The public and private sectors join in a variety of ways to provide public facilities and services. In analyzing these arrangements, multiple distinctions are useful in order to arrive at a relevant definition of a PPP.
First, the arrangement may involve a physical asset (usually some form of infrastructure or building) or it may involve only the provision of service. In the latter category are a variety of contracts for services, such as health care in a prison, foster care for children, maintenance of a park, and providing lunches to school children. The contracts may be with for-profit or non-profit agencies, and they usually involve payments from the government to the agency contingent on adequate performance. More refined versions of these service arrangements may involve shifting from not just requiring the private organization to collect relevant fees (such as the price of a school lunch), but granting incentives for them to earn more when use increases or costs are curbed. Simple examples include concessions for services, such as selling refreshments in a park. More complex arrangements include proposals for private operation of public lotteries. The design, implementation and evaluation of service-oriented contracts with the private sector are an important aspect of pubic administration that warrants serious attention, but they are not the focus of this report. Rather the focus here is on arrangements that are oriented primarily to the creation or renovation and maintenance of physical assets.
Public-private relationships relating to physical assets also take a variety of forms. First, there are "privatizations," asset sales in which the public sector relinquishes ownership of the asset. Examples in New York City include the sale of municipal radio and television stations and municipal parking lots during Mayor Rudolph Giuliani's administration.1 In these arrangements, the relationship between the public and private sectors is limited or non-existent after ownership is transferred. As a result, these arrangements are not considered PPPs.
Another type of relationship involves contracting with a private firm for the construction or renewal of physical assets. Rather than hiring public employees with construction skills, most government construction, ranging from school buildings and firehouses to roads, bridges and sewer systems, is conducted by private firms. Typically the government agency designs the facility it wants (perhaps aided by independent architects) and seeks competitive bids from private contractors for its construction. When construction is complete, the government agency assumes responsibility for maintenance. Although it involves cooperation between the two sectors, these construction contracts are not generally included in a definition of PPP.
A third type of relationship is known as a "design-build" (DB) contract. In this arrangement, the government does not prepare a detailed design of the facility it wants; rather, it provides a set of specifications for capacity or performance. The private party is asked to prepare the detailed design and construct the facility under a single contract.
These DB arrangements have been found suitable for a variety of facilities and have yielded savings for the public sector in the form of speedier completion and lower costs than under conventional arrangements of pubic design and private construction. In California, the San Joaquin Toll Road was constructed under a DB contract, with a guaranteed maximum price and construction date. The road opened three and a half months early. In Utah, the reconstruction of I-15 as a DB project resulted in a road that opened to the public five months ahead of schedule.2 DB contracts are an important and useful procurement mechanism, and are sometimes defined as a type of PPP; however, since they are limited solely to construction phases, they are excluded from the review of PPPs in this report.
The CBC definition of PPPs centers on two important elements that make the relationship more like a partnership with shared risks and rewards. One is the extension of the design-build relationship to include life-cycle costs, including maintenance, energy consumption and others, of the facility over a period corresponding approximately to its intended useful life; this relationship is known as "DBM" and "DBOM" when operational responsibility is also included. This life-cycle cost discipline adds incentives for efficiency in managing assets. The private party, in performing its design function, has incentive to design the facility in a way that minimizes maintenance needs over the life of the asset. Such incentives are absent in DB contracts or in construction contracts for facilities that the public agency has designed. In fact, public agencies sometimes design facilities in a way that emphasizes their grandeur and adds to long-run maintenance costs. Similarly, in DB contracts the contractor may choose design elements that facilitate lower costs and speedier construction, but do not hold up as well over the longer intended life of the facility.
A second element of a PPP is that the private partner finances at least part of the initial construction or renovation of the facility - a "DBFM" partnership. The relationship becomes more of a partnership when the private party has invested some of its own capital and is at risk to lose that investment if other terms of the arrangement, such as maintenance standards, are not met. The private partner need not finance all of the initial construction costs, but some significant private investment is intrinsic to a meaningful PPP. While some private financial commitment may be highly desirable, because of the availability of tax exempt financing, some projects in the U.S. have the characteristics of a PPP without private equity investment. In many of these cases, the tax exempt financing is "conduit" debt for which the private partner is liable, but the debt is issued by a public authority and is not private equity. This report considers these types of arrangements as PPPs. Thus, a PPP is defined as a relationship for a physical asset (as opposed to a service) in which the private partner is responsible for life-cycle costs - including design, build, maintenance, and others - and for at least partly financing the project.3
Two additional points are worth noting in defining PPPs. First, competition is an integral factor is entering into a partnership. Partnerships are formed only after a competitive process among multiple potential private parties, with the award based on clearly defined cost and performance criteria. Second, PPPs are used both for building new facilities and for renovating older facilities. New construction projects are sometimes referred to as "greenfield" projects, and reconstruction or renovation projects as "brownfield" projects.
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1 E.S. Savas. Privatization in the City: Successes, Failures, Lessons. CQ Press: Washington DC, 2005: pp 152-156.
2 U.S. Department of Transportation. Report to Congress on Public-Private Partnerships. December 2004.
3 In some cases, the private financing may take the form of tax-exempt (conduit) debt. In the United States, public authorities, often industrial development authorities, may issue tax-exempt debt for the benefit of private parties, which are responsible for the repayment of the debt. In some cases, this tax-exempt debt can comprise the private partner's investment.