Public and private roles in a public-private partnership
By John Finke
Depending on the speaker, the term public-private partnership (P3) can represent anything from the privatization of public assets to public subsidization of private development. Between these two poles are a variety of structures with varying degrees of public and private involvement. Across all of these structures, the term “partnership” in a public-private partnership must be taken seriously and should be mutually beneficial. The public’s role is more than writing checks. Each partner must give and receive value. In structuring a true partnership, the public and private partners each have distinct advantages they bring, and their respective contributions should be recognized and embraced.
The Public Partner
Tax-exempt debt is undeniably the least costly means to finance public projects and is the most important contribution to a P3 project by the public sector. Too often, private developers propose more expensive combinations of equity and taxable debt for a public-use P3 project. Such private finance schemes too often benefit the private partner to the detriment of the public partner.
Tax-exempt debt offers fixed-rate financing for longer terms and with lower interest rates than taxable debt. For most public facilities, tax-exempt debt requires no more than a 1.0 debt coverage ratio and will finance 100% of the project’s cost, eliminating the need for expensive private equity. Additionally, tax-exempt debt better accommodates public agency leases that include “subject to annual appropriation” and “subject to abatement” clauses. While there are situations where the use of private equity and taxable debt can further the public’s interest, they are seldom the least costly approach.
One issue associated with tax-exempt financing issued by a public agency is that it often is tied to traditional public delivery methods, which are generally slower and costlier than private delivery. But in P3 models such as the New American Approach, the tax-exempt bonds are issued by a private special purpose not-for-profit entity, allowing the project to use private procurement and delivery methods. This approach offers the same or better private development and management efficiencies sought in P3 structures with privately financed DBFOM and Availability Payment models, yet it does so using tax-exempt financing.
The Private Partner
The two most important contributions the private sector offer to P3 projects are efficiency and development expertise. Private development is a competitive and profit driven business. Developers who build for themselves or for design-build clients must work efficiently, remain current in their knowledge, and understand how to control costs. They use in-house expertise and rely less on costly consultants.
In contrast, the public development process is characterized by a heavy reliance on consultants, unreasonably long project schedules and overly inflated project costs. Few local governments have in-house staff with the necessary skill or experience to deliver complex facilities and the public process offers no incentive for staff to seek efficiencies. The result is a slow, inefficient decision-making process with no direct accountability. Additionally, most public agencies employ inefficient public works bidding procedures that are ill designed to reward skills, efficiency or experience.
A true P3 partnership links tax-exempt financing with private delivery expertise in a manner that preserves public use and benefit. In other words, by leveraging the intrinsic value held by each of the partners in a public-private partnership a P3 can achieve its true potential.
John Finke is the president of Public Facilities Group and has more than 35 years’ experience in local government and public private partnerships. He pioneered the American Model Approach and has used that model to finance 28 government social infrastructure projects that total more than $2 billion in direct development costs.