At a time when infrastructure needs in the U.S. have become both acute and publicly visible, the rising adoption of public-private partnerships (P3s) is garnering close attention.
A new study by Brattle economists illustrates the trends in today’s rapidly growing P3 market, different incentive structures for successful long-term risk sharing, and highlights key questions for designing a viable P3.
Infrastructure P3 activity in the U.S. has taken off since 2015. Today more than 30 states are procuring at least one project as a P3 and over 200 projects are in the pipeline—well above prior levels of activity. Notably P3s are being deployed in sectors beyond transportation, with social infrastructure accounting for almost a quarter of the total.
The Number of U.S. P3s in the Pipeline Skyrocketed in 2015
The increase in P3 activity can be attributed to constrained public revenues and financing sources following the Great Recession and Global Financial Crisis, pent up demand for public infrastructure from past underinvestment and deferred maintenance, increasing government recognition of the merits of P3s, and growing interest among private sector investors and other potential private partners. Additionally, the Trump Administration’s recently released infrastructure plan invites an expanded role for P3s given that it calls for a $100 million Incentives Program of competitive grants where fully 70 percent weight would be placed on “securing and committing new, non-Federal revenue” for investment, operations, maintenance, and rehabilitation.
However, developing a robust U.S. P3 market will require the development of sustainable risk allocation mechanisms that ensure projects are successful for both investors and sponsoring governments. The Brattle paper outlines a menu of P3 options, all customizable to the specific objectives of the project and parties, from which public sector project sponsors can choose. The options include hybrid P3 arrangements—in between conventional procurement and a classic user-fee P3 structure—that can serve to fine-tune the sharing of risks and responsibilities between the public and private sectors. Regardless of the arrangement used, projects that enter P3 procurement must be carefully selected and contracted with a payment mechanism that allocates risks appropriately for the project and the procuring government’s needs. Avoiding financial failures and political backlash will be essential to encouraging state and local governments to bring more projects for P3 procurement.
“The number of new P3 projects in development today is unprecedented, more than seven times pre-2015 levels. The trend has been persistent so far, with recent growth in excess of 45% per year,” commented Elaine Buckberg, a Brattle principal and co-author of the paper. “Clearly, many state local governments are actively considering P3s to deliver large projects. P3s may now be poised to play a significant role in addressing the nation’s infrastructure crisis, offering government project sponsors a bigger toolbox for delivering projects.”
The paper, “Rising Tide of Next Generation U.S. P3s—and How to Sustain It,” is authored by Brattle Principals Elaine Buckberg and Robert Mudge and Research Analyst Hannah Sheffield.