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What is a Public-Private Partnership?

July 19, 2017 | By Jessica A. Gover

Investors and policymakers are revisiting how public-private partnership financing can better address infrastructure investment in the US and around the globe. We need better models for public-private partnerships, especially ones that can achieve long-term public good.

Social scientists from across the academic and professional spectrum need to throw their hats into this ring to ask some tough questions about how public-private partnerships can deliver the best outcomes for society. This post is the first in a three-part series on public-private partnerships wherein I ask some tough questions to help policy and private investment conversations make good use of the financing mechanism that is the public-private partnership.

This first introductory post highlights some key themes and general background on public-private partnerships and current research at the Beeck Center.  In this series, we consider what exactly is the definition of a ‘public-private partnership,’ PPP, or P3? What is gained or overlooked by combining the terms ‘public’, ‘private’ and ‘partnership’? What benefits does a public-private partnership offer as a better procurement mechanism? Is this really the best name for the beneficial changes to procurement practices that something like a public-private partnership offers?

And finally, we will consider how the technical use of the term public-private partnership, a name, in my view, that should probably be retired, can be reoriented to better articulate the core lessons, solutions, and assumptions encapsulated by traditional and innovative approaches to this financial model. What lessons can traditional and new approaches to public-private partnerships provide for innovating public sector procurement? How can innovative approaches to public-private partnership procurement that focus on performance measurement and outcomes change the face of public sector services?

So, let’s take a step back, where did the public-private partnership come from? During the 1970s and 1980s, there was significant concern among policy makers about public debt and a recognized need for an alternative procurement mechanism to address funding and finance gaps. Public-private partnerships emerged as an alternative financing mechanism where the private sector could provide needed capital to alleviate public sector fiscal constraints for infrastructure investment. Over the course of the last thirty years, the traditional public-private partnership model has been generally successful in helping to bridge the infrastructure gap in various markets. However, of $2.5 trillion annual spending on infrastructure globally, public-private partnerships only account for 7.5% of total spending.

Internationally, the market for public-private partnerships is growing. The World Bank argues that “Investments in Public-Private Partnerships (PPPs) have grown in absolute terms since 1991… The growth cycles of PPP investments have been influenced by five big economies—Brazil, China, India, Mexico, and Turkey—that have increased their market share over time.” A McKinsey Center for Government 2014 report on public-private partnerships for education in Asia argues that “While there are emerging models and a growing interest for governments and private sector to engage in PPPs in school education, making this partnership function effectively is not easy. PPPs are complex to structure and require considerable public sector capabilities to design, implement and monitor.” In the US, PricewaterhouseCoopers (PwC) writes that “The market for P3s in the US is clearly gaining ground. Investors are interested, capital is plentiful, and governments are building capacity and passing enabling legislation. More projects are entering the pipeline and reaching financial close. It’s noteworthy that these projects are spreading to new sectors and states.”

This is a growing trend. For the past seven months, I have been studying how public-private partnerships can better address public sector needs and the evolution of innovative performance-based contracts to achieve outcomes. Earlier this year, I went to New Zealand to conduct field research, building upon the Beeck Center’s work on performance contracting for infrastructure.  I studied the New Zealand government’s innovative approach to the traditional public-private partnerships, which offers some important lessons for improved outcomes and governance in other sectors and markets. The model we looked at is a privately operated prison facility.

While I do not address the privatization argument in this article, it deserves to be stated up front that the privatization of public goods requires a more public conversation. The distinct philosophical context of a nation’s social norms is a vital backdrop for understanding privatization. In the United States, we have a constant and often contentious debate over the essential role of government in society. Where is the line between market efficiency and moral hazard in a democracy? Can market driven decision rules be trustworthy or even nuanced when human lives are in the mix? With that said, we at the Beeck Center are cautiously optimistic that there are ways to use lessons such as what is happening in New Zealand to better structure public-private projects that achieve public good in other markets and/or sectors.

The innovative public-private partnership model in New Zealand is part of a larger trend in the innovative financing space where social outcomes are being linked to bankable financial models. There are significant social and political differences between New Zealand and the US, and it is critical to recognize those differences when considering the domestic policy benefits offered by an international example of innovative financing. New Zealand’s approach iterates upon the traditional public-private partnership model as well as traditional procurement practices. It offers valuable lessons for how investors and policymakers can address public sector service needs by more explicitly taking into account the public good, especially the role of government. And, it offers lessons on how to build a different relationship with private investors and the public sector to get to better outcomes.

By designing a deal or contract around social outcomes, it is clear that New Zealand is re-defining the concept of a ‘public-private partnership’ in conjunction with changing their overall, traditional procurement practices. We need to be careful to differentiate between what beneficial changes they’ve made to the traditional public-private partnership versus innovative changes to general standards of procurement more broadly. The New Zealand public-private partnership offers a really interesting new approach to risk sharing, performance measurement, and inter-departmental collaboration, but these features are enabled by, not strictly limited to, the framework of a public-private partnership.

Put simply, this is an incredible example of innovative procurement, but policymakers, investors, and even social scientists need to have a clear, shared vocabulary to successfully analyze and negotiate the benefits and challenges of utilizing such nuanced procurement practices. We can use clearer language, and it is my intention with this series to help do just that.

Coming Soon: The second post in this series will dive into the murky waters of defining the ‘public-private partnership’ and its component parts: the public, the private, and the partnership.

 

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