What Makes A Successful Public-Private Partnership?

For decades, Europe, Asia, Australia and Canada have routinely used public-private partnerships (P3s) for large public projects and essential government operations. The United States has been slower to embrace collaboration.

Now, however, that scenario is changing rapidly, and P3s are attractive options to public officials and taxpayers at every jurisdictional level of government. The P3 marketplace in America is poised to experience a significant growth spurt that will put trillions of dollars of public spending into play for private-sector contractors.

That makes it extremely important to look at “best practices” and pitfalls to be avoided.

The term public-private partnership is used to describe various types of contractual arrangements.

The basic concept actually goes back to colonial America, when roads were constructed through collaborative efforts with public and private partners. It wasn’t until 1916, when the Federal Aid Road Act was passed, that road building became entrenched as a government responsibility.

Over the past 20 years, the U.S. has significantly lagged behind the global community in launching P3s. In fact, between 1985 and 2011, only 9 percent of the total P3 projects worldwide were launched in the U.S.

When hurricanes Katrina and Sandy hit, the nation’s infrastructure was severely damaged from Texas to New York. Billions were needed for recovery projects, and the Great Recession of 2007-2009 wreaked havoc on public funds. The reduced funding further compounded a problem that had been brewing for years—the nationwide aging of roads, bridges, water plants, public buildings and other infrastructure.

This confluence of circumstances squeezed state and federal budgets at the same time when Tea Party groups began advocating for reduced government and no new taxes or fees.

With a renewed interest in P3s, primarily because private funding is so desperately needed, an abundance of research and study has been focused on “best practices.”  No public entity wants a failure and taxpayers are adamant about not tolerating one.

After reviewing hundreds of P3s worldwide, researchers agree on three categories of critical success factors:

1. External considerations: Is there a hospitable political environment for the planned project and will stakeholders accept a collaborative partnership?
2. Internal considerations: Is there sufficient demand for the planned asset or service to make it economically viable? Is there enough internal expertise to oversee the engagement and execute risk-free contracts?
3. Partnership-related considerations: Are the roles of each partner clearly defined? Are the expectations perfectly clear for both parties? Do all stakeholders agree on what constitutes success? Is the contractual agreement flexible enough to last through a couple of decades?

The $105 million expansion of the Seagirt Marine Terminal at the Port of Baltimore is a prime example of how these factors come into play.

First, there was a tremendous need for the project (internal characteristic). The project made Baltimore one of only two East Coast ports able to handle the large ships that could pass through the Panama Canal after it was widened.

Second, there was tremendous public support for the project (external consideration). It would significantly boost Baltimore’s economy, which citizens wanted, and the state estimated the project would create $1.8 billion in jobs and revenue over the life of the agreement.

Public and private partners can apply the same types of success factors to any sort of collaborative initiative. Obviously, there are huge and immediate opportunities for P3s in transportation projects, but P3 strategies can also be used for all types of construction projects: water treatment plants, parks, health care clinics and student housing on college campuses.

In May of this year, New Jersey’s City University broke ground on a $400 million residence hall designed to double the school’s student housing capacity. It was a collaborative effort with a private-sector partner.

Texas A&M University in College Station also recently announced a P3 that involves partnering with two private firms to develop and manage a 3,400-bed student housing complex.

And, at the University of California, Davis, a partnership secured nearly $7.5 million in grants to explore a project that will involve development of a Zero Net Energy (ZNE) development design. The university also has announced plans to build a photovoltaic plant near campus that will provide 14 percent of the energy needs for the entire UC Davis campus.

These will all be P3 projects.

Public transit is another area ripe with opportunities. Denver’s Eagle P3 project is part of the Denver Regional Transportation District’s plan to expand transit across the city’s metro region. This will be a $2.2 billion project with multiple funding sources, and a private company will operate and maintain the system.

Public-private partnerships are attractive to public officials who lack the funding needed to build water infrastructure for pumping, purification, desalination and reservoirs.

The Carlsbad, California, desalination plant is a good example. While much of California remains in the grip of a three-year drought, a $1 billion desalination plant that turns seawater to drinking water is on track to open later this year.

A private company paid for the plant’s construction, and the water authority has agreed to purchase at least 48,000 acre-feet of water at about $2,000 per acre-foot from the plant each year for 30 years.

Once running, the plant will be the largest of its kind in the Western Hemisphere. The result will be more than positive for taxpayers, industry and the state’s economy.

There are pitfalls to avoid when considering a public-private partnership.

Regulatory challenges and political complexity must be managed. Appropriate risk allocation and public buy-in are important. Transparency and funding structures are crucial. Environmental issues can be complex.

But, when executed correctly, these issues can all be covered. When that happens, these initiatives result in huge economic output for the regions where they are located.

Public-private partnerships are a part of our future. It is critical that we make them successful.

(Photo by U.S. Department of Agriculture / Flickr.com)