Public Private Partnership Pros and Cons

Public Private Partnership (P3) Benefits and Disadvantages

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A P3 (Public Private Partnership), according to the World Bank, is a contract -- often a long-term contract -- between a governmental body and a private entity, most often a corporation, to provide some public benefit, either an asset or a service.   A key element of these contracts is that the private party must take on a significant portion of the risk because the contractually specified remuneration -- how much the private party gets for its participation -- depends on performance. 

An Example of Successful PP3 Partnering

Although P3s have gotten off to a relatively slow start in the US, there are already many of them, and in general, they've been extremely successful.

One such instance is the high-occupancy toll lanes project in Virginia. Several private-sector firms participated in this particular partnership and, according to Brookings Institute senior fellow Robert Puentes, the partnership saved millions of dollars and brought additional highway capacity online years earlier than the traditional government-does-all approach.  

Public Private Partnership Benefits

Public-Private partnerships (P3) offer several benefits:

  • Better infrastructure solutions than an initiative that is wholly public or wholly private. Each participant does what it does best. 

  • Faster project completions and reduced delays on infrastructure projects by including time-to-completion as a measure of performance and therefore of profit.

  • A public-private partnership's ​return-on-investment (ROI) may be greater than traditional, entirely private or government methods because innovative design and financing approaches become available when the two entities work together.

  • Risks are fully appraised early on to determine project feasibility. In this sense, the private partner offers a brake on unrealistic government promises or expectations. 

  • The operational and project execution risk is transferred from government to the private participant, which usually has more experience in cost-containment.  

  • Public-private partnerships may include early completion bonuses that further increase efficiency. They can sometimes reduce change order costs as well.

  • By increasing the efficiency of the government's investment, it allows government funds to be re-directed to other important socio-economic areas.

  • P3s' greater efficiency reduces government budgets and budget deficits

  • High-quality standards are better obtained and maintained through the life-cycle of the project

  • Public-Private partnerships that reduce costs also allow lower taxes.

Public Private Partnership Disadvantages

 P3 has also some drawbacks:

  • Every Public-private partnership involves risks for the private participant, which reasonably expects to be compensated for accepting those risks, which can increase government's costs.

  • When there are only a limited number of private entities that can perform these tasks -- the development of a jet fighter for instance -- the limited number of private participants big enough to take on these tasks may limit the competitiveness required for cost-effective partnering.  

  • Profits of the projects can vary depending on the assumed risk, competitive level, complexity, and volume of the project being performed

  • If the expertise in the partnership lies heavily on the private side, the government is at an inherent disadvantage. It may be unable to accurately assess the proposed costs, for example. 

 

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