P3s, or Public-private partnerships, refer to the contract arrangements among government agencies and private firms to provide for service delivery and responsibility and risk allocation among the participants, and include increased involvement of the private sector in the funding and completion of the infrastructure project.
Within the state of California, three state agencies have the authorization to take part in P3 arrangements. These agencies include the HSRA (High Speed Rail Authority), the AOC (Administrative Office of the Courts, and Caltrans (California Department of Transportation). While there is variety in the types of P3s that can be arranged, in California the dominate type is a single agreement entered into with a private company that is normally called a “joint venture of companies.” This contract covers the design, building, funding, maintenance, and daily operation of a piece of infrastructure. Within this discussion, a P3 is defined in this way to simplify, but the knowledge that there are variations on this norm (including the collaborating of public agencies with different public agencies) is important as well.
There are many different structure types used in P3 arrangements because of the differing obligations of private firms in these agreements, which include the assumption of financial liability. In addition, differing types of P3 arrangements are best suited to the building of new infrastructure, while other types are best suited for operating or expanding upon infrastructure that is already in existence. Within the state of California, P3 arrangements are a hot topic of conversation and of late. A P3 agreement was entered into with a private firm that is a consortium for a variety of companies to encompass the design, building, financing, maintenance, and daily operation of an infrastructure project.
Advantages and Limits of P3 Projects
P3 agreements are utilized by government agencies to accomplish projects that are difficult to complete using conventional methods of delivery. However, additional problems and limitations may be introduced when using a P3 agreement.
Possible P3 Advantages
- Reduction of liability by transferring it to the private firm
- Stabilization of the costs and schedule
- Use of the best methods and practices for building and engineering
- Frees up public funding for other needed endeavors
- Fewer problems with infrastructure funding
- Infrastructure will be properly maintained
- Insulation from infrastructure financial problems
Reduction in Liability by the Transfer of Liability to the Private Firm
P3 projects are also able to move the risks of an undertaking from the government agency onto a private partner firm. These liabilities may include those involving maintenance, operation, financing, or other unforeseen happenings. The biggest risks involve the design and building of the infrastructure project. For instance, when using the P3 structure, a private firm would shoulder the risk if the project design needed to change to take into account particular conditions at the site such as the finding of archeological remains or unforeseen soil conditions. In addition, the private entity would also bear the responsibility for overages in the price of the project that tend to be significant at times. Because of this risk transfer, the government may rid themselves of the requirement to provide extra government funding to complete a piece of infrastructure. The private firm would also be liable if the estimate of income from the project was higher than the actual income. Because they must ensure a return on their investment, private firms must work the cost of this risk assumption into the projected cost of the project and reflect it in their bids. The private firm, though, is often better equipped to take on the added risk than the public agency.