Public organizations around the world have turned to public-private partnerships (P3s) to engage private sector investment in a wide range of services and infrastructure, such as transportation, utilities, ports, water, schools, and hospitals.

Municipalities considering a public-private partnership should be aware of the full range of possible structures and arrangements. Those structures and arrangements are constantly evolving, and variations arise in response to several considerations. For example, which party owns the asset during the partnership? Which party operates the asset? How are revenues that are generated by the asset shared between the two parties? What portion of the project risks, financial and otherwise, is borne by each partner? What portion is transferred from the public to the private sector, or vice versa? How the parties answer these and other questions defines the structure, dynamics, and, more than likely, the potential for success of the partnership.

P3 structures generally fall on a continuum, with services provided entirely by the public sector at one end and services provided entirely by the private sector with government as the enabler or regulator at the other—with a number of hybrids in between. Here are some of those arrangements.

Passive private investment

Government at all levels relies on private capital to finance infrastructure and other needs that cannot be paid for out of current-year revenues. At the local level, the main instruments for private investment are tax-exempt municipal bonds and notes. Municipal bond investors are passive because they are not directly involved in the day-to-day management and governance of the public services in question. They simply loan the jurisdiction money by purchasing the bonds, and then expect a return on their investment through periodic interest payments.

Traditional public contracting

Local governments rely on private vendors for a variety of goods and services. In most cases those goods and services are procured through traditional contracting and bidding or through request-for-proposal processes. The government pays for and the private sector provides the services in question, although the private provider plays a limited role in deciding how the service is to be delivered; mainly, it responds to the government’s specifications. For infrastructure projects, such an arrangement can include contracts for project design and/or construction of new facilities or other assets. For certain types of economic development services, it might include labor market analysis, website design, and other services in which private partners typically have special expertise.

Operation, maintenance, and service contracts

The municipality hires a private organization to perform some tasks or groups of tasks for a specified period of time. The municipality is responsible for funding any capital investments needed to expand or improve the system, including traditional leasing for such assets as computer technology or fleet maintenance, and it retains complete ownership of the asset. The private partner assumes the risk that the service cannot be provided at the specified level or quality for the specified price.

Joint ventures

In a joint venture, the municipality and its private sector partners form a new company or public authority. Both assume some portion of the ownership and responsibility for the service in question. P3s for pollution remediation, urban redevelopment, and affordable housing projects are often structured as joint ventures.

Joint ventures follow two basic models, with variations. In the first model, public capital is used to procure the land, buildings, and other assets needed to move the venture forward, and the private partner designs the project, secures tenants, and/or manages the operation in exchange for the right to use the facility and, in some cases, some portion of the revenues received from it. In the second model, the private party finances the construction or expansion of a public facility in exchange for the right to build housing, commercial space, or industrial facilities on the site.

Build-operate-transfer

Under a build-operate-transfer arrangement, the private partner takes principal responsibility for funding, designing, building, and then operating a facility. The government retains ownership of the facility and becomes both the customer and the regulator of the service, and formal ownership is then transferred back to the public sector at the end of the agreement.

Most lease-purchase and sale-leaseback arrangements follow this basic model, and a number of variations exist, depending on the private partner’s responsibilities.

Concession agreements

In a concession agreement the public partner grants the private partner full responsibility for all aspects of the design, construction, maintenance, and operations of the facility in exchange for some or all of the revenues generated by it. The public partner’s role is limited to regulating the performance, price, and quantity of the service provided. The facility remains government property, but all maintenance and capital infrastructure investments are the sole responsibility of the private partner.

Passive public investment

Passive public investment includes equity, debt guarantees, grants, tax expenditures, and other public investments in private enterprise. Most local economic development efforts are of this type. Passive public investment takes many forms—for example, tax credits, tax expenditures, business incubators, and discounted utility rates—and is designed to attract new businesses to the jurisdiction, to prevent existing businesses and industries from leaving, or to encourage existing businesses to expand within the jurisdiction’s boundaries. In these types of P3s, the public partner has no role in operations decisions because the operation in question is retail business, manufacturing, or some other decidedly nonpublic service.

Passive public investment has a major effect on local government capital budgeting and finance because it is intended to expand private enterprise, and new private enterprise places new demands on public infrastructure. This is especially challenging because passive public investments are often made incrementally and/or with limited regard for existing capital improvement priorities or programs. For that reason, effective capital improvement programs include a policy or framework of policies that identifies how and when the jurisdiction will make passive public investments. Such policies can help to impose predictability on the economic development process, which can facilitate more effective capital planning and budgeting.