What are Public-Private Partnerships
Public-private partnerships between a government agency and private-sector company 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.
Private Finance Initiatives & Public-Private Partnerships
BREAKING DOWN Public-Private Partnerships
For example, a city government might be heavily indebted, but a private enterprise might be interested in funding the project's construction in exchange for receiving the operating profits once the project is complete.
Public-private partnerships have contract periods of 25 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 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, as with toll highways. In cases such as shadow tolls for highways, payments are based on actual usage of the service. In cases involving wastewater treatment, payment is made with fees collected from users.
Benefits and Risks of Public-Private Partnerships
Private-sector technology and innovation help provide better public services through improved operational efficiency. The public sector 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. 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.
The private partner faces availability risk if it cannot provide the service promised. For example, the company may not meet safety or other relevant quality standards 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. If the public partner agreed to pay a minimum fee no matter the demand, that partner bears the risk.
Examples of Public-Private Partnerships
Public-private partnerships are typically found in transport infrastructure such as highways, airports, railroads, bridges and tunnels. Municipal and environmental infrastructure include water and wastewater facilities. Public service accommodations include school buildings, prisons, student dormitories and entertainment or sports facilities.