Public-Private Partnership: What is it? What are the potential benefits?
August 20, 2017
Regardless of where you live in the U.S., you are almost always provided with very basic and fundamental infrastructure by a local, state and/or the federal government. Infrastructure such as roads, railways, hospitals and power plants from which you benefit are often built with a government budget (taxes you paid), but this is not always the case.
What is a Public-Private Partnership?
In fact, many infrastructure and social overhead capital projects have been, and are financed, through Public-Private Partnerships (“PPP” or “P3s”), a long-term contract between a private sector entity and a government agency to provide goods and services to the public. In the contract, the private party bears the risk of and responsibility in a project, while party’s monetary compensation comes in as a payment from the government or usage fee from the public.  One example is toll-road concessions. Instead of a local government paving an intra-state highway for residents with its own budget, the government enters a PPP with a private highway construction company, which assumes full responsibility of building and maintaining the road and then charges a fee from users at a toll for the period agreed in the contract – i.e. 30 years. The other example of a PPP is in the electricity sector. The government can hire a private power-plant construction company to build and operate a hydro power plant, and then the company sells a pre-fixed volume of electricity at a promised rate to a state-owned electricity company, which in turn provides electricity to the public.
PPPs in the United States
It is reported that the U.S. infrastructure sector requires to attract approximately $3.6 trillion by 2020 to bring the nation’s infrastructure up to a good condition.  The range of social infrastructure projects nowadays is much broader than that of the past, ranging from surface transportation and waste facilities to public universities. Not all projects can be financed and completed through PPPs since some cities and states rather have abundant cash in hand or can raise funds with lesser costs, but there seems to be more than sufficient room for PPPs in the U.S. public sector infrastructure projects. Per AIG’s recent report on P3s, while faced with rapid deterioration of all types of infrastructures in every state, the U.S. federal, state and local governments are having difficulty in financing new infrastructure projects due to decreased tax revenue and shrinking budget.  This definitely makes PPPs more attractive and viable option for governments to consider and utilize. The U.S. Department of Transportation, a federal agency with the most driving force on P3s in the U.S., states that currently 35 States and the District of Columbia have enacted the state legislation that enable the use of P3 approaches for the development of transportation infrastructures.  Lawmakers begin to realize the practicality of PPPs and have been supportive of providing a proper environment for public and private sector to win-win.
Benefits of PPPs
Why do we have to promote and use more of the Public-Private Partnership scheme in the social infrastructure sector? What are clear benefits of a private sector entity getting involved in a social infrastructure project with a government? It should not be so esoteric to comprehend one of the more obvious benefits: funding from the private sector can relieve the burden on local and state governments with a dearth of tax revenue and budgetary shortcomings, while they focus more on development impact of a new project on quality of people’s everyday lives. However, this is not the only benefit of the Public-Private Partnership: 1) PPPs can cost a government less than a traditional social infrastructure project, 2) PPPs can deliver projects faster than traditional government procurement, 3) PPPs can help a government diversify the risk of less-effective projects, and 4) PPPs can take off the financial burden of ongoing maintenance and management of social infrastructure facilities from a government.
First, PPPs can cost the government less than a traditional social infrastructure project because the process is centralized and managed by a private entity, which usually has expertise and techniques required for a certain industry. Once a PPP is decided by a government, a private entity takes full responsibility and moves along every step of the process, which usually saves time and money. More efficient processes not only lead to more cost-effective project results but also benefits potential taxpayers from paying less dues for their usage. Second, in line with the aforementioned benefit, the PPP can deliver projects faster than traditional government procurement since a private entity usually determines which subcontractors to hire and which techniques to apply from a kickoff to avoid falling behind the schedule, a delay that would cause a material loss on its revenue as well as credibility in a market. Third, since terms of a concessionary contract are usually fixed once a project takes off, a private entity assumes the risk of cost-overrun and less-than-expected usage of an infrastructure, resulting in lower revenue. Through the PPP, the government is diversifying these risks, eventually lowering the risk of taxpayers as well. Lastly, any piece of infrastructure needs both periodic and ad hoc maintenance as well as upgrade to meet an expected usage life. These cost taxpayers money, but with PPPs, the government can structure a contract in a way that a private partner takes care of maintenance throughout the contracted period.
Many infrastructures in the U.S. - roads, hospitals, power plants, schools and railways – are either deteriorating quickly or outdated, and local and state, as well as the federal, government should act fast to replace and enhance current social infrastructures. Public-Private Partnerships can bring this necessary change quickly with less costs and less burden on citizens, and simultaneously, private partners can benefit from working with governments since their reputation and expertise in markets will only be improved. PPPs are win-win systems for both the public and private sector.
Student Blog Disclaimer
The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Penn Wharton Public Policy Initiative’s strategies, recommendations, or opinions.
Additional Blog Posts
 PwC, “Public-private partnerships in the US: The state of the market and the road ahead,” November, 2016. http://www.pwc.com/us/en/capital-projects-infrastructure/publications/public-private-partnerships.html
 Dan McNichol, “The United States: The World’s Largest Emerging P3 Market,” American International Group, April, 2013. https://www.aig.com/content/dam/aig/america…/final-p3-aig-whitepaper-brochure.pdf
 U.S. Department of Transportation Federal Highway Administration, “Successful Practice for P3s: A review of what works when delivering transportation via public-private partnerships,” March, 2016. https://www.transportation.gov/buildamerica/programs-services/p3/successful-practices