What is a Public Private Partnership (P3)?
A P3 is, in its simplest definition, an alternative method of project delivery; a type of procurement. More broadly, P3s are a form of contracting that shares risk and occupies the space between the two extremes of outsourcing and privatization.
A ‘typical’ P3 does not exist as they are generally best suited for complex, atypical projects.
Why would a government prefer a P3 procurement to a traditional procurement?
Lower transaction costs
Working with a single private partner across all stages of the project eliminates the costs of developing, awarding and monitoring separate contracts at each stage. In other words, a P3 can reduce the transaction costs of bringing the private sector into the project.
Synergy across the phases
There’s an old saying that if mechanics designed cars, then every hose and valve would be much easier to reach. Cars might not be beautiful, but they’d be easy to maintain and, in turn, much cheaper to own. That concept applies just as well to major public infrastructure. If the private partner is responsible for operations and maintenance, it has a powerful incentive to design the facility to minimize the long-term costs to staff, operate, and maintain it.
By some estimates, construction costs increase 3 percent each year. Prices on commodities like cement and steel can rise quickly. Interest rates can increase unexpectedly, driving up financing costs. Labor costs rise when local market conditions improve and unionized employees negotiate new contracts. With these and other factors at work, it’s difficult to know what the design and build phases might cost through traditional procurement. However, it’s not difficult to see that completing the design and build phases quickly will almost certainly save money. Most research on P3s shows that they are almost always completed faster than traditional procurements.
Once the design and build phases are complete, it’s difficult to know what it might cost to operate and maintain the facility over time. A well-executed P3 with a transparent long-term payment schedule can address this problem. Certainty about the long-term costs to build and operate a facility — known as its life cycle costs — can bring about substantial financial and political benefits. Before going further, it’s crucial to understand another defining characteristic of P3s: an emphasis on outcomes. In a traditional procurement, the government tells the design and build contractors what to design, how the highway should look, what materials should be used to build it, and so forth. This approach is popular and timeless because we know how to hold it accountable. It’s clear if the contractor meets the public’s expectations. P3s demand a different approach. Presumably, the highway should have the capacity to accommodate several million cars each day, depending on traffic patterns. But how the highway facility looks and works would be up to the private partner. To know if the private partner is performing, the government must shift its focus of accountability. Instead of tracking as to whether certain specifications were met, government can now test highway smoothness, monitor the highway’s facility’s condition and performance, and enforce the other contract provisions.
The South Mountain Freeway was delivered to the public three years sooner and at a cost savings topping $100 million. Construction began in September 2016 and was open to the public in December 2019. For more information visit Loop 202 South Mountain Freeway.
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