Construction public-private partnerships (or P3s) are often a topic of debate – what are the benefits and the disadvantages to one of these agreements?
It’s hard to answer that question without fully understanding what a P3 is, but they are usually described in different ways depending on who you ask.
One of the more elaborate definitions comes from the Government Accountability Office. They write, “These arrangements typically involve a government agency contracting with a private partner to renovate, construct, operate, maintain, and/or manage a facility or system, in whole or in part, that provides a public service.”
However, P3s are a little more involved than what at first it seems. The government agency (public) and the contracted party (private) each have individual roles within the agreement.
The public agency:
- Retains ownership of the public facility or system
- Shares the income resulting from this partnership with the private party
- Gets access to the new revenue or service delivery capacity without having to pay the private partner
The private party:
- Invests its own capital to design and develop the properties or systems
- Shares income resulting from this partnership with the public agency. How much income they receive for the contract depends on their project performance.
- Makes a cash, at-risk equity investment into the project
Construction’s role in these types of agreements would be the private party contracted to take on a long-term government job. While the benefits seem to outweigh the drawbacks, before agreeing to this kind of partnership, you should have a good understanding of both.
Benefits of a construction public-private partnership
- Quality control: Because profits depend on performance as part of the P3 contract, the private party has to control speed and efficiency, resulting in less delays and faster completions. Plus, some of these partnerships include early completion bonuses that help to speed up the project.
- Better return on investment: Neither party has to take on all of the responsibility for this type of project, so, as small business blog thebalancesmb.com writes, “innovative design and financing approaches become available when the two entities work together.”
- Risk management: Sometimes, government entities don’t know what is an unrealistic expectation for a project. In a P3, risks are established early on to determine if the project is feasible and, since the private party takes on this risk, they are responsible for communicating it.
- Budget control: Private parties are almost always in control of their own project costs so they know how to contain them and keep them under (or within) budget. With a P3, the operational and project cost agenda gets transferred to the private party for them to control.
- Reallocation of funds: With private parties taking on the cash investment of a project, it frees up the government funds to be redirected to other socioeconomic areas in need. Overall, it helps to reduce government budgets and budget deficits.
- Lower taxes: Because these partnerships help to reduce government costs, they could lead to lower taxes for the people in the specified city or state.
Drawbacks of a construction public-private partnership
- High risks with high costs: The private party who is taking on the risks for the project expect to be paid accordingly which can increase government costs.
- Uncertain profits: Profits for the construction firm can vary depending on the assumed risk, level of competition, and complexity of the project. This makes it difficult to understand your all-in profit as the private party.
- Unbalanced expertise: The government could be at a disadvantage if the expertise of a project lies almost explicitly with the private party. For example, the government agency may not be able to accurately assess the costs associated with a project.
These tidbits are just the tip of the iceberg when it comes to public-private partnerships. There is still a lot to be learned so it’s worth diving in and seeing if a P3 is something your construction company would want to explore in the future.