Five myths about public-private partnerships

July 2010 » Web Exclusive
Allan T. Marks

Public-private partnerships (PPPs) have come into their own as a viable solution for the increased infrastructure demands of a growing and ever more mobile population. While PPPs are increasingly common today, pockets of wariness remain. Much of this wariness results from misconceptions and misunderstandings. Below are five common myths about PPPs and the realities of each.

Myth 1: PPPs are more expensive and lead to excessive profits.
Reality: Private concession companies are incentivized to achieve cost efficiency and innovation in project delivery. Because PPPs transfer more risk — such as construction risk, cost overruns, delays, performance failures, operating costs, and usage — to the private sector, government budgets and the public are protected, even if a project does not go as planned. Correctly managed projects start with a thorough cost comparison of conventional financing versus PPP, and only projects that can provide value for money result in private concessions. The life cycle costs of building and maintaining a new PPP facility are transparently and efficiently managed so that the overall cost to the state is reduced and the quality of infrastructure is improved. The government agency decides whether or not to toll the PPP facility and can cap tolls or fares. Profits are regulated by procurement competition and contract terms with transparency and predictability so that the public owner shares in surplus revenues or excess profits, and possibly also shares in any gains from refinancings. PPP concessions frequently contain a maximum rate of return and termination provisions, or a maximum availability payment in the absence of tolls, to protect both the public partner and the users of the facility.

Myth 2: Private companies are not accountable to the public and thus may cut corners or allow projects to deteriorate.
Reality: The public partner owns and controls the transportation asset. Strict contractual requirements, performance standards, and remedies hold the private partner accountable to the public partner. Indeed, because of this contractual standard for performance, PPPs lead to more accountability in the quality, operations, and long-term maintenance of projects. And with toll concessions, the private partner is highly motivated to provide customer satisfaction. PPP projects are typically better maintained than conventional projects since the concessionaire is subject to both contractual standards and market pressures. As such, PPPs are often called, correctly, “performance-based infrastructure.”

Myth 3: PPPs are a means to cut jobs and labor costs.
Reality: PPPs create construction and service industry jobs because most projects otherwise would be delayed or never built. Furthermore, project labor compliance, prevailing wage, and Disadvantaged Business Enterprise requirements apply to PPPs, either by law or by the terms of concession contracts.

Myth 4: PPP procurements are secretive and lack transparency.
Reality: The laws that permit PPPs require an open and transparent public procurement process, typically through competitive bids to set requirements. Public involvement in the selection of projects and routes matches the process for public projects, and the rules that apply to public procurement processes apply to all of a PPP project’s public policy decisions. Further transparency can be built into the procurement process and documentation through the Public Records Act and other avenues of access.

Myth 5: PPPs diminish environmental protection.
Reality: All environmental laws, land use, zoning, and mitigation requirements apply to public infrastructure projects and private PPP projects alike. Indeed, concession terms can be structured to incentivize environmental protection so that PPPs deliver even greater environmental benefits or fund additional offsite mitigation or recreational improvements. PPPs also help the environment in two more ways. Because they allow for accelerated project delivery, smog-inducing congestion can be reduced more quickly. And because some PPPs depend on user fees or congestion pricing, traffic patterns can be rationalized and existing or new capacity can be utilized more efficiently to prevent the need for facilities sized just for peak loads. Excess revenue sharing can also be used to subsidize mass transit or to fund less economic public infrastructure and environmental enhancements.

Allan Marks is a partner in the Global Project Finance Department of Milbank, Tweed, Hadley & McCloy LLP. He can be reached at amarks@milbank.com or 213-892-4376.


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