| At its core, a public/private partnership (PPP) is a contractual agreement between a public agency and a private sector entity resulting in greater private sector participation in the delivery and/or financing of infrastructure projects.4 PPPs differ significantly from sector to sector and from project to project. They also differ from country to country given the contracts are based on different legislative frameworks across the world. For example, the U.S. Department of Transportation considers both contracting out operations and maintenance, as well as the arrangement for design and construction of a project by a single con-tractor (known as "design-build"), as a PPP. In other countries, this is generally outside of the definition for PPPs.5 There are numerous ways to classify PPPs, but the most important from a public policy perspective is based on the sharing of responsibilities and risks.6 The simplest form of a transportation PPP project, for example, involves contracting out of individual operations, such as design, paving, or maintenance. On the other end of the continuum, the private sector would build, own, and operate a new piece of infrastructure, with the government providing maybe tax-exempt status for the project but no direct funding. In reality, there is a plethora of combinations of PPPs that mix different elements and transfer different types of risk to the private sector. Traditionally in the United States, a public entity in transportation (a state government, local government, or transit agency) decides, plans, and finances the construction of a new piece of infrastructure and ultimately maintains and operates it. Different private entities (e.g., an engineering firm and a private contractor) bid for the individual tasks of first designing then, later, actually constructing it.7 In a design-build arrangement, these operations are bundled into one fixed-fee contract with a private entity that assumes the delivery of these services. The Bay Area Rapid Transit extension to the San Francisco International Airport is an early case of design-build.8 A design-build-operate-maintain contract adds private entity responsibilities after construction, in terms of the operation and maintenance of the asset. In these cases, the public entity is in charge of financing and assumes all the risks related to operating costs and revenues. The Hudson-Bergen light rail system in New Jersey is one example. Some PPPs include a private finance component. The Denver Eagle Commuter Rail project has a design-build-finance-operate-maintain arrangement. In such projects the private party is also responsible for all or a major part of the project's financing and is generally paid through revenues directly related to the project itself (e.g., tolls or fares) while the public sector retains ownership.9 Much popular attention is directed to PPPs that are Long Term Lease Agreements such as the Chicago Skyway. In this case, a private company is granted a lease on a piece of infrastructure for a certain amount of time, for which it pays an initial concession fee. The private entity operates, maintains and collects revenue from a fees charged to users of the facility. The public entity maintains ownership over the infrastructure.10 The sharing of risks and responsibilities of a PPP project attempts to attain the goal of asset maximization, which is the optimal distribution of risks and value between the public and the private sector for a specific project.11 Further, PPPs may be a useful mechanism to deliver a portion of the procurement of a piece of infrastructure at a lower cost than through traditional infrastructure provision. Through a Value for Money analysis, a public entity can assess whether the traditional method (the Public Sector Comparator) or the private sector bid costs less for the outsourced stage of procurement.12 PPPs may be a tool towards better sharing of risks and costs of infrastructure provision, but most governments have pursued them for other reasons. Governments in developed and developing countries see PPPs as a way to access new sources of funding and push some of the infrastructure financing off-budget.13 However, it is important to note that PPPs are a financing tool, not a new source of funding. Project funding is still derived from the public entity or directly from the users of the facility, who will pay the private party for its services in the PPP project. It is true that PPPs often involve direct revenue streams (such as tolls), therefore helping to better match the benefits and costs of the use of a facility and shift the funding burden from the government to the users. In addition, if the public entity pays periodic disbursements to the private party for post-construction services (i.e. availability payments), the public organization gets a piece of infrastructure, while paying for it over time, relieving some of the pressure on the annual budget. Thus, PPPs should be a tool for better risk and cost allocation, and not merely a way to fill in budget gaps.14 Lastly, despite the considerable attention to them, the evidence on PPPs is frustratingly sparse. This is partly because infrastructure PPPs are long term arrangements and most have only been implemented in the last few decades. Therefore, there are few projects that have completed their life-cycle, allowing for ex-post analysis. Further, it is difficult to construct the hypothetical alternative to a PPP, which is the outcome in the absence of the PPP.15 At a more basic level, there is evidence from the United Kingdom and Australia that PPP projects do achieve efficiencies in comparison with traditional procurement. "In 2009, the UK National Audit Office found that 65 percent of UK PPP construction projects were completed on budget, compared to 54 percent of public construction projects delivered to the contracted price.16 Based on an analysis of 21 PPP projects and 33 traditional projects undertaken since 2000 in Australia, the PPP projects had a 1.1 percent net cost overrun, in comparison with 15 percent in the case of traditional procurement.17 | PPPs should be a tool for better risk and cost allocation, and not merely a way to fill in budget gaps. |