Public-Private Partnerships: Change the Name to Reflect Reality

With the continued negative view of P3s, it is time to change the term to open new doors for financing infrastructure projects

By Manuel H. Lazerov

 

When Public-Private Partnerships (P3’s) were first launched they were, in fact, privatizations. It was, perhaps, because some of the initial projects did not go well that prospective concessionaires did not want to have P3’s associated with privatization. Actually, money from some earlier deals were used to fill a budget gap, and some of the money was used for purposes which did not result in building economically sustainable projects that might have generated long term income. The term became toxic to the point where the National Council of Public-Private Partnerships once had a huge sign in its reception area that said, “Public-Private Partnerships are not privatization.”

Fast forward to today. It’s still a problem. However, the administration, in announcing its infrastructure initiative, insists that to do new projects, state and local government should sell existing assets to developers, who will upgrade them, and raise taxes and user fees for new projects. It doesn’t appear that the money derived from existing projects will have any connection to new projects by local government. So, if a sale isn’t privatization, what is it? The administration has a term for it: “recycling.” What’s the difference? There is none.

If elected officials continue to view transactions as privatization, the resistance that currently exists is not likely to change. In the minds of many officials, they view privatization as having a certain finality, the disposition of an asset and the end of their responsibility for it, and the reason for their being employed. It also looks like an admission, in their eyes, that the private sector can do it more efficiently and cheaper than they.

The public, however, has their own reasons for opposing privatization. First, they are suspicious of the disposition values of any public assets, no matter who may have done the appraisal. Citizens may also feel that they will have less control over user rates, which is not an unwarranted concern. Many an election has been lost over minimal increases in user rates, despite any urgency. This is especially true in the water sector, where many believe that it should be free as a matter of right. While the public may accept the costs of treating water, they do not want to pay for water transmission or upgrading treatment plants.

So, the retention of a term about which there is no clear understanding, or that means something which is objectionable, impedes putting projects together. That’s why it should be called something else, something that is more reflective of how they are increasingly done.

The new name should be Alternative Finance and Procurement, which addresses a broader range of options than governments have in doing projects with other than their own resources, or entering into a variety of financial, construction and management agreements that offer more superior alternatives.

This removes the presumption (which the existing term still carries to many people) that the arrangement is one of privatization and loss of financial and operating control, to one where government remains very much in control of the outcomes it expects from specific projects. It leases, sells, operates or not. Alternative Finance and Procurement reflects a more responsive, flexible development model. And, in many cases, agreements can be made to shift a great deal of development and management risk in the process to others. The opportunity to shift risk would be no small concern to public officials.

As an example, a jurisdiction could enter into a lease, after which the asset, by agreement, would revert to the government. The lessee may be responsible for upgrading and keeping it in good shape, addressing normal wear and tear, until it reverts to the government. The government may or may not have the lessee manage the asset as well. In a design-build arrangement, the construction risk for the upgrade can be entirely shifted to the lessee. That is just one way in which the resistance to the disposal of public assets can be solved.

It’s going to be a new year soon. Many of the elements of public infrastructure policy have become much clearer over the last year. It’s time, also, to abandon old, confusing terminology to reflect the current realities of how projects are actually being put together these days.

 

Manuel H. Lazerov is President of Infrastructure Financial, Inc. He may be reached at Lazerov@InfrastructureFinancial.org

 

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