The term “public-private partnership” (“partnership”) encompasses many different types of projects. Governments and government finance officers need to understand the different risks and rewards associated with various public-private partnership endeavors. Traditionally, the term “public-private partnership” has referred to private or public-private projects that involve the use of public resources or financing capabilities to promote local economic development. In those arrangements, the public entity is typically asked to provide some combination of tax incentives, public land or other assets, infrastructure investments or financing methods. In consideration of those public contributions, the private entity is asked to make capital investments, commit to provide jobs, contribute development expertise and assume financial risk. These “partnerships” (which typically are not partnerships legally) can have short life spans covering only the construction period for the project, or longer life spans covering debt repayment or long-term operating agreements.
The public-private partnership term has also been used to refer to transactions that are essentially privatization efforts, in which a state or local government enters into a long-term lease of a major asset (e.g., toll road, parking garage, airport, etc.) to a private-sector company and transfers the rights and responsibilities for the leased asset to the private company, or to transactions aimed at privatizing or outsourcing the provision of services that a governmental body had been providing directly. These transactions present a fundamentally different set of opportunities, risks and concerns for governmental participants than the traditional “partnerships” do. For the purpose of this Best Practice (BP), we are addressing only public-private partnerships (P3s) in the traditional sense, not privatization transactions. An example of the types of projects intended to be covered by this BP may be found in Exhibit A.
Within the types of “partnership” transactions covered by this BP, a broad range of risk exists for the governmental participants. At one end of the spectrum, the governmental participants may be serving only as an issue of conduit debt, enabling the private borrower to gain access to tax-exempt financing but with no promise to use any other public funds. At the other end of the spectrum, the governmental participant may be guaranteeing a private party’s debt or otherwise placing public funds directly at risk. The nature and extent of the governmental participant’s appropriate diligence will vary depending upon where in the spectrum a particular proposed "partnership” transaction fits. In addition, some transactions may necessitate utilizing the limited resource of private activity volume cap for tax-exempt financing, while others will not. For those that do, the governmental participant should have policies in place to assure compliance and to cause the governmental participant’s use of that resource to reflect its priorities and policies.
In “partnership” arrangements, the public and private parties have both complementary and conflicting objectives. Complementary objectives center on the ongoing success of the development, while conflicting objectives focus on levels of financial participation and risk. The public and private parties have two different perspectives. The public party’s perspective is towards stewardship of the public’s assets and other public benefits (job creation, tax base, elimination of blight), while the private party’s perspective is on return of investment. Both views must be accommodated for a viable development project.
For governmental participants, successful partnering requires an understanding of the transaction’s risks and benefits for both parties, sufficient knowledge of the private parties in order to assess their ability to fulfill their obligations, a fully negotiated development agreement, and agreed-upon methods to resolve future conflicts and uncertainties. The government finance officer should play a central role in the government’s involvement. He or she brings professional expertise in evaluating, structuring, and managing the government’s involvement in a proposed public-private partnership and should lead the financial review of public-private partnership development agreements.
GFOA recommends that finance officers achieve a full understanding of the available options when determining if a public-private partnership agreement is a viable and prudent transaction for their jurisdiction. This includes development of an internal policy that defines the government’s criteria for making various contributions to or investments in “partnership” arrangements. Early in the process of analyzing a proposed “partnership” transaction, the finance officer should also assess the nature and extent of any outside consulting or financial analysis services that the governmental body requires for its analysis and negotiation of the transaction.
As noted in the Best Practice (BP), The Role of the Finance Officer in Economic Development, finance officers are encouraged to participate in and provide essential information to the “partnership” process. This includes developing the objectives for the partnership, analyzing financial aspects of proposed arrangements, making recommendations to elected officials, advising on procurement issues arising from the solicitation and engagement of non-governmental parties, and participating in the negotiation of the development agreement. The finance officer must also determine the total value of the public contribution (participating jurisdiction and others) in the agreement, including non-cash items, to make sure that the public’s contributions to and investments in the project are justified and properly compensated. The finance officer must also be mindful of any direct or indirect increased, ongoing public operating costs that may result from the project.
The GFOA recommends that finance officers use the following list as a guide for preparing a comprehensive examination of issues that must be addressed before, during and after the project is determined to be viable and prudent. This list emphasizes that a great deal of due diligence must be completed prior to entering into a contract, since these decisions may have significant and long-lasting ramifications. Actions that should be taken, and issues for which procedures and policies should be in place, include:
- researching private partners and their business and market;
- researching the type of transactions being considered;
- consulting with appropriate professionals about applicable federal and state tax laws;
- understanding the rights and obligations of each party;
- setting standards for public financial commitments;
- evaluating and disclosing the financial and non-financial impacts of the proposals on the public entity; and
- on-going monitoring of the agreement.
The finance officer involved in a “partnership” should ensure full disclosure and make recommendations that the government’s participation in the venture does not bring excessive and unbalanced risk to the public. Preparing a comprehensive list of potential issues that may affect the government, and assuring that the government has sufficient in-house and outside expertise to evaluate these issues, will help to ensure that the P3 venture is beneficial to the public as well as the private partners.
Examples of P3 Programs
- Land assembly programs, by negotiation or eminent domain
- Urban renewal programs
- Tax increment financing programs
- Tax (property, sales, income, etc.) abatement/rebate programs
- Industrial development revenue bond financing programs
- Note and bond financing programs, including full faith and credit bonds and revenue bonds, for land assembly, site preparation, public facilities or supporting public improvements and infrastructure
- HUD Section 108 loan programs
- Small Business Administration programs
- Economic development administration programs
- Foreign trade zone programs
- Community development block grant programs
- National and state tax credit programs, including New Markets Tax Credits
- Loans or grants to developers
- Public body guarantees of developer loans
Typical P3 Projects
- Development projects involving commercial facilities
- Manufacturing facilities
- Parking facilities
- Office buildings
- Industrial parks
- Convention centers
- Entertainment complexes
- Museum projects
- Multiple redevelopments in various urban renewal projects
- Theater districts
- Waterfront development and marina projects
- Major and minor professional league sports stadium and arena complexes
- Port authority projects
- Airport improvements
- Housing projects
- Pedestrian walkway systems
- Neighborhood development projects
“Project Evaluation for Public Private Partnerships: Aligning Development with Strategic Goals in Virginia Beach,” Patricia Phillips, Robert Scott, and Nancy Leavitt, Government Finance Review, GFOA, June 2004.
An Elected Official’s Guide: Economic Development, GFOA, 2005.
GFOA Best Practice, “Role of the Finance Officer in Economic Development,” 2006.
Issue Brief: Privatization vs. Public Finance Partnerships: A Comparative Analysis; California Debt and Investment Advisory Committee; August 2007.