Each type of private-sector financial participation offers potential advantages in the right applications, though not in every instance. (And not all advantages are exclusive to long-term private concessions; some also may be attainable through public-sector project financing.) Their applicability will depend on the public sponsor's goals, the project's own characteristics, and market circumstances at the time. Among the potential advantages that properly structured and applied private-sector participation can help to achieve are the following:
• Risk Transfer-Private-sector participation provides an opportunity to shift certain project risks from the public sector to the private-sector partner, such as construction risk (risk of cost overruns or delays as well as risks associated with final design stage), performance risk (technical and operational feasibility risks), and revenue risk (risk of lower user demand than anticipated).
• Project Acceleration-By providing incentives for streamlined fast-track construction, often through design-build procurement approaches, private-sector participation can provide quicker project delivery once environmental permitting and other public approvals are in place. Faster project completion not only brings the improvement on-line sooner, it also reduces the project's exposure to construction cost inflation.
• Operational Benefits-A private operator whose compensation is performance- based has a strong incentive to strive for maximum operational efficiencies and to grow revenues by providing strong customer service. In addition, long-term agreements typically codify operating and maintenance standards, which assures performance outcomes and allows private-sector innovation to achieve these outcomes rather than relying on government regulation, as used in projects delivered directly by the public sector.
• Focus on Life Cycle Costs-A concessionaire operating a non-tolled facility supported by availability payments is more likely to consider the project's total life cycle costs, since payments are conditioned on the concessionaire maintaining asset quality. The same advantage applies to toll concessions because aggregating responsibilities and control for long-term performance under a fixed incentive structure can promote efficiencies that bifurcated responsibilities inherent in conventional public-sector delivery may not. For instance, highway agencies facing near-term fiscal constraints may be more likely to follow short-term strategies that conserve cash outlays but increase asset life cycle costs over the long term.
• Maximizing Capital Formation and Potential Payments to the Public Sector-The borrowing capacity of government issuers is constrained by the market requirement that tax-exempt bonds demonstrate sufficient debt service coverage to receive an investment grade rating. Private investors' ability to draw on non-rated bank debt and investor equity can potentially allow a larger amount of a project's costs to be financed. Upfront payments, in turn, can create a pool of funds to advance other projects that would be deferred otherwise. In addition, a private operator generally will increase tolls or fares, within public-sector constraints, to maximize profits within those contractual limits. This willingness to set higher market-based toll rates also has the potential to facilitate upfront or annual concession fees to the governmental owner.