Benefits and Risks of Public-Private Partnerships

July 14, 2019

America’s aging infrastructure is an increasingly significant problem, and public-private partnerships (PPPs) are part of the solution. PPPs promise to reduce costs and improve services for the public. They also offer private investors a new alternative to expensive stocks and low yielding bonds. The undeniable potential benefits of PPPs more than offset political uncertainty and other risk factors.

When PPP contractors underestimate the long-term funding required for a project, they risk losing money later. Long-run expenses like maintenance are often underestimated when traditional government projects are approved. As a result, our public infrastructure deteriorates prematurely. Awarding projects to the lowest bidder means American roads usually last just 20 years. That is only half as long as many highways in Europe. Cutting down completion time is another PPP benefit.

Benefits

Public-private partnerships (PPPs) can cut expenses, maintain service quality, and reduce time to completion. Lower cost is one of the primary motivations for PPPs, but they are better at reducing costs over time. 

Public-private partnerships (PPPs) also provide substantial benefits for private investors. Governments often start new infrastructure projects to offset the effects of economic downturns, so PPPs can thrive during recessions.

A PPP may also provide a high yielding source of government-backed income, which is increasingly difficult to find. Environmental issues are another area where PPPs excel. Some PPPs create opportunities for socially responsible and ESG (Environment, Social, Governance) investing.

PPPs are also much more developed in most other countries, so there is substantial growth potential in the United States. For example, the UK spent an average of more than 4 billion pounds (5 billion dollars) a year on PPPs. In 2015, US PPP deals totaled only 2.4 billion dollars. Adjusting for GDP size, US PPP spending would have to rise above 35 billion dollars to equal the UK spending rate.

Disadvantages

While public-private partnerships (PPPs) have significant potential for public institutions and private investors, there are also some disadvantages. The PPP market in the United States is relatively new, so the risk of incorrect cost estimates is higher. Another limitation is that most firms are too small to partner with government agencies on large projects. Governments are also more likely to outsource technically demanding projects, further limiting the number of potential partners.

Political events can produce unpredictable changes, and there is even the risk that projects will be canceled. Finally, governments have direct access to low-interest rate financing via public debt markets. Private companies involved in PPPs typically have to borrow at higher and less predictable market rates.

Solutions

Most risks related to public-private partnerships (PPPs) are relatively low or easily minimized. For example, the costs of financing can be controlled through loan guarantees and other measures. Political risks are also lower than commonly believed because there is a growing bipartisan consensus in favor of PPPs. The FAST Act passed overwhelmingly in 2015, allowing states to use federal highway funds for PPP offices. In 2019, a PPP based infrastructure overhaul is one of the few measures that might pass a divided Congress. 

Realizing the potential of public-private partnerships (PPPs) presents challenges, but we can overcome them when we work together. At EHI Corp, we analyze costs, create financial models, and run stress test scenarios to reduce PPP related risks. PPPs can lower costs for government agencies, speed up project completion, and give investors access to a new asset class. All of these benefits are within our reach when we work in partnership to find practical solutions.






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