Governments that are contemplating public-private partnerships (P3) projects need to understand exactly what they intend to accomplish--and it is equally important for governments to understand what the private sector is looking for. Knowing the private-sector motivation behind a project helps a government negotiate a better outcome for taxpayers and increases the chance that they will be able to work constructively with the private entity, ensuring a successful transaction.
Frequent motivations for the private sector include expanding the customer base, generating regular cash flows for securitization purposes, and using technologies to increase profits while lowering costs borne by taxpayers/consumers. Private-sector firms also simply want to earn a profit. They like the cost-plus pricing that is a regular feature of government service provision. They also like monopoly markets, which can be found in the portfolio of government services provided to taxpayers. These include parking activities, fleet management, and toll roads.
THE U.S. MARKET
The United States has been slower than other nations in adopting P3 models to support the development of infrastructure, Unlike other countries, the United States has a well-developed and relatively liquid municipal bond market which, along with income tax exemption on municipal bonds, has traditionally provided a very efficient source of financing for states and municipalities. While P3s are much more than just another financing technique, in recent years, the debate about P3s in the United States has primarily centered on the relative financing costs under P3s versus those under traditional municipal bond financing. However, the deteriorating state of U.S. infrastructure--the vast majority of the nation's water mains are at the end of their useful lives, and a third of the major roads are in poor or mediocre condition --combined with widening fiscal deficits have forced policy and decision makers to seriously consider alternative mechanisms for delivering public infrastructure and services.
The U.S. P3 market has matured appreciably over the last few years, having followed two distinct phases, pre- and post-2008. The initial P3 transactions (pre-2008) involved the monetization of infrastructure assets under long-term concessions. Private infrastructure investors assigned a value to the future revenues of those assets. They paid "upfront rent" to the state or the city, operated the assets,...