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Public-Private Partnerships Gain Steam as Municipalities Face Diminished Revenues

  • States and municipalities more likely to consider public-private partnerships as they face budget uncertainties due to COVID-19
  • Partnerships had seen pre-pandemic growth due to their potential to develop public infrastructure more efficiently
  • However, the arrangement has also raised concerns about cost overruns, liability, and other issues

The public sector has been put under considerable strain during the COVID-19 pandemic. State and local governments have seen higher expenses in areas like public health, while lower income tax, sales tax, and other revenue losses cut into budgets.

One area where this situation has created new opportunities is public-private partnerships. In this arrangement, a private developer takes on costs of a public project up front and receives compensation from the government partner once the project is completed, usually over a long-term period such as 30 years. The tradeoff typically grants the private developer a share of the taxes or operating revenues generated by the project, or even partial ownership of the asset.

In the arrangement, the private party secures financing for the project and plays a role in several aspects of its development, including design and implementation. The public partner is responsible for setting and enforcing compliance standards. The agreement typically outlines what risks may arise in the process and who is responsible for shouldering them, such as what happens if deficiencies are found in the completed project.

Public-private partnerships have the benefit of allowing a government to turn over an infrastructure project to a private developer who can finance and manage the whole process. This can make it more feasible to complete a large project on time and under budget, while capitalizing on technology, expertise, and innovations that may not otherwise be available to the government. The arrangement can also create opportunities that help strengthen the local economy.

The World Bank has hailed public-private partnerships as an efficient way to help nations develop public infrastructure such as water access, waste management, public transit, and efficient energy. The arrangement has been less popular in the United States, but was showing signs of growth even before the pandemic. The National League of Cities says that more than 30 states have allowed public-private partnerships since 2015, and that they have completed $36 billion in infrastructure projects in the past decade with a typical taxpayer savings of 20 percent.

Connecticut has established rules for public-private partnerships, and Governor Ned Lamont has also been supportive of these arrangements.

However, public-private partnerships come with risks as well. These include the possibility of cost overruns, technical deficits, disagreements over quality standards, or the potential that a project needs to be revised and renegotiated partway through the process. Companies could fail or withdraw from the agreement before the project is completed. In some cases, the developer may benefit from the arrangement while the public partner finds that usage fees or other revenues are lower than anticipated.

Critics also charge that public-private partnerships create a more nebulous relationship between public properties and for-profit activity. State and local governments often float bonds to raise funds for infrastructure project, and this option continues to hold appeal as interest rates remain low.

One factor that could drive more interest in public-private partnerships is a reluctance in Congress to approve funds to assist state and local governments as part of COVID-19 economic relief package. This assistance proved to be a major point of contention during efforts to strike a bipartisan compromise on new economic relief, with Republicans typically opposed.

The architects of a $900 billion relief bill passed last month carved out aid to state and local governments to increase its chances of success. President Joe Biden has included $350 billion in state and local aid in his $1.9 trillion economic relief proposal, though this portion is sure to face similar resistance.

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