Public-Private Partnership Pros and Cons
Benefits and Disadvantages of P3 Contracts
A public-private partnership, or P3, is a contract between a governmental body and a private entity, with the goal of providing some public benefit, either an asset or a service. Public-private partnerships typically are long-term and involve large corporations on the private side. 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.
One Public-Private Partnership Success
Popular in many European countries, P3s have gotten off to a relatively slow start in the United States, but they are increasingly used for large-scale infrastructure and public works projects. Many P3 projects in recent decades have been extremely successful. The high-occupancy toll lanes project in Virginia is a good example. Several private sector firms participated in this partnership, resulting in cost savings in the millions of dollars. In addition, the collaboration between government and private partners brought expanded highway capacity online years earlier than a 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 projects with traditional, all-private or all-government fulfillment. 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 serve as a check against 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 potentially can lead to lower taxes.
Public-Private Partnership Disadvantages
P3s also have some drawbacks:
- Every public-private partnership involves risks for the private participant, who 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 have the capability to complete a project, 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, the level of competition, and the complexity and scope of the project.
- 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.