Three myths about public-private partnerships

ElizabethRiverCrossingPhoto Credit: Skanska USA

A public-private partnership (PPP) is a partnership between a public authority – usually a state government agency – and a private entity. While PPPs have been around for more than 20 years, they remain shrouded in mystery. Let’s separate the myths from the facts.

PPPs are a viable option for delivering critical infrastructure that would otherwise be unfunded. As part of a PPP, the private entity is responsible for developing, funding, designing, constructing, operating and maintaining some form of public infrastructure through a performance contract for a set period of time, normally 30 – 50 years. The PPP model can be applied to new highways, bridges, power plants, schools, hospitals and even municipal street lighting districts. As payment, the private entity receives either user fees (such as tolls) or a regular availability payment from the public authority.

Some common misconceptions about PPPs are that governments give away control of projects developed via PPP or that government projects are cheaper than PPPs. Let’s take a look at three myths and the facts behind PPPs:

Myth 1: The only benefit of a PPP is the private financing.

Fact: While private financing can be an advantage, there are many other benefits to PPPs that are often overlooked. PPPs can:

– Infuse needed capital into the infrastructure system
– Spur economic growth by generating new projects
– Reduce need for tax hikes
– Transfer project risks to the private sector
– Minimize lifecycle costs through efficient design, construction, operations and maintenance
– Achieve projects on time, on budget with any overages borne by the private partners
– Ensure high environmental and safety performance

Myth 2: PPPs are really privatizations.

Fact: PPP is not privatization. The government plays a central role in PPPs during every step of the project lifecycle. A concession agreement always provides a strict performance regime for provided services, so the public sector never forfeits control. If metrics are not met, the public authority can react and adjust scope and services. The private partner has every reason to outperform in delivering a quality project over the long-term. If the project somehow fails, it’s the private partner who has the most to lose.

Myth 3: You can’t trust Wall Street to deliver PPPs.

Fact: Wall Street is only part of the funding equation for PPPs. Effective developers place at risk their balance sheets against their projects, invest significant shareholder equity to help finance PPP projects, take responsibility for performance under the design-build construction contract, as well as the long-term operations and maintenance of the asset. Many national and international pension funds, insurance funds and labor unions invest in PPPs.

Here are three sample PPP projects in the U.S.:

Elizabeth River Tunnels – Virginia

– East End Crossing – Indiana

– I-595 Managed Lanes – Florida

 

Karl Reichelt

Karl Reichelt

Executive vice president, Skanska Infrastructure Development North America

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