Public-Private Partnership Pitfalls

Public-private partnerships are often presented as the solution to municipal resource constraints. By partnering with private capital, cities can build infrastructure, develop projects, and provide services that would otherwise be impossible.

This narrative is sometimes true. It's also sometimes a recipe for transferring public assets to private interests while shifting risks to taxpayers. The difference lies entirely in how partnerships are structured.

The fundamental challenge in P3s is aligning incentives. Private partners are motivated by return on investment. Public partners are motivated by public benefit. These motivations can align, but they don't align automatically.

Common pitfalls include risk allocation that favors private partners, performance metrics that don't capture public priorities, and exit provisions that leave cities worse off when partnerships end.

Successful P3s share certain characteristics. First, the public partner has clear objectives and the capacity to negotiate effectively. Cities that enter partnerships without understanding what they want usually get taken advantage of.

Second, risks are allocated to the party best able to manage them. Construction risk typically goes to private partners. Demand risk is more complicated and should be carefully evaluated. Regulatory risk usually stays with the public sector.

Third, performance requirements are specific, measurable, and enforced. Vague commitments to 'community benefit' or 'economic development' are meaningless without metrics and consequences.

Fourth, exit provisions protect public interests. What happens if the private partner fails or wants out? What happens when the partnership ends? These questions must be answered before signing.

P3s can work. But they require sophisticated public sector capacity to structure, negotiate, and manage. Cities without that capacity should either develop it or avoid complex partnerships.