrast, a greenfield project in which there are significant risks during design and construction, poses an important future usage risk given the lack of historical information.

Risk is but one of multiple aspects of P3s. This and other critical factors of P3s, how they can be used to promote economic development, and the misconceptions that surround this delivery method will be further discussed in future articles. 

 

Author:

Edwin González-Montalvo, PhD, PE , CPM’s Senior Technical & Strategic Advisor    

 

References:

Garvin, M. J., and Bosso, D. (2008). “Assessing the Effectiveness of Infrastructure Public–Private Partnership Programs and Projects.” Public Works Management and Policy, 13(2), 162-178.

Miller, J. B., Garvin M. J., Ibbs, C. W., and Mahoney, S. E. (2000). “Toward A New Paradigm: Simultaneous Use of Multiple Project Delivery Methods.” J. Manage. Eng., 16(3), 58-67.

World Bank (2012). “About Public-Private Partnerships.”, <http://ppp.worldbank.org/public-private-partnership/overview> (Oct. 29, 2012).