The Rise of Public-Private Partnerships

By any measure, the decades leading up to and following World War II were the golden ages for public works in the United States, with entities like the Works Project Administration spending the modern equivalent of hundreds of billions of dollars on infrastructure across the nation. During those years, tens of thousands of bridges and roadways were constructed ? including the creation of the Interstate Highway System ? and most of today?s water infrastructure was installed.

But in the 1990s, the availability of federal funding for these projects began to decline, even as maintenance and replacement requirements began to increase. This trend has been well-documented and researched by countless universities, think tanks and government agencies, and no sector better exemplifies its impact than the U.S. water infrastructure.

By the time the 2008 financial crisis hit, local governments were shouldering 95 percent?of the cost of their water infrastructure upgrades ? a heavy burden to begin with, made even more difficult in the face of declining local and state tax revenues. Added to this challenge is the enormous nationwide need for these upgrades, which a recent U.S. Environmental Protection Agency (EPA) study quantified at more than $330 billion over the next two decades.

As cities and states look in earnest for new ideas and allies to help meet their commitments, they have turned their attention to Public-Private Partnerships, also known as PPPs. The PPP is nothing new in the United States, dating back to the private turnpike companies that sprung up to build and maintain our nation?s first major roadways in the late 1700s. In fact, the National Association of Water Company?s oldest member company, York Water Company, was founded in Pennsylvania in 1816.

In the simplest of terms, PPPs are contracts between government agencies and private entities that deliver services or facilities for the general public?s benefit. These agreements allow both sectors to share their respective skills and assets, as well as the risks and rewards associated with service delivery. This mutual benefit has led cities and states to look to PPPs in their search for expert partners to share in risk and funding burdens as infrastructure needs grow and funding dwindles.

More than 30 states have enacted PPP legislation, and two years ago, former Governors Ed Rendell of Pennsylvania and Arnold Schwarzenegger of California joined New York Mayor Michael Bloomberg to form the Building America?s Future Coalition, an advocacy group for rebuilding America?s infrastructure via alternative methods including PPPs. According to the Brookings Institution?s Hamilton Project, the use of infrastructure PPPs has increased fivefold in the immediate wake of the Great Recession, with a significant number of them used in water infrastructure.

Today, more than 2,000 water facilities from New York to California are operated in PPP arrangements, allowing communities to maintain a critical role in the water services process while taking advantage of the expertise and efficiency a private operator can bring to the table. The types of arrangements vary widely, and can include design/build, lease and operate, contract operations and financing, or simply operations assistance. With the proper preparation and guidance, they can be extremely beneficial; year over year, these contracts are renewed at a rate of more than 93 percent.

But before a community jumps into a PPP arrangement, there are a number of factors that must be taken into consideration during a deliberative, thoughtful process:

1. Account for all costs. Though understating or even excluding long-term maintenance expenses may make a project?s price tag more palatable, a community must make all costs clear at the beginning of a PPP discussion. Full disclosure is critical to public buy-in and a good partner relationship.

2. Focus on long-term projects. A PPP is best suited to projects that will be used by the public for years to come, so that investments can be recovered by the private partner over a long period of time. For that reason, water and wastewater projects are ideal subjects for a PPP arrangement.

3. Involve the public. Communities pursuing PPP contracts should ensure the public has multiple opportunities to weigh in, ideally through a significant public hearing and comment period. Public input should be welcomed through the life of the project, especially in situations where customer rates might have to be raised.

4. Retain control. Past opposition to partnerships with the private sector often centered on a loss of control of infrastructure assets. Today?s PPPs often involve the community retaining ownership of those assets, keeping the right to set user fees, and/or conditioning payments on the maintenance of operating standards.

5. Transfer risk. A key benefit of a PPP arrangement is the ability of the private sector partner to bear operations and maintenance risk. Including these expenses in the PPP pricing structure protects them from changing political landscapes.

6. Share revenue. Concession projects provide administering public agencies with a large up-front payment, which can help close immediate funding gaps. Other arrangements provide for the sharing of revenue over the life of the contract, constituting a dedicated funding stream that may be more appropriate. Every community is different and must explore the pros and cons of all options.

7. Consider job safeguards. Contrary to early criticism that PPPs cost existing jobs, today?s PPP developers typically depend on the quality of the existing work force; they also bring in additional expertise to enhance the skills of those employees and improve the system.

With the right level of preparation, research and commitment, PPPs can be true win-win situations, bringing private sector resources and expertise together with the best in public sector governance. Well-structured PPPs provide much more than critical capital for large, complex projects ? they also can be models of reliability, efficiency, and transparency. Their proper and widespread implementation can help create a new golden age of public works in this country.

Michael Deane is executive director of the National Association of Water Companies (NAWC). He joined NAWC from the U.S. Environmental Protection Agency, most recently serving as associate assistant administrator for water.

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