Facing increasing pressure to update aging public infrastructure while delivering more services for less money, government officials are turning to creative methods to develop public infrastructure projects. Public-private partnerships – commonly referred to as P3s – are proving to be a valuable tool for achieving this goal.

Technically, P3s are nothing new. They have been used for decades to deliver public projects across Europe, Canada and, to a lesser extent, the United States. While the details of individual P3s vary greatly, they all have a common thread: a private entity agrees to provide a public service or project and assumes some degree of financial, technical or operational risk. In every P3, the public and private entity work together with the goal of developing a project that will meet a public need. For a P3 to be successful, the goals of the government entity must be aligned with the profit motive of the private party. This alignment results in a win/win project that provides “value-for-money” and the optimum amount of risk transfer to the private party.

P3s are on the rise in the U.S. as more governments look for value-added services that may not be amenable to traditional low-bid procurement. In this context, “value-add” means more than just providing the least expensive structure or facility. It means providing a more cost-efficient project, a faster delivery schedule or some other innovative solution that is more readily developed in the marketplace rather than through low-bid procurement. Additionally, because P3s often involve a component of private operation, private entities are incentivized to find ways to deliver the project as soon as possible to begin receiving revenues sooner and to minimize life-cycle cost to maximize long-term net profit. 

The Advantages of P3s

A group of professors at Arizona State University recently completed a study comparing P3 projects to more conventional projects. The study showed that P3 projects are more likely to be completed ahead of schedule and within budget than similar projects developed under design/build or design/bid/build procurement models. Of 12 P3 projects reviewed, 10 were delivered within the contract amount, and the other two were less than 1 percent over budget. By comparison, the design/build projects were significantly over budget, and in some cases, cost at least 12 percent more than the original contract value. Similarly, the P3 projects were, on average, completed before the specified contract time, while the conventional projects overran the project schedule by 4 to 11 percent. The significance of these results cannot be overstated, particularly as taxpayers become increasingly weary of schedule delays and cost increases on large infrastructure projects.

In response to these positive findings, many states are actively considering legislation specifically designed to encourage collaboration between public and private entities on P3 projects. Particularly in areas where public capital is constrained or legal limits on public debt restrict a government’s ability to borrow, P3s can provide an attractive means of project finance. Currently, more than 30 states have P3-enabling legislation, and additional states are in the process of drafting or enacting P3 legislation. Increasingly, these states are creating market spaces to attract private dollars that might otherwise sit on the sidelines as well as providing opportunities for more innovative projects that would not otherwise be available through traditional procurement.

While P3 projects in the U.S. have traditionally focused on so-called “horizontal” infrastructure – including roads, bridges, wastewater treatment and drinking-water production facilities – there is significant momentum both nationally and internationally to develop more “vertical” infrastructure. By way of example, British Columbia has developed more hospitals using P3 than roads or highways. Other public entities are seeking to utilize P3s to reduce energy costs by implementing high-efficiency street light systems and for purposes of introducing smart grid technology to achieve greater efficiency and lower maintenance costs in their electrical supply systems. This signifies an important movement, as governments more fully appreciate the flexibility and potential benefits of P3s.

A P3 is not, of course, a one-size-fits-all panacea. A successful P3 project must be based on a well-developed financial model that relies on realistic figures for use or occupancy and provides for adjustments and contingencies for future changes. Many state P3 statutes recognize this need and require a detailed financial evaluation prior to approval of any P3 project. The project also must meet a critical need. Criticality ensures strong public sector buy-in, which is an essential ingredient for success. Criticality also helps to ensure that the facility will generate revenue over the long term, a threshold requirement which must be met before a project will attract investors or lenders. 

Theologian and author Henry Van Dyke once said, “Time is too slow for those who wait, too swift for those who fear.” Nowhere is this truer than in P3s. Many have lamented the relatively slow pace of P3 development in the U.S. compared to Canada and other nations, but momentum is building. As public budgets become increasingly constrained and P3 projects develop a track record of on-time, under-budget completion, more and more public and private entities are considering P3 projects of their own. Regardless of the timeline, P3 is increasingly being recognized as an attractive alternative to traditional delivery models and a useful tool in the infrastructure development toolbox. 

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