Considerations for Forming Infrastructure Partnerships with the Private Sector

By Rozsa, Stephanie; Raj, Jerin | Nation's Cities Weekly, July 26, 2010 | Go to article overview

Considerations for Forming Infrastructure Partnerships with the Private Sector


Rozsa, Stephanie, Raj, Jerin, Nation's Cities Weekly


This article is the second of two that focus on infrastructure investment through public-private partnerships.

Carefully managed privatization can save municipalities substantial sums of money. According to the National Center on Public Private Partnerships (NCPPP), governments traditionally realize cost savings of 20 percent to 50 percent when the private sector is involved in providing services.

While the increased yield of property and sales tax revenues also motivates many governments, money is not the only compelling reason. Public-private partnerships (PPPs) are flexible and can be used to effectively provide services and financial management and to fund large-scale infrastructure projects.

The public sector can draw on the vast knowledge and proficiencies of the private sector, including workplace efficiencies that could reduce demands on a shrinking city workforce. In addition to abundant technical and financial expertise, the private sector has better access to newer technologies and far more diverse funding sources. Such a partnership also exposes the public sector to innovative management practices and flexible operating procedures.

Considerations

The partnership concept is oft mislabeled as either a cure-all for government's ills or a deal with the profit-inclined devil. But the reality of PPPs lies somewhere in the middle, with success entirely dependent on a city's unique political, fiscal and developmental profile. As such, local officials rely on privatization's success stories to guide decision making as much as the failures. Accomplishing infrastructure goals in this way requires many careful considerations:

Decision

To begin any partnership, a city's political leadership must first be willing to allocate the budgetary resources and trained personnel to manage the project through its lifecycle.

Second, the financial and political risks must be properly assessed.

Third, the bidding, contracting, and oversight processes must be effectively managed.

Lastly, private companies can be allowed access to public assets, but they may not exercise policy-making authority.

Negotiation

The basic principle of PPPs is to allocate risk to those who can manage it for the least cost. This means that the type of contract a city initiates depends on the political or monetary gains it will receive from redistributing its risk. The strength of the contract rests on the city's capacity to negotiate and implement the contract.

These two factors require time and expertise, and must be done well the first time. That said, re-negotiations must be anticipated and contractor incentives must be maximized.

For example, bundling facility construction and service provision in a single contract means that the contractor's facility will be more cost-efficient to operate. Finally, to reduce the complexity of a contract and obstacles for the contractor, existing regulatory processes may require modification.

Oversight

Municipal accountability is not transferred to the private sector alongside public assets. Oversight of contracted services is therefore critically important for cities to ensure that public funds are being spent effectively.

Oversight includes on-site inspection, measuring goods and services against specifications, accounting and auditing, performance measures, and holding council hearings. …

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