Let's Explore Public-Private Partnerships (PPPs)
Posted on January 5, 2018 by Dr. Reid Cummings
In this month’s newsletter, we explore the meaning and the pros and cons of Public-Private Partnerships (PPPs). We do this because as mentioned in the Snapshot commentary section, the Alabama Department of Transportation (ALDOT) is in the process of pursuing a PPP structure to develop and construct a new bridge over the Mobile River and Mobile Bay, an infrastructure project that is critically important for our region’s future growth. Although PPP deal structures are not new, it is highly likely their use will increase in the future as both the Congress and state legislatures across the country grapple with how to pay for much-needed physical improvements, estimated by the U.S. Army Corps of Engineers to total more than $3.6 trillion dollars by 2020.
So, what is a Public-Private Partnership? According to the World Bank, they are a “mechanism for government to procure and implement public infrastructure and/or services using the resources and expertise of the private sector. Where governments are facing ageing or lack of infrastructure and require more efficient services, a partnership with the private sector can help foster new solutions and bring finance. PPPs combine the skills and resources of both the public and private sectors through sharing of risks and responsibilities. This enables governments to benefit from the expertise of the private sector, and allows them to focus instead on policy, planning, and regulation by delegating day-to-day operations.”
PPPs offer a number of benefits. Just a few include project design and construction efficiencies, broad-based expertise of professional, private sector development and investment teams, wide-ranging financing options, incentivizing on time and within budget project delivery, and supplemental support for limited, or even dwindling public resources. PPPs are not without risk though. In some cases, development and construction costs may be higher due to financing and government procurement processes. Private debt carries a cost that is often higher than government-backed financing. Project control and ownership can become an issue, especially if future income streams (e.g. tolls from using a bridge) will repay project costs.
So, why is it important to understand what a PPP is? Few would argue that the new bridge project is long overdue. To be sure, if the U.S. Congress enacts a national infrastructure spending bill this year, countless projects will merit consideration, but most likely, not all will be funded. By opening the door to the PPP structure, ALDOT and the State of Alabama are enhancing the possibility the bridge may get built sooner, rather than later. Now that you know what a PPP is and how it works, follow this story, and when you can, join the conversation to let your leaders know how your views.
Sources: ALDOT, World Bank, U.S. Army Corps of Engineers