Public-Private Partnerships (PPPs) are a well-established mechanism for collaboration between government and the private sector, and which is also often mischaracterized and misunderstood.
Economies are split between the public sector, which is composed of state-run agencies providing public goods and governmental services, and the private sector which is made up of for-profit, privately owned enterprises.
The public sector includes but is not limited to schools, hospitals, federal agencies, healthcare services, and law enforcement. The private sector, on the other hand, is comprised of privately-owned businesses such as contractors, consulting firms, software developers, manufacturers and more.
Though each sector provides different services and serves different markets, there are huge opportunities for both the public and private sectors to collaborate and create long-term partnerships for the benefit of both taxpayers and shareholders.
Public-Private Partnerships: What Are They?
Public-Private Partnerships (PPPs) are contractual agreements between government agencies and private sector companies which allow for greater private sector participation in the delivery of public sector projects and services.
With industry experience and proficiency, private sector professionals can apply their knowledge of financing, operations, and customer service to the various challenges that the public sector faces.
But what does that mean? Essentially, PPPs allow companies to assist in the design, implementation and operation of public sector services, assets and infrastructure.
In doing so, the private contractor utilizes capital funding and industry expertise in constructing government-related projects. Additionally, this is beneficial for the public sector as the private company absorbs the risks associated with constructing or modernizing the infrastructure or system.
Giving responsibility to the private sector reduces risk on the government’s behalf and transfers it to the private sector, who is better able to manage that risk.
Through a PPP model, the government agency retains ownership over the public facility or system while the private entity invests its own capital to design and develop the facility to deliver the highest quality of service for the cost.
The private entity agrees on binding service levels with the government - called service level agreements (SLAs) - and the penalties associated for not meeting them, up to cancellation of the contract for non-performance and damages for failing to meet milestones or service levels. This incentivizes the private company to both deliver a high quality service and continue to invest in modernization and efficiency over the term of the contract.
Though PPPs are most often seen in transportation and public facility projects, PPPs are becoming a more popular means for the public and private sectors to achieve their own respective goals and share relevant expertise.
Public-private partnerships have proven to be extremely effective in executing challenging projects and benefiting from the relevant wealth of knowledge that each sector possesses.
Common Misconceptions of Public-Private Partnerships
So why the bad rap? If you have been working solely in the public or private sector, you have probably heard a business professional or two talk negatively about PPP relationships, often mischaracterizing what a PPP is. Here are some common misconceptions worth debunking.
1. “Public-Private Partnerships are costly and if they fail, taxpayer money is at risk.”
Research has shown that public-private partnerships can cost a government as much as 20% less than a traditional government operated project.
Over the length of a project, the private partner is constantly maintaining infrastructure and operations which leads to less spending on maintenance over time.
Also because public-private partnerships are commercially funded, taxpayers do not bear any risks, and instead the private contractor takes on some or all of the responsibility involved.
2. “PPPs are time consuming and take longer than average public sector projects”
Because the government agency and private contractor agree to a set timeframe, PPPs usually deliver projects faster than traditional government projects. Because private contractors may be penalized if they fall behind schedule, they are incentivized to complete their projects efficiently and in a timely manner.
3. “The government is capable of maintaining their own projects and systems so there is no reason for private groups to get involved”
Though we may want to believe that the government has all of the expertise, capital, and staff to solve its own problems, this is often times not the case. Obtaining support and money from a third party with a history of industry experience and success allows the government to relay some duties to those best able to manage, operate and maintain them.
The ‘partnership’ part of a PPP means that both sectors work together because they both have incentives to successfully complete a difficult project that neither one can completely manage on their own.
4. “All public-private partnerships are the same”
There are several different types of public-private partnerships depending on the extent of the project, the risks involved, and specific needs of the public sector agency. Some common models of PPPs include:
- Design-Build (DB): The public sector provides the financing and procures from a private partner who is paid through a fixed-fee contract for engineering and constructing services. The private partner assumes the risks and responsibilities with regard to the project while the public sector maintains full ownership and financial liability for operation and maintenance.
- Design-Build-Operate-Maintain (DBOM): This is a more sophisticated partnership in which operation and maintenance are also incorporated into the design and delivery of the project. Everything is agreed upon through a single contract.
- Design-Build-Finance (DBF): Full or partial financing of the project, with regards to construction and design, are fulfilled by a private partner. Though the public sector may only partially finance the project, it retains full responsibility and risk associated with its operation and maintenance.
- Design-Build-Finance-Operate-Maintain (DBFOM): This is the most complex form of a public-private partnership. The financing, design, construction, operation and/or maintenance of a given project are bundled together under one contract to a private partner. It is often the case that under such contracts, the entire responsibility for raising funds falls on the private partner.
5. “Privatization and Public-Private Partnerships are the same thing”
False. In public-private partnerships, the government still retains ownership over the facility and even the staff involved even though a private partner may be funding, designing and implementing the infrastructure.
Privatization, on the other hand, refers to the transfer of government assets and services from public ownership to private ownership. Through privatization, ownership and responsibility of a public facility or system are given over to a private company and the government no longer has any role in the management, ownership or operation of that organization.
Why is collaboration necessary?
The public and private sectors have their own designated roles and responsibilities in society but sometimes those roles and responsibilities overlap when there are opportunities for both to contribute to large-scale projects.
PPPs have proven to be extremely successful when each sector clearly defines the scope and scale of their role in the project and effectively communicate how such projects will be maintained and operated over a set period of time.
In general, collaboration between the private and public sector promotes best industry practices and relevant expertise that can leverage the best aspects of both sectors.
PPPs can cut costs over time and utilize agile development to successfully maintain large-scale projects.
To learn more, visit www.teamrg.com for more information about public-private partnerships and RG’s work in the commercial and federal sectors.