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 systems, parks and convention centers. Funding a project through a public-private partnership can make it possible to finish a project sooner or make it a possibility in the first place.
Private funding initiatives and public-private partnerships
How public-private partnerships work
A municipal government, for example, may be heavily in debt and unable to undertake a capital-intensive construction project, but a private company may be interested in financing its construction in exchange for receiving operating profits after the project finished.
Public-private partnerships generally have contract durations of 25 to 30 years or more. The funding comes partly from the private sector but requires payments from the public sector and / or users during the life of the project. The private partner participates in the design, completion, implementation and financing of the project, while the public partner focuses on defining and monitoring compliance with the objectives. Risks are divided between public and private partners according to the capacity of each to assess, control and respond to them.
Key points to remember
- Public-private partnerships make it possible to carry out large-scale government projects, such as roads, bridges or hospitals, with private funding.
- These partnerships work well when technology and innovation from the private sector combine with incentives from the public sector to complete the work on time and on budget.
- Risks for private enterprise include cost overruns, technical faults and inability to meet quality standards, while for public partners, agreed user fees may not be covered by demand , for example for a toll road or a bridge.
Although public works and services can be paid for by means of a charge taken from the public revenue budget, as in the case of hospital projects, concessions may involve the right to pay users directly, for example with motorways to toll. In cases such as notional tolls for motorways, payments are based on actual use of the service. When wastewater treatment is involved, payment is made with the fees collected from users.
Public-private partnerships are generally found in transport and municipal or environmental infrastructure and public service housing.
Advantages and disadvantages of public-private partnerships
Partnerships between private companies and government provide benefits to both parties. Technology and innovation from the private sector, for example, can help deliver better public services through better operational efficiency. The public sector, for its part, encourages the private sector to execute projects on time and within budget. In addition, the creation of economic diversification makes the country more competitive by facilitating its infrastructure base and stimulating construction, equipment, support services and other associated enterprises.
There are also disadvantages. Physical infrastructure, such as roads or railways, carries construction risks. If the product is not delivered on time, exceeds cost estimates or has technical defects, the private partner generally assumes the responsibility.
In addition, the private partner faces a risk of availability if it cannot provide the promised service. A business may not meet safety or other relevant quality standards, for example when operating 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 agrees to pay a minimum fee regardless of demand, that partner assumes the risk.
Examples of public-private partnerships
Public-private partnerships are generally found in transport infrastructure such as highways, airports, railways, bridges and tunnels. Examples of municipal and environmental infrastructure include water and wastewater facilities. Public service accommodation includes school buildings, prisons, student dormitories, and entertainment or sports facilities.