What’s the Key to Building a Successful P3?

By Ed Green
P3 Kentucky Editor

How can we make this work? This can be a tough question when considering a public-private partnership, whether you’re a public official, business owner or community leader.

Whether trying to improve a water system, develop a downtown or provide a public service, it’s important at the end of the process that leaders understand and consider three Rs: risk, reward and responsibility.

Risks are two-sided

Risk is often related to the financial side of the deal but can related to other factors. In theory, a P3 shifts a portion of the risk to a private partner. Unlike a vendor relationship, the partner typically doesn’t get paid fully unless a project is a success. If a project costs more than expected, doesn’t generate the finances expected or takes longer than expected, a private partner may assume a financial loss.

Although P3s are intended to shift some risks away from government, public entities may still have some risks, such as loss of taxpayer dollars for an unsuccessful project. They may be giving up revenue streams such as parking or toll income to finance a project. If there are bonds attached to a project, the government bond rating may be at risk if the financial projections don’t hit target.

It’s important to note that all of these risks should be considered as projects are being put together. P3s are simply contract negotiations.

Rewards: Both sides should win

To reach a successful deal, both the government and private partner should benefit. With the shifting of risk, the government entity should be relieving some pressures, perhaps to finance, maintain or operate a public asset. The agency should gain expertise from a partner, and the P3 process might accelerate project timelines.

For the P3 partner, the reward is often financial. By investing in a project, the partner attains work that might not otherwise be available. A P3 often creates a long-term relationship that provide firms with additional financial certainty, and the financial return should be positive.

Responsibility: No more “not my job”

A clearly defined set of obligations should ideally benefit both partners by giving both sides incentives to make a project work. When something goes wrong, there shouldn’t be finger pointing. A properly structured agreement makes clear who is responsible for addressing issues that arise.

Additionally, both entities lose if a project fails to deliver as planned, so there is an incentive to collaborate to make it work.

If you still want to know more about building a successful P3, consider this: P3s have been used around the world for centuries. An article published in the journal Sustainability traced the P3 model back to 15th-century Italian city-states.

Today, the World Bank Group is involved in P3 projects around the world, and Yale Insights recently talked with its Chief Investment Officer for Public-Private Partnerships, Isabel Marques de Sá. Click here to read the article,  titled How Do You Build Effective Public-Private Partnerships?

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