# Understanding Public-Private Partnerships: How They Work and Key Examples

![Public-Private Partnership](https://www.investopedia.com/thmb/WpTmIbe3oFabNOrWpAEGjRGfcGc=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/public-private-partnerships-Final-36ea2b6d4c7b40379fa6fe4570606fe8.jpg)

*Public-private partnerships can have contract periods of more than 30 years. — Zoe Hansen / Investopedia*

> **Definition**
>
> A public-private partnership (PPP) is a collaboration between a government agency and a private-sector company to finance, build, and operate public infrastructure projects.

## What Are Public-Private Partnerships?

Public-private partnerships (PPPs) involve collaboration between a government agency and a private-sector company. They can be used to [finance, build, and operate projects](https://www.investopedia.com/terms/p/privatefinanceinitiative.asp), such as public transportation networks, parks, and convention centers.

Potential benefits of a [public-private partnership](https://www.investopedia.com/ask/answers/021715/what-impact-publicprivate-partnerships-have-economic-growth.asp) include allowing a project to be completed sooner or making it a possibility in the first place, because of either financial constraints or completion timelines. It often involves concessions of tax or other operating revenue, protection from liability, or partial ownership rights over nominally public services and property to private-sector, for-profit entities.

PPPs are usually found in environmental, municipal, and transportation infrastructure, as well as public service accommodations.

Public-private partnerships typically involve negotiated risk sharing. The public sector takes on regulatory risk, while the private sector absorbs construction and operational risks.

Real-world examples of PPPs include airports, bridges, highways, prisons, school buildings, and water and wastewater facilities.

### Key Takeaways

*   Public-private partnerships (PPPs) enable governments to collaborate with private enterprises to finance and expedite large-scale infrastructure projects, which may otherwise be delayed or unfeasible due to financial constraints.
*   In PPPs, risks and responsibilities are typically negotiated between the public and private sectors, often with the private sector taking on construction and operational risks while the public sector provides regulatory oversight.
*   Although PPPs harness private-sector innovation and efficiency, they can also blur the lines between public service and private profit, potentially leading to issues such as a lack of accountability and increased costs for users.
*   There are various models of PPPs, including Build Operate Transfer (BOT) and Build Operate Own (BOO), which outline different arrangements for control and ownership over the lifecycle of a project.
*   While PPPs can significantly enhance infrastructure development, they might raise ethical concerns due to potential conflicts between public accountability and private interests, including risks of corruption and rent-seeking behavior.

## Understanding the Mechanics of Public-Private Partnerships

A city government, for example, might be heavily indebted and unable to undertake a capital-intensive building project; however, a private enterprise might be interested in funding its construction in exchange for receiving the [operating profits](https://www.investopedia.com/terms/o/operating_profit.asp) once the project is complete.

Public-private partnerships typically have contract periods of 20 to 30 years or longer. Financing comes partly from the private sector but requires payments from the [public sector](https://www.investopedia.com/articles/personal-finance/022315/how-government-budgetary-decisions-impact-public-sector.asp) and/or users over the project's lifetime.

The private partner participates in designing, completing, implementing, and funding the project, while the public partner focuses on defining and monitoring compliance with the objectives.

> **Important**
>
> Public-private partnerships are typically found in transport and municipal or environmental infrastructure and public service accommodations.

Risks are distributed between the public and private partners through a process of negotiation, ideally though not always according to the ability of each to assess, control, and cope with them.

Although public works and services may be paid for through a fee from the public authority's revenue budget, such as with hospital projects, concessions may involve the right to direct users' payments—for example, with toll highways.

In cases such as shadow tolls for highways, payments are based on actual usage of the service. When wastewater treatment is involved, payment is made with fees collected from users.

## Pros and Cons of Public-Private Partnerships Explained

### Advantages

Partnerships between private companies and governments provide advantages to both parties. Private-sector technology and innovation, for example, can help improve the [operational efficiency](https://www.investopedia.com/terms/o/operationalefficiency.asp) of providing public services.

The public sector, for its part, provides incentives for the private sector to deliver projects on time and within budget. In addition, creating economic diversification makes the country more competitive in facilitating its infrastructure base and boosting associated construction, equipment, support services, and other businesses.

### Disadvantages

There are downsides, too. The private partner may face special risks from engaging in a public-private partnership. Physical infrastructure, such as roads or railways, involves construction risks. If the product is not delivered on time, exceeds cost estimates, or has technical defects, the private partner typically bears the burden.

In addition, the private partner faces availability risk if it cannot provide the service promised. A company may not meet safety or other relevant quality standards, for example, when running a prison, hospital, or school.

Demand risk occurs when there are fewer users than expected for the service or infrastructure, such as toll roads, bridges, or tunnels. However, this risk can be shifted to the public partner, if the public partner agrees to pay a minimum fee no matter the demand.

Public-private partnerships also create risks from the general public's and taxpayers' point of view. Private operators' partnership with the government may insulate them from accountability to the users of the public service for cutting too many corners, providing substandard service, or even violating people's civil or constitutional rights.

Private partners might increase tolls and fees, especially where people have no other choice due to laws or monopolies.

Separating ownership and decision rights in public-private partnerships can lead to complex [principal-agent problems](https://www.investopedia.com/terms/p/principal-agent-problem.asp).

This may facilitate corrupt dealings, payoffs to political cronies, and general [rent-seeking](https://www.investopedia.com/terms/r/rentseeking.asp) activity. This would happen by attenuating the link between the private parties who make important decisions over a project, from which they stand to benefit, and accountability to the taxpayers who foot at least part of the bill and who may be left holding the bag in terms of ultimate liability for the project's outcome.    

## Examples of Public-Private Partnerships

Public-private partnerships are typically found in transport infrastructure such as highways, airports, railroads, bridges, and tunnels.

Examples of municipal and environmental infrastructure include water and wastewater facilities. Public service accommodations include school buildings, prisons, student dormitories, and entertainment or sports facilities.

## What Is an Example of a Public-Private Partnership?

Public-private partnerships can be found in infrastructure projects such as in building toll roads and highways. One example is Canada's 407 Express Toll Route (407 ETR). This 67-mile stretch of highway was a PPP between the provincial government of Ontario and a private consortium that was responsible for the design, construction, financing, and maintenance of the highway with a lease term of 99 years, during which time they are permitted to collect tolls from users of the roadway. However, traffic levels and toll revenues were not guaranteed by the government).

## What Is Revenue Risk in a Public-Private Partnership?

Revenue risk is the chance that the private party to a PPP will not be able to recover its costs or ongoing expenses from operating a piece of infrastructure. For a toll road, this may be due to lower-than-expected traffic or limits set on toll rates. Extensive studies should be conducted ahead of time to avoid this risk and plan for contingencies.

## What Are Some Types of Public-Private Partnerships?

Public-private partnerships can be arranged in several ways. Here are just a few:

*   **Build Operate Transfer (BOT)**: A government hands overall construction and operations to a private party for a set number of years (often several decades or more). After that period of time, it is transferred to the government.
*   **Build Operate Own (BOO):** The same as a BOT, but the private entity is not required to ever transfer the project to the government.
*   **Design-Build (DB):** A government contracts with a private party to design and construct a project for a fee. The government retains ownership and may either operate it itself or contract out operations.
*   **Buy Build Operate (BBO):** a government sells a preexisting project that has already been completed and may have been operated by the government for some time to a private party, who will take it over fully. The private party may need to invest in rehabilitating or expanding the project.

## The Bottom Line

Public-private partnerships (PPPs) are a collaboration between a government agency and a private-sector company that help fund large government projects like roads, bridges, or hospitals with private money.

Key advantages of PPPs are financing big projects that may otherwise be unfeasible, leveraging private-sector technology and innovation to improve public services and infrastructure, and completing projects on time and within budget.

Potential disadvantages of public-private partnerships include cost overrun risks for businesses, inadequate quality standards, low project demand for governments, and blurred lines between public and private interests that could lead to possible ethical concerns (such as possible exploitation through self-dealing). Despite the risks, PPPs continue to be popular due to their capability to efficiently finance environmental, municipal, and transportation infrastructure, as well as public service projects.

It's important to negotiate balanced risk sharing in PPPs between public and private entities to manage possible financial, demand, and operational risks.

> **Article Sources**
>
> 1.  International Road Federation. "[Public Private Partnerships in Highway Construction](https://www.irf.global/assets/pdf/Alan-Ruck-Public-Private-Partnerships-in-Highway-Construction.pdf)."