Public-Private Partnership - Explained
What is a Public-Private Partnership?
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What is a Public-Private Partnership?
Public-private partnerships involve collaboration between a government association or institution and a private-sector firm or company to finance, build, or manage certain projects, such as public transportation networks, parks, and convention centers. Public-private financing makes a projects completion to be faster and in most cases, it makes the completion of a project a possibility.
How Does a Public-Private Partnership Work?
Sometimes, it is easy to see a case where the government of a city or a town is highly indebted, thus thwarting its effort to start new projects or even completing existing ones. In most cases, these projects are usually capital-intensive building projects or contracts, and due to the large debt owed by this government, it cannot carry out this task. A private firm which might be interested in completing such a project can decide to jump in an offer funding for such a project. In exchange, this private company will get to keep the operating gains from the project after its completion. Public-private partnerships usually have a contract length of 25 to 30 years or longer in most cases. Here, the minimum length will be 25 years, to allow the private company regain all they invested in such a project. Primarily, financing comes from the private-sector firm, but requires that the public sectors or users pay up over the projects lifetime. Both sectors have differing roles to play in the projects completion. The private-sector firm finances the project, designs it, engage in implementing and completing the process, while the public-sector focuses on ensuring compliance with the objectives as well as defining such compliance measures. Risks are shared between the private and the public sector according to their ability to cope with such risks, assess the project, and control the happenings. Important Points
- Public-private partnerships give space for large-scale government projects like roads, bridges, or hospitals, and allow for quick completion of such projects.
- Public-private partnerships work well when private sector technology and innovation is combined with public sector incentives and directives to complete work on time and within budget.
- Risks for enterprise include cost overruns, technical defects, and an inability to satisfy quality standards, while for public partners, an agreed upon usage fee may not be supported by demand. An example would be a toll bridge or road.
Even while public works and services are paid via fee from the publics authority revenue budget, like hospital projects, concessions may consist of the freedom to direct or drive users payments (toll highway payments serve as a perfect illustration of such a practice). In situations like shadow tolls for highway, payments are collected from actual usage. When wastewater treatment is included in such project, payment is made with fees that are collected from users. The best place to see public-private partnership is in the transportation sector and the municipal or environmental space as well as in projects related to public service accommodations.
Pros and Cons of Public-Private Partnerships
Each party involved in a public-private partnership benefits from such association. Both the government and private-sector company cannot deny the benefits which they receive from working together. Private-sector technology and innovation can bolster the completion and operation of public services via improved operational efficiency. The public sector (which is the government body in this case) provides incentives and directives for the private sector company to be able to deliver the assigned projects on time and speed up the collaboration, as well as stay within their budget. In addition to this, public-private partnerships create economic diversification which in turn makes the country more competitive in the internal space. It also helps in bolstering support services, boosting infrastructural bases and associated constructions, as well as developing other businesses within the region. On the other hand, there are also some disadvantages of public-private partnerships. Physical infrastructures like road, water boards, railways include construction risks. The private company is the one to bear the risks of inefficient materials, overspending on construction, technical defects, and delay in project completion. The private sector company also faces availability risk if it cannot provide the services which it promised the public sector. In some cases, they might not be able to meet the safety standards or other quality requirements for running a prison, a school, or a hospital among others. Demand risks is also something that can create loss for either party. In most cases, demand risks have been found to affect toll highways, tunnels, and bridges, and this results from a reduced use of the infrastructure being built. However, if the public partner agrees to pay a minimum fee to the private partner no matter what happens, then that partner bears the demand risk of such a project.
Examples of Public-Private Partnerships
Public-private partnerships are found in transport infrastructures like highways, airports, seaports, railroads, bridges, and tunnels. Some examples of municipal and environmental infrastructure include water and wastewater facilities. Public service accommodations include school buildings, prisons, student dormitories, and sports, arts, and entertainment facilities.