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Public Private Partnerships: A Win-Win Model

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David M. Lick
Foster Swift Commercial Litigation News
October 13, 2015

Public Private Partnerships – P3s for short – are an increasingly popular tool used by state and local governments to tackle growing demands for services and infrastructure. Despite their growing use, and viability as a solution to overcome budget challenges, there is a general lack of awareness about what P3s are (and are not), and the benefits they can provide to both improve public infrastructure and fuel private sector economic growth.

What is a P3?

Before identifying the benefits, let’s start with a definition. P3s are contracts that involve a public entity, which has a need for a service or a building, and a private entity that takes on the responsibility with risks and benefits.

The P3 contract could include, for example, design, construction, finance, and operation and maintenance of a fire station, a wastewater treatment plant, or a mixed use project. The public entity gets what it wants – the infrastructure – and the private entity receives the opportunity to make a return on its investment.

What Benefits Do P3s Provide?

P3s bring out the best, and minimize the worst, of both the public and private sectors. P3s unleash the creativity of the private sector in the areas of finance, design, build, and long-term maintenance. The creativity is driven by incentives to perform efficiently and a culture that encourages new technology and innovation.

P3s also often result in best value because the entire process of finance, design, construction and long-term maintenance are competitively bid by one party against another. In a traditional government model only the construction cost of a project is competitively bid.

There are many benefits to P3s, including:

  • In a P3 model, the success, viability, and risk of a project are examined by multiple players who have an interest in the project. These include the banking community, the developer, the designer, the contractor, the operation and maintenance company, and the insurance company. This multiple-party analysis reduces the risk of failure through knowledge and the development of contractual terms. 
  • The risk of the project is mostly shifted to the private sector, which reduces the political risk of government officials.
  •  In the event of a default, citizens do not lose – the private sector loses.
  • When government budgets are tight, P3s offer access to capital. Governments can obtain upfront capital to commence a project, thereby delaying the governmental investment until the project is complete.
  • Governments can obtain the project and capital in record time, and the private economy benefits through the growth of economic activity and jobs.
  • P3 projects also can reduce cost through tax incentives, tax credits, and depreciation that are only available to the private sector.
  • The private sector has a great deal of experience in the types of projects that are to be delivered and the public sector has the power to demand results, share in revenues, and to enforce protections through contractual terms.
  • On balance, there tends to be more efficiency, innovation, and cost sensitivity with P3 projects, which provides greater economic value than with traditional government procurement methods.

P3s shake things up, change attitudes and, most importantly, improve outcomes.

P3s can have major benefits for both sides – public and private. But because P3s are premised on the parties acting as partners, there must be lots of communication in order to achieve a successful outcome. Collaboration toward a common goal is required to realize the benefits that P3s offer. 

This article originally appeared in the Foster Swift Commercial Litigation News in October. The article was then reprinted in the October Municipal Law News.

This communication highlights specific areas of law. This communication is not legal advice. The reader should consult an attorney to determine how the information applies to any specific situation.

IRS Circular 230 Notice: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication is not intended to be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed in this communication.