Understanding the Structure of Public-Private Partnerships

Three pillars work together to ensure the success of a P3 water or wastewater treatment project

Public-private partnerships (P3s) are an effective mechanism for funding infrastructure developments such as highways, hospitals, and water treatment plants. P3s are a collaboration between a public entity — typically a government agency — and a private company, with both parties sharing risks, resources, and responsibilities, and both contributing to the decision-making process.

The success of P3s — also known as PPPs — depends on a careful balance of financial, operational, and asset management strategies. Alan Trager of Johns Hopkins University’s School of Advanced International Studies, founder of the PPP Initiative introduced a practical way to understand P3s through the “three-component framework.” This model breaks down the structure of P3s into three interconnected pillars, each essential for the project’s success:

1. Financial Component

For any project to be successful it has to be financially viable. A sound financial strategy is critical to the success of a project, ensuring that it’s economically viable and financially sustainable. This component deals with aspects of the project including how it will be funded, who bears the financial risks, and how revenues will be generated and distributed. Key considerations include:

• Funding mechanisms: How will the project be financed? With public funds, private investment, user fees, or a combination of these?
• Risk allocation: How will risks be shared? Will the public or private partner bear the financial risks associated with the project? Clearly defined roles ensure that any risks — such as budget overruns or revenue shortfalls — are allocated to the party best equipped to manage them.
• Revenue streams: How will the project generate income, and how will these funds be distributed among stakeholders? Structured revenue streams, such as service fees, can provide private partners with a return on their investment while ensuring affordability for users.

A well-structured financial component ensures the project’s long-term viability and protects both public and private interests.

2. Operational Component

Once the project is up and running, operational efficiency is necessary to ensure that the infrastructure provides value to its users. This component focuses on the day-to-day operations and management of the project. To avoid operational conflicts and ensure seamless management, it’s essential to establish clear roles and responsibilities for both the public and private partners in managing the project’s operations, including aspects such as:

• Maintenance and staffing: Who will handle the ongoing maintenance and staffing of the project? Roles can be shared or assigned based on expertise.
• Service delivery: How will the project meet performance standards and deliver quality services to end users? Clear agreements establish performance benchmarks to guarantee quality and reliability.

Effective operations require collaboration, transparency, and adherence to contractual obligations to meet public expectations.

3. Asset Component

The foundation of any P3 project is its physical infrastructure, a valuable asset that must be managed and maintained to protect its value for years to come. Asset management involves meticulous planning and involves considerations including:

• Ownership: Who owns the asset? Agreements must specify who owns the asset during and after the partnership term.
• Maintenance responsibilities: A proactive approach to maintenance ensures infrastructure longevity. How will the asset’s condition be preserved to avoid costly deterioration, and who will be responsible for these expenses?
• Long-term management: Who is responsible for ensuring that infrastructure continues to serve its purpose effectively over time?

Proper asset management safeguards the infrastructure’s utility and extends its lifespan, maximizing value for all stakeholders.

The Importance of Balance

The success of any P3 relies on balancing these components. Neglecting any aspect can undermine the entire partnership and jeopardize the project. For example, if the financial component is not well-defined there can be unanticipated costs that affect profitability, or the project may become financially unsustainable, leading to insolvency.

Similarly, if the operational component is not effectively managed, service delivery may suffer, leading to public dissatisfaction, while mismanagement of the physical asset can diminish its value and functionality over time. By addressing each component comprehensively, stakeholders can mitigate risks, optimize outcomes, and build resilient partnerships that deliver sustainable, impactful solutions.

How Can Public-Private Partnerships Work for You?

Public-private partnerships are more than financial arrangements; they are intricate collaborations that demand a balanced focus on funding, operations, and asset management. The three-component framework offers a valuable blueprint for structuring these partnerships, identifying potential risks, and ensuring that all aspects of the project are carefully considered. By aligning public goals with private expertise, P3s create opportunities to build resilient, efficient, and future-ready infrastructure.

Seven Seas Water-as-a-Service® P3 contracts offer a customer-focused approach that gives municipalities access to private funding, a team of knowledgeable water professionals, and innovative water treatment technologies. Contact Seven Seas to learn more about our public-private partnerships and how they can help you get the water infrastructure you need most cost-effectively and sustainably.