Public Private Partnership Pros and Cons
Public Private Partnership (P3) Benefits and Disadvantages
A P3 or public-private partnership is a contract—often a long-term contract—between a governmental body and a private entity, most often a corporation. The goal of the partnership is 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 receives for its participation—typically depends on performance.
An example of successful Public-Private Partnering
P3s have gotten off to a relatively slow start in the US, but there are a good many of them all the same. They've generally been extremely successful. The high-occupancy toll lanes project in Virginia in a good example. Several private sector firms participated in this partnership and the partnership saved millions of dollars. It brought additional highway capacity online years earlier than the traditional government-does-all approach might have done.
Public-Private Partnership Benefits
Public-private partnerships offer several benefits:
- They provide better infrastructure solutions than an initiative that is wholly public or wholly private. Each participant does what it does best.
- They result in 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 or ROI might be greater than traditional, entirely private or government methods. 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 can offer a break on unrealistic government promises or expectations.
- The operational and project execution risks are transferred from the 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 redirected to other important socioeconomic areas.
- The greater efficiency of P3s reduces government budgets and budget deficits.
- High-quality standards are better obtained and maintained throughout the life cycle of the project.
- Public-private partnerships that reduce costs also allow lower taxes.
Public-Private Partnership Disadvantages
P3s also have some drawbacks:
- Every public-private partnership involves risks for the private participant, which reasonably expects to be compensated for accepting those risks. This can increase government costs.
- When there are only a limited number of private entities that can perform these tasks, such as with the development of a jet fighter, the limited number of private participants that are big enough to take these tasks on might limit the competitiveness required for cost-effective partnering.
- Profits of the projects can vary depending on the assumed risk, competitive level, complexity, and the 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. For example, it might be unable to accurately assess the proposed costs.