A Public-Private Partnership (PPP) is a mutually beneficial collaboration between a public agency and a private sector entity. Through this contractual arrangement, the skills and assets of each sector are shared in delivering a service or facility for the use of the general public. In addition to the sharing of resources, each party shares in the risks and rewards potential in the delivery of the service and/or facility.
Projects with the greatest likelihood of success are those high priority projects that are clearly defined and have a demonstrated public sector commitment. Projects delivered through a PPP must allocate the risks fairly between the parties, with each sector assuming the risks that they are best able to manage.
The public agency usually assumes the project definition risk by undertaking the environmental clearance effort, assessing financial feasibility and garnering stakeholder and political commitment. The private sector can best assume the financial risk, such as project financing, construction and perhaps facility management.
We are looking at PPPs as a means to accelerate delivery of our much-needed transportation projects. If we can use up-front private investment to finance some of the projects, we will likely see construction cost savings due to today's favorable bidding environment, efficiencies in alternative delivery and/or management strategies, congestion mitigation, earlier achievement of CO2 emissions reductions and earlier completion of planned rail-bus-highway transportation network.
A private investor will be entitled to a reasonable return on the financing investment made in the public project. Therefore, to determine whether delivering the project through a PPP is the most financially responsible method for the public agency to pursue, we must undertake a thorough analysis and comparison of life-of-project costs to be incurred both by delivering, operating and maintaining a project as a strictly public project, and by delivering it with private financial participation.
These decisions can be made only after extensive analysis to fully understand project details. The processes we've initiated are outlined on the Project Evaluation Process chart.
1. New Sources of Capital
Private equity, pension funds and other sources of private financing must still be repaid, but shifting responsibility for arranging the financing to a private partner can help deliver needed infrastructure in instances where the government agency is facing shortages in infrastructure funding.
2. Faster Completion of Projects
Conventional procurements usually require the public sector to provide significant upfront capital for project construction. Securing private financing allows the public sector to spread the public’s cost of infrastructure investment over the lifetime of the asset, much as homeowners do when they take out home mortgages. Typically, the private contractor also has a strong incentive to complete the project as quickly as possible to begin collecting the stream of revenues needed to recapture its capital costs.
3. Shifting Construction and Maintenance Risks from Taxpayers to Private Partners
The ability to shift the risks a contractor can best manage to the private sector is an important benefit of the public-private partnership concept. The private entity is allowed to earn a financial return commensurate with the risks it assumes on the project. Among the risks that can best be assumed by the private partner are:
Some Partnership agreements require the private sector to maintain the assets over the full term of the concession. California currently carries approximately $12.5 billion in deferred transportation maintenance at the state level and $10.5 billion locally. This deferred maintenance imposes huge costs in the long run—early intervention costs about 20% less than maintenance postponed to the latter quarter of a facility's life. Continual maintenance deferral can result in more safety problems, a shorter infrastructure lifespan and reduced quality of services.
4. Lower Costs - Construction Savings
Experience from several countries has demonstrated that public-private ventures cost comparatively less during the construction phase thanks to innovations in design and construction methodologies.
5. Reduced Life-Cycle Costs
In traditional contracting, the private sector’s role is typically limited to immediate construction. This can create a perverse incentive to economize on elements of construction today even though maintenance costs might be higher in the long run. Shifting long-term operation and maintenance responsibilities to a private entity creates a stronger incentive to ensure long-term construction quality because the firm will be responsible for maintenance costs down the road.
6. Superior Customer Service
Private infrastructure providers, often relying on user fees from customers for revenue, have a strong incentive to focus on superior customer service. And, since the asset is not managed by the public sector, government agencies are better able to concentrate on ensuring the provider maintains customer service levels. In the case of accommodation Public-Private Partnership model agreements, such as schools or defense facilities, customer satisfaction metrics can be built into the contract to ensure a strong customer orientation.
The chart below outlines the process for evalauting and considering a project for Public-Private Partnership. Click on image to view information in Acrobat format (87KB, PDF).
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