The privatization of government projects is complex and often misunderstood. This article explains the potential benefits that allow Public-Private-Partnerships (PPPs) to make large capital investment projects successful.
Public-Private-Partnership Definition
Public-Private-Partnerships are defined as “a partnership between an agency of the government and the private sector in the delivery of goods or services to the public.” The important distinction between PPPs and outright privatization is that, in privatization, the government sells the entirety of the assets in a given entity whereas, in a PPP, the government can retain ownership of the assets and maintains a continuing active role in the project. Depending on the structure of the deal, the government can offer control of the assets or rights to the private sector but will still retain ultimate control. The “continuing active role in the project” is the key distinction between PPPs being a tool of partial privatization as opposed to full privatization.
It’s important to understand the difference between PPPs and government contracts which stems from the fundamental differences in their structures. A contract represents an “agreement” between two parties to do business together whereas a partnership represents a “relationship” between two parties of business done together. A PPP is a true partnership between the public and private sectors, not an asset scale. In a partnership structure, both parties share responsibility for profit, risk, and financing. For example, in a PPP there is a combination of public and (mostly) private financing which places the private party as a higher stakeholder in a project’s success. A PPP is often considered to be a larger-scope and larger-term agreement between the government and a private sector firm that in many cases may generate contracts. For example, PPPs are often used for large-scale infrastructure projects, such as highways, airports, student housing, prisons and entertainment facilities. Whereas contracts may be used for more specific projects such as sweeping a certain street at a designated time. It is important to note, however, that PPPs vary in their structures and could still be designed in a structure that looks like a contract.
Long-term and Ownership Mindset
As previously mentioned, PPPs are often used for larger-scale and long-term projects that involve the private partner operating and maintaining the asset for some time. For this to be successful, there needs to be a focus on long-term costs and ownership strategy. Traditional procurement practices often award contracts to the lowest bid without the proper mechanisms to consider the full cost of life cycle operation and maintenance. Public-Private-Partnerships are designed to focus on the long-term cost of the project and to consider operation and management elements at the time of the award. Using a PPP helps ensure that the firm that wins the award is incentivized to optimize the initial capital expenditure and ongoing operational expenditures to maximize the project’s value, essentially creating a larger “buy-in” by the private-sector party. The long-term mindset bleeds over into how the project is delivered. A PPP forces its private sector party to adopt an ownership mentality in terms of the asset due to incentivized performance goals and the obligation to eventually transfer the asset in good repair to the government.
Private-Sector Innovation with Public-Sector Incentives
Public-private-partnerships allow for the unique and highly beneficial marriage of private-sector innovation with public-sector incentives. For example, the private sector can improve the operational efficiency of public services through innovative technology that the public sector alone could not offer. Whereas the public sector offers incentives (typically financially) to the private sector to ensure they deliver the project on time and within budget. The use of PPPs to ensure a project is delivered on time and within budget is a practice that is very popular throughout the world, especially in Europe, Australia and Canada. In Europe the use of PPPs can reduce project life cycle costs by up to 20 percent. The UK Audit Office found that deploying a PPP model for a project could reduce the project’s overrun counts by 70% and reduce project schedule overruns by 65 percent. An Australian study found that out of 54 projects using a PPP model, only 1 percent of them went over budget. The study also found that on average these PPP structured partnerships beat the schedule by 3 percent, while the projects using a traditional approach were late 24 percent of the time. Similar results have been proven in Canada whose success is in PPPs stems from their transparent procurement process and consistent approach. The United States offers great success stories of PPPs as well, particularly the George Deukmejian Courthouse in Long Beach, which is the largest availability payment - based in social infrastructure in US history. The state of California established a 35-year partnership with a private firm to update the facility. The building was delivered on time and within budget based around the agreement that the state would provide the private firm with low-risk cash payments for the duration of the lease, protected with the clause that the private firm could evict the state if they failed to pay. The project is a prime example of both improved delivery and a successful long-term relationship as the state still occupies the improved building with a performance-based agreement with the private firm to ensure adequate long-term operations.
Added Transparency
The transparency of the procurement process relating to PPPs is crucial not only to the success of a PPP but also to the public’s view towards them. Public-private partnerships face opposition on both pragmatic and ideological grounds. Because this paper is focused solely on the pragmatic elements of privatization, it will only address those elements, but the author does acknowledge the existence of ideological resistance and support. The main pragmatic arguments against PPPs stem from acquisitions of mismanagement of the process, specifically, failure to adequately define a project’s dimensions and costs as conflicts of interest within the selection process. As with any type of contract or partnership agreement, the government must be a careful buyer/partner and discern not only which offeror can provide a solution of best value but must ensure the offeror is pursuing the government's goals and not solely their own.
Public-private-partnership advocates counter the claims of mismanagement under a PPP structure by stating that these mismanagement shortcomings are equally as present under purely public sector management structures. The difference is that, when mismanagement happens in the private sector, the market tends to ruthlessly weed it out, yet when mismanagement happens in the public sector, public agencies are often accused of just getting bigger budgets to improve their performance.
Conclusion
A public-private partnership structure may not be the correct “tool of governance” for all types of partial-privatization-oriented projects, but it offers substantial benefits for those projects using large capital investments, particularly on large-scale infrastructure projects. Public-private partnerships offer unique project benefits that other “tools of governance” don’t because of the unique long-term partnership relationship present in PPPs. Public-private partnerships create a long-term-ownership-oriented buy-in from the private sector due to the partial project financing that the private sector provides as well as the understanding that the asset will ultimately be transferred to the government. This “true” long-term partnership with mutual buy-in enables the private sector to increase the capabilities of public services through innovative solutions that are aided by government performance incentives. The public sector performance incentives paired with private-sector innovation and mutual long-term project buy-in is the formula that enables PPPs to deliver projects on schedule and within budget more frequently than the traditional method. An on-time and within budget project delivery represents the ultimate benefits of PPPs by providing the government with a best-value solution and by ensuring that the public’s tax dollars are most effectively spent, a goal made possible by the power of a “true” partnership.