Public-Private Partnerships (PPPs): Definition, How They Work, and Examples

Public-Private Partnership

Investopedia / Zoe Hansen

What Are Public-Private Partnerships?

Public-private partnerships involve collaboration between a government agency and a private-sector company that can be used to finance, build, and operate projects, such as public transportation networks, parks, and convention centers. Financing a project through a public-private partnership can allow a project to be completed sooner or make it a possibility in the first place.

Public-private partnerships often involve concessions of tax or other operating revenue, protection from liability, or partial ownership rights over nominally public services and property to private sector, for-profit entities.

Key Takeaways

  • Public-private partnerships allow large-scale government projects, such as roads, bridges, or hospitals, to be completed with private funding.
  • These partnerships work well when private sector technology and innovation combine with public sector incentives to complete work on time and within budget.
  • Risks for private enterprise include cost overruns, technical defects, and an inability to meet quality standards, while for public partners, agreed-upon usage fees may not be supported by demand—for example, for a toll road or a bridge.
  • Despite their advantages, public-private partnerships are often criticized for blurring the lines between legitimate public purposes and private for-profit activity, and for perceived exploitation of the public due to self-dealing and rent-seeking that may occur.
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Private Finance Initiatives & Public-Private Partnerships

How Public-Private Partnerships Work

A city government, for example, might be heavily indebted and unable to undertake a capital-intensive building project, but a private enterprise might be interested in funding its construction in exchange for receiving the operating profits once the project is complete.

Public-private partnerships typically have contract periods of 20 to 30 years or longer. Financing comes partly from the private sector but requires payments from the public sector and/or users over the project's lifetime. The private partner participates in designing, completing, implementing, and funding the project, while the public partner focuses on defining and monitoring compliance with the objectives. Risks are distributed between the public and private partners through a process of negotiation, ideally though not always according to the ability of each to assess, control, and cope with them.

Although public works and services may be paid for through a fee from the public authority's revenue budget, such as with hospital projects, concessions may involve the right to direct users' payments—for example, with toll highways. In cases such as shadow tolls for highways, payments are based on actual usage of the service. When wastewater treatment is involved, payment is made with fees collected from users.

Public-private partnerships are typically found in transport and municipal or environmental infrastructure and public service accommodations.

Advantages and Disadvantages of Public-Private Partnerships

Advantages

Partnerships between private companies and governments provide advantages to both parties. Private-sector technology and innovation, for example, can help improve the operational efficiency of providing public services. The public sector, for its part, provides incentives for the private sector to deliver projects on time and within budget. In addition, creating economic diversification makes the country more competitive in facilitating its infrastructure base and boosting associated construction, equipment, support services, and other businesses.

Disadvantages

There are downsides, too.  The private partner may face special risks from engaging in a public-private partnership. Physical infrastructure, such as roads or railways, involve construction risks. If the product is not delivered on time, exceeds cost estimates, or has technical defects, the private partner typically bears the burden.

In addition, the private partner faces availability risk if it cannot provide the service promised. A company may not meet safety or other relevant quality standards, for example, when running a prison, hospital, or school. Demand risk occurs when there are fewer users than expected for the service or infrastructure, such as toll roads, bridges, or tunnels. However, this risk can be shifted to the public partner, if the public partner agreed to pay a minimum fee no matter the demand.

Public-private partnerships also create risks from the general public's and taxpayers' point of view. Private operators' partnership with the government may insulate them from accountability to the users of the public service for cutting too many corners, providing substandard service, or even violating peoples' civil or Constitutional rights. At the same time, the private partner may enjoy a position to raise tolls, rates, and fees for captive consumers who may be compelled by law or geographic natural monopoly to pay for their services.

Lastly, as with any situation where ownership and decision rights are separated, public-private partnerships can create complex principal-agent problems. This may facilitate corrupt dealings, pay-offs to political cronies, and general rent-seeking activity by attenuating the link between the private parties who make important decisions over a project, from which they stand to benefit, and accountability to the taxpayers who foot at least part of the bill and who may be left holding the bag in terms of ultimate liability for the project's outcome.    

Public-Private Partnership Examples

Public-private partnerships are typically found in transport infrastructure such as highways, airports, railroads, bridges, and tunnels. Examples of municipal and environmental infrastructure include water and wastewater facilities. Public service accommodations include school buildings, prisons, student dormitories, and entertainment or sports facilities.

What Is an Example of a Public-Private Partnership?

Public-private partnerships can be found in infrastructure projects such as in building toll roads and highways. One example is Canada's 407 Express Toll Route (407 ETR). This 67-mile stretch of highway was a PPP between the provincial government of Ontario and a private consortium that was responsible for the design, construction, financing, and maintenance of the highway with a lease term of 99 years, during which time they are permitted to collect tolls from users of the roadway. However, traffic levels and toll revenues were not guaranteed by the government).

What Is Revenue Risk in a Public-Private Partnership?

Revenue risk is the chance that the private party to a PPP will not be able to recover its costs or ongoing expenses from operating a piece of infrastructure. For a toll road, this may be due to lower than expected traffic or limits set on toll rates. Extensive studies should be conducted ahead of time to avoid this risk and plan for contingencies.

What Are Some Types of Public-Private Partnership?

Public-private partnerships can be arranged in several ways. Here are just a few:

  • Build Operate Transfer (BOT): A government hands over all construction and operations to a private party for a set number of years (often several decades or more). After that period of time, it is transferred to the government.
  • Build Operate Own (BOO): The same as a BOT, but the private entity is not required to ever transfer the project to the government.
  • Design-Build (DB): A government contracts with a private party to design and construct a project for a fee. The government retains ownership and may either operate it itself or contract out operations.
  • Buy Build Operate (BBO): a government sells a pre-existing project that has already been completed and may have been operated by the government for some time to a private party, who will take it over fully. The private party may need to invest in rehabilitating or expanding the project.

The Bottom Line

Governments use public-private partnerships to collaborate with private sector companies in order to finance projects. While there are benefits and drawbacks to these types of partnerships, governments still use them frequently to finance transportation, municipal, and environmental infrastructure, as well as public service projects.

Article Sources
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  1. Public-Private Partnership Knowledge Lab. "PPP Contract Types and Terminology."

  2. Public-Private Partnership Knowledge Lab. "How PPPs Are Used: Sectors and Services."

  3. The World Bank. "Government Objectives: Benefits and Risks of PPPs."

  4. Private Infrastructure Advisory Facility. "Drawbacks of PPP."

  5. Congressional Research Service. "Public-Private Partnerships (P3s) in Transportation."

  6. International Road Federation. "Public Private Partnerships in Highway Construction." 

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